Van Baker

There has been much speculation on what an Apple tablet would offer, and the company did not disappoint with today’s announcement. Apple introduced the iPad with the core productivity apps an e-reader with and e-book store and 140,000 apps from the Appstore, all at a very aggressive $499 price point. This product will define the tablet form factor for the market, and it sets a high bar for other manufacturers.

Apple is offering a product that is very competitive with a netbook and offers a clear value advantage over the Kindle assuming Apple is able to line up the publishers for its e-book store. At first glance, the iPad offers little incremental value as an e-reader other than being color which has some value. However when comparing a $249 Kindle with this device the additional value is immediately apparent. For $250 more a consumer gets a device that offers productivity software, a media player for HD media, a music player and access to 140,000 cheap applications in the App Store. Seems like a pretty easy decision to me. This product will be very strong at $499.

Additionally the company is offering data plans for 3G connectivity that do not require a contract which are aggressively priced and could attract additional data plan users to AT&T. That said the majority of users will find Wi-Fi adequate for their needs as the product is most likely to be used in the living room, the classroom or the local coffee shop, and Wi-Fi is likely to be available in all these venues.

Aesthetically the iPad is a beautiful product that is a half inch thick with a beautiful display and very intelligent multi-touch controls. This new product is positioned on par with netbooks in price but well below most notebooks in both functionality and capability, so the consumer should find it easy to make their decision between the two It is not hard to imagine a use model where a consumer carries a smartphone and an iPad and leaves the netbook at home.

This is not to say that there are no challenges for Apple in this market. Communicating the value proposition for this new category of device is complex by Apple standards, and it will take a little time for consumers to digest exactly what the iPad offers, but the Apple Stores present a great venue for Apple to do exactly this. Additionally Apple has the challenge of lining up the same variety of content in its iBook Store that Amazon offers for Kindle, and they are not there yet.  Additionally, for those customers that have been unhappy with AT&T those challenges still exist with the iPad. In short it is not a slam dunk for Apple but the prospects look good.

The new Nano will sell for the same price as the current model at $149 for the 8 GB model and $179 for the 16 GB model. The company also announced three models of the iPod touch with the 8 GB model starting at $199 and two additional models at $299 and $399 with 32 GB and 64 GB respectively. The feature set remains the same for the iPod touch despite rampant speculation by the trade press that the product line would be enhanced with the addition of a still and video camera similar to the iPhone. The decision by Apple to keep the feature set of the iPod touch the same is the safe element of the Apple announcement.
If Apple had added a microphone and camera to the iPod touch the company would have introduced a VOIP equivalent of the iPhone without any service revenue to go with it. This would have been an aggressive but risky choice for Apple. In the end it was one that the company chose not to make.
The Nano has been the best selling iPod ever with over 100 million sold. The focus on the Nano will resonate with consumers that are likely to be watching their wallets this coming holiday season. It is expected that the company will generate very strong revenues with the new iPod Nano in the upcoming holiday season as video continually gets bigger with 1 billion videos being uploaded to YouTube every day. However, the less than aggressive behavior from Apple gives us pause as the company has historically been very aggressive in cannibalizing its own products in order to stay ahead of the competition. This new safe behavior may come back to haunt Apple in the long run.

Sony has committed to connectivity for their electronics with the company pledging to achieve connectivity with 90 percent of its products by 2010. In a recent meeting Sony USA confirmed that they are on track to hit this 90% target. In their Internet connected television offering Sony has chosen to support Yahoo! TV widget library that ensures that consumers will be able to access a large library of widgets for use on their Sony televisions in addition to those widgets supported and delivered by Sony. This is a very positive step for Sony that allows them to deliver Sony specific value without denying consumers access to additional value. This open approach by Sony mirrors the open access of the Internet as opposed to the walled garden approach that some television manufacturers are following. In short kudos to Sony with just one caveat. When researching the televisions on the Sony sight it is impossible to get much more than the statement that the television supports Internet connectivity. My suggestion to Sony is don’t keep this a secret as it could lead consumers to pick Sony over less open competing brands.

The Nokia N900 is a significant change for Nokia on the user interface front. While it is not clear how this user interface will influence future versions of the Nokia S60 smartphone offerings it does show that Nokia is capable of developing an attractive and usable interface that consumers should find both easy to use and appealing to the eye. This new user interface is based on a multiple desktop metaphor where users can easily page through multiple desktops and select from tiles of open applications to activate an open application. The N900 user interface accomplishes a number of important features. First it brings the functionality of several applications to a top level, which consumers clearly appreciate. Additionally it brings a metaphor that consumers are familiar with to a smartphone platform namely an electronic desktop model that allows users to select from multiple desktops and then identify and select the task that they want to work on.

The App store just hit 1 billion downloads and with a billion downloads there has to be some money involved. Right? Well let’s do some math.
There are 1 billion downloads but it is likely that a minority of these are applications that consumers paid for. I will err on the conservative side and guess that 10% of downloads are applications that had a price associated with them. That gives us 100 million applications that were paid for. Most of the applications are centered around the 99 cent price point, with a few that are a little bit higher and very few that are much higher. For argument’s sake let’s say the average selling price was $1.20 for the paid applications. That gives us revenues of $120 million for the applications. Apple grosses 30% of the revenue so that gives Apple $36 million. Out of that they have to pay the credit card transaction fees which should reduce that by about $550 thousand. They also have to fund the infrastructure that delivers the applications to the Macs, iPod touchs and iPhones. That is hard to calculate but it is significant. For the sake of this exercise we will say that the infrastructure costs are $15 million. This is purely and estimate as some costs are fixed costs and some costs are variable costs. That leaves Apple with $20.45 million.
However there are other things to consider. Don’t lose sight of the fact that Apple has been running prime time television advertisements on the App Store and those certainly don’t come cheap. For the sake of this exercise let’s assume that these cost $120,000 for each airing. I haven’t counted the number of ads Apple is running but given what I have seen personally during the prime time I would guess that they are running at least 50 per week and have been doing that for the last couple of months. Let’s see that is 50 per week times 4 weeks times 2 months or roughly 400 ads for the App Store at $120,000 a pop. That is $48 million in ad expenditures over just the last two months and the billion downloads took 9 months. That leaves Apple with loss of roughly $27.6 million dollars.
Conclusion the App Store is not about making money, it is about selling iPhones and iPhone sales for the quarter ending in March were up 123% over the year ago quarter. I guess I would call this a good investment.

Apple posted very strong results for its second fiscal quarter reporting net income of 1.21 Billion or $1.33 per share on revenues of $8.16 billion. Sales fo the iPhone were up a spectacular 123% over the year ago quarter wnd sales of the iPod were up 3% over the year ago quarter. There was some sign of weakness in the Mac business with sales down 3% of the year ago quarter and admission by Apple that the mix of Mac sales had shifted toward the lower end of the product line. Apple did point out that Mac sales of the year ago quarter had gown by 51% over the prior year due partially to the launch of the MacBook Air so it was a hard comparison quarter. While this is true the results do reflect weakness on the high end of the PC market and highlights the fact that Apple has chosen not to participate in low end low margin markets.

Clearly Microsoft has tried to capaitalize on Apple reluctance to participate in the low-end mini notebook or netbook market with its ads that feature less expensive Windows based notebooks. While not highlighting netbooks the Microsoft ads do point out the high end pricing of the MacBook Pro notebooks in the comparisons that it highlights in the ads. On has to ask however is focusing on lower prices is the right thing for Microsoft to do. PC makers have been trying to figure out how to attack Apple’s strength in the high end notebook market as these products are high margin high profit products. Microsoft’s ad campaign clearly undercuts these efforts and seems to promote Windows notebooks as the low priced alternative. As has been proven many times in the past price is not a sustainable competitive advantage. While Apple may not choose to compete at the lower end of the price range for PCs at this time that is not to say that the company will avoid it forever. As evidence the iPod shuffle is the lowest price product in Apple’s line but is among the most profitable products that it sells.

The amount of hype around the upcoming Palm Pre is impressive and has almost achieved Apple level buzz. The phone has been widely shown at CES, Mobile World Congress and CTIA and it is a very impressive device. The user interface is very impressive and the functionality that the device brings to the market is certainly impressive and will no doubt appeal to consumers wanting the latest greatest smartphone technology. All of this bodes well for the Palm Pre when it finally reaches the market. This level of excitement combined with the impressive functionality have led many in the trade press to refer to the device as an iPhone killer. This positioning ignores a numbers of factors that will potentially limit the appeal of the Pre.

The first and most important factor is the carrier. Sprint has an exclusive on the Pre and most consumers are at least somewhat aware that Sprint has been bleeding customers for a very long time. As such there is some concern about the viability of Sprint. Even if the consumer believes that Sprint will survive the economic downturn they may be concerned about the coverage in their areas. Many consumers are reticent to switch carriers when they know that the carrier they currently have provides good coverage in the places they use their phone regularly. This alone will limit the initial appeal to some degree among the consumers that are AT&T or Verizon subscribers. Admittedly, the length of the Sprint exclusive is not known and we could see the Pre in a Verizon store before the end of the year and that would change this dynamic dramatically.

Additionally, the phone is not out yet. This is important simply because the phone is not tested in the hands or real world users. This causes one to pause and consider how stable the platform is as WebOS is a brand new platform for Palm and new platforms tend to have glitches. Palm has been very reluctant to put the phone in the hands of consumers at the trade shows where they have shown it. At CES you reportedly had to ask a Palm employee to pick up the phone as consumers were not able to handle the phone on their own. An additional concern is battery life. Until the Pre gets into the market the battery life performance using all the cool features is an unknown.

I am impressed by what I have seen so far but I have to ask if iPhone users would find the Pre impressive enough to switch carriers especially in light of the upcoming iPhone OS 3.0 release. Is the difference significant enough to make them move. Only a real product in the market and time will answer that.

Cisco announced that they are buying Pure Digital the maker of the low cost Flip video camera. Cisco states that this product fits nicely into their home networking strategy. I am not impressed with this purchase for a number of reasons. First Cisco is an enterprise networking company in their DNA. They have never been very good at consumer marketing and I am afraid the word of mouth marketing that we have seen from Pure Digital will die rapidly under the Cisco umbrella. Cisco paints a beautiful vision of the connected future with rich video being delivered at the drop of a hat across the web but their execution in consumer products falls well short of their vision. The Linksys brand while successful has never been very innovative or exciting and there is no reason to believe that Cisco will suddenly become a consumer products company. In short the value of the Flip will likely be lost in Cisco within two years.

Even assuming that Cisco is able to execute on consumer products one has to ask if the purchase of Pure Digital makes sense. Yes the Flip is popular and easy to operate but cell phone are increasingly incorporating video capture and the resolution of these cameras is increasing rapidly with some models sporting 8 megapixel CCDs and 12 megapixel models are on the horizon. While the video capture will not be at these resolutions these phones will likely be capable of capturing HD video. Additionally most point and shoot digital cameras have video capture capability and these cameras have optical zoom which beats digital zoom any day. As such the Flip will be squeezed from the low end by cell phone video capture which has the added benefit of immediate posting to social networks and at the high end by increasingly affordable digital cameras with video capture. As such the Flip’s days may be numbered. While the purchase may be pocket change for Cisco it is still  likely to be wasted money for Cisco.

Sony and Google have announced that they will have 500,000 public domain titles available for the Sony Reader for free. This is a very smart move on the part of Sony as it instantly broadens the appeal of the Sony Reader and addresses one of the complaints about the Sony Reader namely that the available library is just too small when compared to Amazon’s 230,000 titles. Admittedly these titles have been available through other means for some time now but this makes it much more convenient for owners ot the Sony Reader to get access to these titles.

More interesting is the contrasting approaches that we see from Amazon with the Kindle and Sony. Amazon’s recent release of the Kindle reader for the iPhone points to the fact that Amazon is focused on selling ebooks and the iPhone applications expands the number of devices that they can sell books to. Sony on the other hand is clearly focused on selling devices as this announcement indicates Sony’s focus is to enhance the value of the Sony Reader. In short Amazon wants to sell more books and Sony wants to sell more ebook readers. The two approaches are likely to appeal to different segments of the market. Sony’s approach will appeal to consumers that read the classics while Amazon’s approach will appeal to consumers that are most interested books on the New York Times best seller list. While neither of these approaches is likely to lead to widespread consumer adoption of ebook readers it certainly adds momentum to the ebook reader market.

Apple has introduced a new iPod Shuffle that has no controls on the player. The device is small and is relatively non-descript with the only logo on the back of a stainless steel clip. Instead of buttons that control the device the controls are built into the headphone cord. With the control button you can play, pause, skip forward or back one track and turn the volume up or down. That is where the fun begins. If you hold the button on the headphone cord it will announce the name of the track and artist in the headphones. A longer push recites playlists and lets you cycle through them to pick the one you want.

So is this new iPod Shuffle an innovative product or a gimmick? If I had to pick I would say it is a little of both. The fact that you can control the shuffle without having to actually access the device is a big plus if you use the shuffle when you run or are exercising at the gym. The controls are simple and allow for easy access to roughly 1000 songs in your library with the ability to simply skip forward or back if you don’t care to hear the current track or want to repeat a track. The device is elegantly small and can be left in the pocket at all times with everything being done via the headphones that you are wearing. True it is very small and would be easy to lose but the new design may actually help here as you don’t need to touch the device again once you have turned it on.

Now for the gimmick. The text to speech functionality which Apple calls VoiceOver, is a bit of a gimmick and to Apple’s credit you don’t have to use the functionality as the device can be controlled without ever accessing this feature. It is a bit more complicated in that it requires the consumer to hold the button down to hear track / artist information and continue to hold it until a beep is sounded to access the playlists. As such it seems a bit complex. That said the text to speech, which is actually done inside iTunes, is initially fun and even if the novelty wears off quickly it does not get in the way of using the shuffle. If only I could talk back to it and have it play when I say play or skip when I say skip. For those features I guess we will have to wait for the next version of the iPod.