You might have missed it if you blinked, but there was a moment this month when, for perhaps the first time, a competitor’s tablet was outselling the iPad.
Shortly after Hewlett-Packard Co. announced it was completely overhauling its business by shuttering its new TouchPad tablet and putting its entire consumer PC business up for sale, the company was forced to get rid of existing tablet inventory. It did so by slashing prices on the devices – the original TouchPad, which went on sale for about $500, was cut to $100, making it one of the cheapest tablets on the market.
Even though it seemed certain that HP would no longer support the operating system powering the TouchPad, customers lined up outside retail locations to get their hands on the tablet. HP’s own online store also quickly sold out.
“Even for a piece of junk, somebody will want it for the right price,” said Robert Pavlik, chief market strategist at Banyan Partners. “I don’t know if HP’s tablet is a piece of junk, but nobody seemed to want it before.”
For the company, a fire sale on a device that was launched just a couple of months earlier was an inglorious exit from one of the hottest markets in the technology sector. But the TouchPad buying frenzy did illustrate an important phenomenon: While consumers seem to overwhelmingly prefer Apple Inc. ’s mobile devices, they like saving money even more.
As Steve Jobs steps down as Apple chief executive officer this week, ushering a new era in the company he helped create, that phenomenon is at the heart of what may well be the most promising – and riskiest – strategy for beating the tech giant in the mobile device space: forget the high-end market and focus on making your product cheap and easily available. In a way, it’s a throwback to a battle over personal computers that Apple found itself involved in – and ultimately lost – 25 years ago.
“The landscape right now is very similar to the Mac and PC era in the mid-80s,” said Vincent Cheung, founder and CEO of ShapeCollage.com, a startup that recently launched its first iPhone app. “Apple had very good head start, but at the end of the day you can’t have one manufacturer making every mobile device or computer in the world.”
The idea of trying to loosen Apple’s stranglehold on mobile device profits by competing on pricewas given fresh lifethis month, after Google made a $12.5-billion (U.S.) offer for Motorola Mobility Holdings Inc. The move comes at a time when most analysts see the consumer smart phone and tablet markets as a two-horse race between Apple’s iOS devices, and Android-powered hardware, with Microsoft Corp. and Research In Motion Ltd. playing catch-up. While Apple has positioned its mobile devices as high-end and aspirational, Google Inc. has tried for a critical mass with Android, allowing just about anyone to develop software and hardware for the operating system with few fees or restrictions. As a result, Android devices in total make up the fastest-growing segment of the consumer smart phone and tablet markets, while Apple remains the top single manufacturer.
Although most observers suggested Google’s interest was in acquiring Motorola’s patent portfolio, others are floating a different theory – that Google might try to sell handsets as cheaply as possible to create an even bigger user base for its Android operating system (and to increase its core ad-sales revenue).
“As a venture capitalist with investments across a number of mobile startups, my advice to my portfolio companies is simple: plan for a scenario in which Google gives away Motorola phones for free and imagine how the market would be shaped in its wake,” Rebecca Lynn, a partner with Morgenthaler Ventures, wrote in a recent blog post.
But the real competition in the low-end mobile space likely won’t come from Motorola so much as a slew of smaller, lesser-known handset manufacturers such as Xiaomi and Huawei in China, which have been developing multiple Android-powered phones with price tags around $150. Those handsets may not make a dent in the lucrative North American market, but they are becoming increasingly popular in fast-growing regions such as Africa and Asia.
The low-price market strategy has been used to some success in recent memory. During the height of the video game console wars last decade, when Sony Corp. and Microsoft saw gaming systems as an entryway to the entire living room digital entertainment market, Microsoft was widely believed to be losing money every time it sold an Xbox gaming console. Still, the company kept pushing the system, hoping that by establishing the Xbox as the hub of living room entertainment, it could later generate revenue through a variety of other means. Today, Microsoft offers everything from movie rentals to Web search through the Xbox.
In fact, the low-cost approach has previously helped topple Apple itself. In the late 1980s and early 1990s, Microsoft managed to undercut Apple’s high profit-margin computer sales business by offering Windows as a cheap alternative. The strategy worked so well that, during the following decade, Windows came to dominate the PC operating system business, while Apple went through one of the worst funks in its history.
But there’s no guarantee such an approach would work nearly as well today. Unlike the Apple of 25 years ago, today the company dominates the mobile landscape, has enough free cash on hand to buy many of the companies it competes against, and is in the running with Exxon Mobile for the title of world’s most valuable company. For the past two years, Apple has made more money every time it sells a smart phone or tablet than any of its competitors. Of the top eight handset manufacturers in the world, Apple sells about 5.4 per cent of mobile phones, yet it generates 57 per cent of industry profits, according to a recent Canaccord Genuity survey.
Additionally, under the leadership of chief operating officer (and now CEO) Tim Cook, Apple has managed to maintain a surprisingly low cost structure for its mobile devices. As a result, competitors have had a hard time undercutting the iPad and iPhone on price without delivering a significantly lower-quality product.
“They’ve actually priced their competitors out of the market because their supply chain is so tight,” said Neil Bearse, manager of Web-based marketing at the Queen’s School of Business. That means other companies will have a very hard time buying the raw components for their devices at a lower price than what Apple has managed to negotiate.
But there’s another reason Apple’s competitors will have a hard time beating Apple to the low-cost end of the market – Apple is taking aim at the very same market.
As customers wait for the fifth version of the iPhone to launch later this year, many expect further price cuts on existing iPhone models. The soon-to-be-dated iPhone 4 already sells for close to $100 (Canadian) through multi-year contracts with carriers. The further those prices drop, the smaller the window for competitors to exploit.
Still, with Apple’s wide lead in mobile applications and popularity, price may be the best battleground for competitors. Mr. Pavlik of Banyan partners estimates Apple still has at least a year of solid growth based on its existing product lines alone, before the company starts to feel any potential impact of Steve Jobs’ departure from the CEO’s office. In those coming years, Android’s myriad developers and manufacturers have a chance to turn the mobile operating system into the new Windows – a piece of commodity software that eventually found itself on the vast majority of the world’s personal computers.
“That’s how Windows won,” said Mr. Cheung of ShapeCollage. “It wasn’t that Windows was better, it was that all these other manufacturers were developing for it. It reached a lot more people.”
THE BATTLES AHEAD
Apple Inc., Google Inc. and Research In Motion Ltd. are waging war over smart phones and tablet computers. Here’s a look at what other battles are in store for the consumer technology giants:
1. The television set
Having already changed the way we use smart phones and personal computers, top consumer technology companies are setting their sights on the home television.
Some analysts say Apple could introduce a branded television set soon, and Google’s recent purchase of Motorola Mobility Holdings Inc., one of the world’s largest manufacturers of TV set-top boxes, could see that company stepping up its television presence.
“Ultimately we’ll have an environment where that same ecosystem [of the smart phone and personal computer]will be available on TV,” says Colin Gillis, an analyst at BGC Financial in New York.
2. Cloud computing
By storing files on a remote server, users can access them from any device, anywhere. The technology is already widespread: Google stores users’ e-mail and documents on its servers, and Apple recently unveiled iCloud, which will push users’ iTunes library, photos, documents and other information onto the company’s servers to make them accessible from various devices.
RIM just launched BBM Music, a cloud-based music storage system in which subscribers pay to access a catalogue of songs and create a personal playlist.
“It’s really just starting,” said Mark Tauschek, an analyst at Info-Tech Research Group. “All of these companies recognize the importance of it.”
3. Near-field communication
Near-field communication allows smart phone users to pay for a purchase using their device. All a user needs to do is type a password into their phone and hold it near a pay pad.
Google is set to launch a wallet app to work with the system, and Mr. Tauschek said it’s rumoured that Apple will embed the technology in its iPhone 5.
“When the first vendor comes out with it in a way that it’s widely deployed and purchased, others will say, ‘Oh, we better get on this,’” Mr. Tauschek said.
4. Enterprise security
RIM built its brand on being the most secure option for enterprises, and that niche of the smart phone market has long been the company’s bread and butter.
But that dominance may not last much longer. “Increasingly people are saying ‘I want to bring my iPhone or my Android to work. I don’t really want to carry around [my]BlackBerry,’” Mr. Tauschek said.
Apple’s products are increasingly viewed as acceptable for enterprises, in part because the company’s mobile device management service makes it possible to remotely lock or wipe a phone clean.
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