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Asymmetric Intelligence

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  1. The job the iPhone is hired to do

    Research · 94 comments

    In the latest quarterly report Apple changed how it reports product revenues. In previous quarters the iPhone and iPad were reported including accessory revenues while iPod accessories were reported under "Music" revenues.

    "Under this new format revenue from iPhone, iPad, Mac and iPod sales is presented exclusive of related service and accessory revenue […] revenue from all Apple and third party accessory sales is presented as a single line item [Accessories.]"

    Apple provided a document showing re-classified product summary data.  By measuring the difference between original revenue and re-stated revenue per product we can determine how much service and accessory revenue was being attached to each product.

    I did this for two quarters as a sample:

    Screen Shot 2013-01-24 at 1-24-2.16.14 PM

     

    The analysis shows that the iPhone has been receiving about $15 of accessory attached value and the iPad about $25. Interesting trivia, but how is this insightful?

    Consider the impact on this analysis of revenues/unit shipped:

    Screen Shot 2013-01-24 at 1-24-2.31.52 PM

    The iPhone obtained about $642 revenue/unit (shown above as the last datum in the green line). That compares slightly lower with last year's $659/unit. However, the latest quarter is on the new basis and the data in the chart above shows old basis.

    Here is the data with re-stated iPad and iPhone ASP:

    Screen Shot 2013-01-24 at 1-24-4.29.37 PM

    On a re-stated basis, without the extra revenue from accessories, the iPhone "ASP" (Average Selling Price) from a year ago becomes $646 (which, again, is not what is reflected in the graph). This is almost exactly the same as the current quarter. The iPhone "ASP erosion" therefore goes from 2.6% to only 0.7%.

    Similarly, the iPad shown at $467 in the latest quarter does not drop from $593 last year but from $568. Its ASP erosion becomes 18% rather than 21%.

    Interesting resilience with the iPhone and slightly better support for the iPad price. What does it mean?

    Pricing power is the most important indicator of differentiation and it implies an ability to create value in excess of cost. Not only that but it also indicates whether a product is being "commoditized" by over-serving the market and being substituted by lower priced alternatives.

    In the case of the iPhone the tenacious retention of its ASP indicates that the point of over-service has not been reached. Buyers are not yet switching in significant numbers to the older, cheaper variants available from Apple. If they were we would see evidence in the price first due to the change in mix.

    Contrast that with the iPad where there is a far more marked erosion. That's due to the introduction of the mini which is good enough to substitute for the larger version for many of the jobs it's hired to do. We can safely argue that the iPad is good enough in smaller form factors and addressing larger markets.

    But why isn't this happening to the iPhone? Why isn't the iPhone n-1 "good enough"? Surely consumers can do almost the same tasks with an iPhone 4S as they can with the 5. Why are they still buying the new phone?

    The clue comes from the fact that the consumer is not the only buyer. It's  operators who buy and re-price the product. They are hiring the product to sell broadband and the newest variant is still the best hire to do that job. This observation is crucial to understanding the growth dynamics of the iPhone and consequently, of Apple itself.

    I repeat what I've mentioned before: The iPhone is primarily hired as a premium network service salesman. It receives a "commission" for selling a premium service in the form of a premium price. Because it's so good at it, the premium is quite high. Also because it's so good, it gets bought in large batches which allow Apple to schedule production efficiently.

    This understanding gives us a solid basis from which to evaluate its growth potential.

  2. The new age of Capital Intensity

    Research · 117 comments

    In the post reviewing Samsung's Capital Structure I noted that its component divisions have historically taken 90% of capital investments and that the overall capital intensity for Samsung Electronics has increased in proportion to its component revenues.

    In another post regarding the capital structures of other technology companies with different business models I noted that Apple has changed its capital structure to a significant degree over the previous three years.

    In the following graph I combined these observations to show how capital expenditure patterns may be used to discern the underlying business model.

    I would group "cloud" or "platform" based companies like Google, Amazon and Microsoft as a cohort which, although spending significant amounts on capital equipment, do so mainly to support services. Their primary employment of capital is to sustain the infrastructure of data centers necessary to deliver the services underpinning their business models.

    I would group Intel and Samsung as "component" based companies which use capital to build production capacity that delivers, hopefully, a control point in the value chains they participate in. Note that I am assuming that Samsung Electronics' CapEx primarily targets semiconductors and displays as it did during the 2006 and 2007 period when data was available.

    Therefore, given the patterns over the last six years, it might be possible to classify a company's core business by just looking at its CapEx: The services group showing growth but relatively stable patterns and the components group showing more volatility, macroeconomic sensitivity and an overall higher level of spending, especially as a percent of sales.

    The question that pops up then is in what category does Apple fall?

    My observations for over a year have been that Apple is increasing its capital spending to such a degree that it is neither fish nor fowl. It operates data centers but presumably does not operate fabrication plants. And yet it spends more than Intel and Google combined.

    Contrasting Apple and Samsung Electronics tells an even more interesting story. In the following graph I've added two additional items of information: First, although CapEx spending is recorded in the cash flow statement, Apple reported in its yearly (10K) report that it spent an additional $2 billion for equipment which did not pass through cash flow.

    If we were to add $1 billion to each of the previous two quarters, the graph would look like this:

    The second piece of information is that Apple projected its spending for the following fiscal year. I've added that spending in a pattern matching the last fiscal year.

    Apple is still spending less than Samsung. In its fiscal year 2012 Apple spent about $10 billion while during the same time frame Samsung spent nearly $22 billion. However, Apple has begun to bump against Samsung's spending level on a quarterly basis.

    I consider this extraordinary evidence of an extraordinary shift in strategy.

    For a year we've been debating here to what degree Apple has a "capital intensive" business and what exactly could it be spending capital on. One early hypothesis has been that it's on data centers or on real estate for spaceship campuses. These can be easily dismissed on the knowledge that they can't cost that much (and that the spending happens gradually). Another hypothesis is that the tooling for milled aluminum cases and other mechanical components is expensive and Apple has to buy a lot of it. But, again, the level of expenditure is in the league of Intel and Samsung which make vast quantities of semiconductors in very expensive plants. It's hard to imagine milling machines being cost equivalent to chip foundries.

    The comparison with Samsung, whose vast capital commitments are legendary and are its primary strategic asset puts Apple in a new light. Perhaps we can't yet call Apple a semiconductor company or even a fabricator but they are putting their "money where their mouth isn't". We can infer that it's not going where the company currently operates. The capital is being deployed almost silently and, though vast in scale, barely gets a mention from analysts. Not even a single question has been raised at any earnings call about this spending.

    So what tale does this capital tell?

    One interpretation is to apply the value chain disruption theory and ask whether Apple is acting to counter a potential disruption. In other words, that this is a specific threat response from an incumbent. There is some logic to this because  the antagonism between Samsung and Apple is so strong that it might justify a reaction of this kind.

    However, I believe that there is a more measured process at work over a long period of time. The one distinguishing advantage and attribute that Apple has  is its preference for integration. This preference is not a secret and Tim Cook repeats it often. The integration is evident with their move into retail and component design, in other words in both directions along a value chain. So my hypothesis is that this is part and parcel of an ongoing re-alignment of their role in the value chain.

    This second explanation suggests that Apple simply wants to control all the areas which affect the value they produce. First because they feel that there are areas that are not good enough and the product/experience cannot be good enough if its constituent parts are not good enough. Second because without control there are constraints to what it can do strategically.

    Whatever the reason, I read the evidence of increasing commitment and engagement in parts of the value chain as part of a continuous evolution of Apple's role. Furthermore, it's something that should be seen as a signal of a new era in how technology companies operate. We see hints of "vertical integration" with Microsoft building hardware, and Google buying Motorola and Amazon selling devices. Apple did all these things and now it casts an eye over the next frontier: components.

    ---

    If you want to learn more about the future of the technology industries and the evolution of value chains, consider participating in Asymconf.

  3. The real threat that Samsung poses to Apple

    Podcast · 430 comments

    [The following is a post written by James Allworth.

    James is the co-author of How Will You Measure Your Life?. He has worked as a Fellow at the Forum for Growth and Innovation at Harvard Business School, at Apple, and Booz & Company. It follows and builds on a discussion we had on the 56th Critical Path podcast.

    You can connect directly with James on Twitter at @jamesallworth -ed]

    A lot of ink has been spilled in the wake of the recent Apple Samsung patent disputes, and the legal wars see no sign of abating any time soon. The rise of Samsung's phone business has been meteoric, and Apple is right to be concerned. But the real threat that Samsung poses to Apple has very little to do with the copying (or not) of Apple's designs. The lawsuits have simply been a convenient (if expensive and risky) way to attempt to quash a threat that is of Apple's own making. While there's no doubt that Google has played a key role in Samsung's success by handing out a free mobile operating system to pretty much anyone who wants to build one — it is actually Apple, more than any other company, that is responsible for Samsung's present success.

    How? By outsourcing as much work to Samsung as they have. And it's impossible not to wonder whether Tim Cook's announcement yesterday on bringing back Apple's manufacturing to the USA is the beginnings of an attempt to rectify the problem.

    But first, I want to establish why copying is actually less of a threat to Apple than you might think. Daring Fireball's John Gruber wrote last year on what he termed "The New Apple Advantage". Like most people who appreciate Apple and its products, the starting point for Gruber's appreciation of Apple is its design — he says as much in the article. But the realization that Gruber has in the article on Apple's true competitive advantage is what's really interesting:

    So let’s be lazy for a second here, and attribute all of Apple’s success over the past 15 years to two men: Steve Jobs and Tim Cook. We’ll give Jobs the credit for the adjectives beautiful, elegant, innovative, and fun. We’ll give Cook the credit for the adjectives affordable, reliable, available, and profitable. Jobs designs them, Cook makes them and sells them.

    It’s the Jobs side of the equation that Apple’s rivals — phone, tablet, laptop, whatever — are able to copy. Thus the patents and the lawsuits. Design is copyable. But the Cook side of things — Apple’s economy of scale advantage — cannot be copied by any company with a complex product lineup. How could Dell, for example, possibly copy Apple’s operations when they currently classify “Design & Performance” and “Thin & Powerful” as separate laptop categories?

    This realization sort of snuck up on me. I’ve always been interested in Apple’s products because of their superior design; the business side of the company was never of as much interest. But at this point, it seems clear to me that however superior Apple’s design is, it’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.
    (emphasis mine)

    The argument is beautifully made. The design part of Apple's equation is to their ability to redefine new industries as they did with the iPhone. Whether they go after the TV market next, or something else, it's this integrated design component that will be crucial to their initial success. But compared to the business side of Apple, design actually generates much less sustained strategic advantage in any one product category, once performance in that category becomes "good enough". The tech industry has always revolved around copying. Once folks work out how it's done, everyone piles on. And at that point, it becomes much less about design than it does about how you operate your business.

    It is the last part of the Gruber quote that really drives things home. "It cannot be copied without going through the same sort of decade-long process that Apple went through". He's right — it's very hard for a competitor to outright replicate what Apple has achieved without going through all the same steps. But it got me thinking of a concept — and a related story — that I learned from someone I was fortunate enough to have as a teacher: Clayton Christensen. Perhaps a competitor didn't have to copy Apple.

    What happens if Apple had already taught them?

    Christensen first wrote about the dangers of outsourcing in The Innovator's Solution, explaining how seeking to maximize efficiency by employing third party vendors to do the "low value-add" work for you can be a lethal strategy. In the Solution, Christensen and Michael Raynor gave the example of two fictional corporations—"Component Corporation" and "Texas Computer Corporation". I had the good fortune to work with Clay on his most recent book, How Will You Measure Your Life?, and we recount a similar story; only without any of the players being disguised. The story is that of Asus and Dell, and how by outsourcing its work—starting with just basic circuit boards—Dell equipped a competitor:

    Asus came to Dell and said, “We’ve done a good job fabricating these motherboards for you. Why don’t you let us assemble the whole computer for you, too? Assembling those products is not what’s made you successful. We can take all the remaining manufacturing assets off your balance sheet, and we can do it all for 20 percent less.”

    The Dell analysts realized that this, too, was a win- win...

    That process continued as Dell outsourced the management of its supply chain, and then the design of its computers themselves. Dell essentially outsourced everything inside its personal-computer business—everything except its brand— to Asus. Dell’s Return on Net Assets became very high, as it had very few assets left in the consumer part of its business.

    Then, in 2005, Asus announced the creation of its own brand of computers. In this Greek-tragedy tale, Asus had taken everything it had learned from Dell and applied it for itself. It started at the simplest of activities in the value chain, then, decision by decision, every time that Dell outsourced the next lowest-value-adding of the remaining activities in its business, Asus added a higher value-adding activity to its business.

    There are two sides to this story: the part that relates to Dell, and the part that relates to Asus. Dell, in its quest to maximize its financial efficiency, continued to outsource way beyond manufacturing components and assembly. They outsourced a long way up the value chain. But there's also the side of the story that relates to Asus — a small components manufacturer that was, in effect, nursed to success by Dell. The extent of the schooling delivered by Dell to Asus was pretty profound, given how far up the value chain Dell outsourced its operations.

    But here's a question: at what point did Dell seal its fate? When was it that Dell had outsourced enough that Asus, with a desire to simply get out of the low-value work, could have made it all the way to the point that it did? I'm beginning to wonder whether just component development and assembly was enough. In the case of Samsung, it seems that everything else they needed to learn, they did by entering the emerging market, which Apple has largely left alone.

    Now, it's obvious that there are some very clear differences between the decisions that Apple have made in terms of outsourcing, and the decisions Dell have made. Dell outsourced its business all the way up to the design of its products. In many respects, Apple is doing the opposite — going so far as to even bring chip design in house. Horace has done some fantastic work detailing the extensive amount of investment Apple has made in its supply chain and it's clear that they've spent a lot of money investing in equipment used in production.

    But there's also no denying that Apple has begun to rely extensively on a network of suppliers across Asia.

    It's when you start putting the two arguments together that you realize that Apple may have a more serious problem on its hands. I want to again recount the final two lines of Gruber's argument:

    It’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.

    He's right — generating that scale requires a long gestation period — one that Apple went through. And it can't be copied without significant time and effort on the part of a competitor. But there's one big implicit assumption here — that suppliers won't turn around and start developing their own offering. Because when Apple went through this transformative process, where the design whittled down the broad range of offerings to just a few, and they generated the scale on the business side that accompanied that — they weren't actually the only one to go through that process. Apple's partners — their suppliers — went through it with them. And they've got very big, and very good at what they do. Samsung, obviously, is among those partners.

    Now, the response I often hear to this line of reasoning is: Apple hasn't outsourced anywhere near as much as Dell has. How are the situations analogous? But I think it's actually the wrong question. Instead, the question is: has Apple already outsourced too much?

    For all intents and purposes, we're at a level of maturity in the smartphone market where I believe design — particularly on the hardware side — has largely become commoditised. Performance is now "good enough". Whereas it was not so long ago that consumers sat on the edge of their seats to find out what the new iPhone had to offer ("please, fix the battery life", or "please, make it faster") the recent release of the iPhone 5 seemed not to generate the same intense reaction. Now, I'm not saying it won't sell well — in fact, it will probably become the best selling phone of all time — but people aren't making these decisions based on huge design differences between the devices. The basis of competition has shifted. HTC recently learned this the hard way when it introduced the One X — a phone that, to the critics, at least, was considered the best Android phone available — "a masterpiece",  "one of the best mobile devices I've ever used". Yet it has been absolutely crushed in the marketplace by Samsung.  How? Well, Samsung used its business scale to, as Horace put it on Twitter, "invite operators to a better party with an eye-watering marketing budget". This has nothing to do with Samsung making a better phone (they probably didn't), or Samsung copying Apple (indeed, HTC may have just done a better job of copying Apple). Instead, it has everything to do with the fact that Samsung has had its business sucked along in Apple's slipstream.

    There's another way of seeing just how deep the problem lies. Jobs promised "thermonuclear war" on the copied devices, and so far, the biggest target of Apple's many legal warheads has undoubtedly been Samsung. Getting a $1 billion judgement certainly proves Apple was serious about it. But doesn't it seem strange to you that the target of such a devastating strategy on the legal side, just so happens to be… one of the most important suppliers for Apple's new phone?

    The problem that Apple is facing right now has nothing to do with their designs being copied. There is a long history of copying in the tech industry; patents being deployed in lawsuits by giants often signify desperation more than anything else. Rather, the problem that Apple faces is that it now is going up against at least one competitor that has been a beneficiary of the scale that Apple has achieved on the business side. Samsung has clearly demonstrated that, like Asus, it was not satisfied being a low-margin ODM — of doing all the menial work while somebody else made the big bucks. Suing Samsung over Android patents isn't going to change that — if Google's operating system gets too expensive to use, there'll be a switch made to Microsoft. Or to another operating system altogether. It doesn't really matter, because design in the smartphone space has been commoditized. It's good enough. Manufacturers are now creating performance that most consumers aren't able to absorb. Instead, as we've moved into a world where performance is now "good enough", the world has flipped into one where it's the business side — operational scale — that matters most.

    Apple have taken steps to minimize the ability of competitors to duplicate their business advantage. There's a great post here on Quora describing how Apple has used its supply chain as a competitive advantage and how competitors end up subsidizing Apple's use of the technology. But the approach of "locking in" key new technology so nobody else can get them works best in a world where consumers need more performance from their devices — a world is rapidly slipping away.

    So, what's Apple got to do? In so much as it is able to trust its suppliers of key components not to become competitors, it can continue to use them. But where it can't, or where those suppliers have already become competitors, it has only one sensible choice — replace them. It has two choices here: the first (and obvious one) is with another supplier. But that risks the same thing happening all over again — Apple nursing another supplier into a competitor. The second choice: for components and services that are critical to maintaining competitive advantage in the markets which Apple plays, Apple needs to build the components themselves.

    Most companies wouldn't be in a position do that. But Apple is almost already there. I also hear that there might be a country out there with relatively high unemployment rate, looking for some jobs to be brought back home. Funnily enough, it seems that's just what Tim Cook is doing right now. This approach might just be a good way of on-shoring some of those untaxed offshore profits (I imagine the tax benefits for building a few factories in the US would be quite high), all the while taking away business from competitors — both current and future.

    But there's one question that still remains. In the instance of the threat that Samsung poses to Apple: is it already too late?

    –

    Looking for more information on the renaissance of production and its effect on the technology industries? Then come to Asymconf and take part in the debate.

     

  4. Is the iPhone good enough?

    Research · 180 comments

    We don't want to just make a new phone. We want to make a much better phone.

    - Jony Ive, video at iPhone 5 launch event

    Disruption theory has taught us that the greatest danger facing a company is making a product better than it needs to be. There are numerous incentives for making products better but few incentives to re-directing improvements away from the prevailing basis of competition.

    This danger is more acute for technology companies. Coupling incentives with the speed of improvement in various technologies (aka Moore's law) means that over-service can come suddenly and more quickly than warnings from the marketplace. A product can tip from under- to over-shooting the market within one product cycle. One year the product is under-performing and trying to catch up to the competition and the next it's superfluous and commoditized. The dilemma is compounded by the cycle time of development which can span multiple product cycles.

    Therefore, how to tell whether a product is over-serving a market is one of the most important and frequently asked questions I get asked. It's easy to see over-service in the rear view mirror when looking at a multi-year pattern. The trouble is that by the time you see the data, it's too late. How do you tell you're on the cusp of good enough, subject to imminent disruption before you get there?

    I consider measuring a product's absorbability to be a marketing problem. The marketer's job is to read the signals from the market[1]. Determining absorbability comes down to reading two market signals, both of which must be met before green-lighting an improvement:  (a) a product's improvements must be used and (b) a product's improvements must be valued.

    If a product's improvements are not used and the buyer will not pay more for them then they are not being absorbed and the effort to develop the improvements should be redirected.

    Now the problem becomes one of measurement. Of the two, utilization is easier. Data can be gathered on whether a feature is being used. Research methods exist to tell if a feature would be used even if it's not available[2]

    The more difficult assessment is that of the value of a feature. You can usually only tell value by trying to price it and watching what happens. For example, you add more speed/memory/capacity and try charging more (or the same) for the product. The acceptance will be measured by sales growth and will give you an indication of whether these improvements are valuable.

    If you have to add features and drop prices at the same time then it's likely that the market does not value the improvement.

    But this is extremely risky. You need to wait through a sales cycle and iterate through a development cycle before you have an answer. In a space where competitors are placing opposite bets, the experiment fails even if you get the data.

    How can you structure a value measurement experiment without wasting an opportunity?

    Rather than dealing with hypotheticals, let's use the iPhone as a test case. As Jony Ive states, the focus for the latest iPhone was to make it better. Is this improvement absorbable? What happens if Apple's bet on being better is wrong?

    First, we can confirm that the iPhone has been on a trajectory of getting better and that those improvements have been absorbed so far. We can measure the history of performance of the product (roughly doubling every year) and we can also measure proxies for performance as I have in the following charts:

    As the product has been improved along these dimensions, sales have increased and prices have held steady (even rising occasionally.)

    The question is about the future: what about the latest "5" variant?

    The clue to this experiment is the presence of a control group.  We could test the question of absorbability by keeping a version of the product which did not improve (or got cheaper) and measuring whether it performs better vs. the "improved" version.

    Of course, this is exactly what Apple does with the n-1 generation products. By ranging products which are older and at lower price points it can measure whether the improvements are valued.

    If sales of the n-1 variant were to increase relative to the new version then they can understand when they are at the point of good enough. The experiment is brilliant because the margin on the older products is maintained even at the lower price point.

    We don't have public data on the performance of the old vs. the new but some studies show that, at least in some markets, the older variants have, so far, been a minor part of the sales mix. The CIRP study from early this year showed that about 90% of holiday iPhone sales in the US we for the latest (4S) variant. If this pattern persists globally and for the 5 then the improvements can be said to be valued.

    If the new features (as represented by the metrics charted above) also get broad engagement--data which Apple can easily obtain--then the iPhone 5 can be declared not good enough. The company can then comfortably work on improving it further.

    ---

    1. Note that the marketer's job is to listen not to talk.
    2. e.g. contextual inquiry.
  5. Positioning Lumia

    Research · 17 comments

    The US has reached 50% smartphone penetration.

    comScore data shows July penetration at 48.8% and a monthly growth in penetration of nearly 2 percentage points. Given the rate of growth, it's nearly certain that we've crossed 50% in August.

    The historic growth is shown below:

    The platforms making up the smartphone market in the US have seen unequal shares of this new population of users. The following diagrams show how the install bases have changed in absolute and share terms.

     

    To round out the analysis, here is the net user gains for the platforms showing the net addition or loss of users since early 2010.

    What I look for in this data are signs of slowing adoption (so far there aren't many), subtle shifts in platform performance (as seen in RIM's move from consistent net gains to consistent net losses) and signs of churn or the transfer of users from one platform to another (rather than from non-consumers to consumers.)

    The story in the latest data seems to be that Windows Phone has turned in a first significant gain in users (378k new users). Its share seems to have stabilized at around 4%. This is in contrast to BlackBerry whose hemorrhage continues (a net of 7 million users defected from the platform in the last 12 months.)

    On this occasion of reaching what I've called the tipping point, it's worth reflecting on just how far we've come. In December 2009 the total number of smartphone users in the US was 39 million whereas now it's about 115 million. That's a total of 75 million new users in a bit more than two and a half years, quite a story there.

    And yet, half of the phone users still remain to be converted. It's possible that the growth in adoption will remain steady but it's also possible that it might slow down and follow the "S-curve" adoption rate that new consumer products typically follow, perhaps reaching saturation at some point below 100%.

    If growth slows immediately then there will be more churn between platforms. If rapid growth can be maintained then there will be more competition with non-consumption rather than between rivals for some time still.

    The changing character of competition will need to be reflected in product strategies. Non-consumption is typically an easier competitor to beat with features. Switching users from a comparable product is harder and may require pricing pressure. To solve this in a time of transition, new products will have to split into a set offered to new users and another set offered to switch users.

    You can see the pressure of this on the Windows Phone platform most of all. As a late comer, does the Lumia range from Nokia fit the bill as targeting non-consumers or switchers?

    In other words, has the brand been positioned as a "better" smartphone or as a "good enough" smartphone? It matters because the "good enough" position has been held by Android overall while the "better" position has been held by iPhone. However, not exclusively. We've seen "better" positioning from Samsung's Galaxy S and Verizon's Droid brand and "good enough" positioning from the older variants of iPhones.

    So it's quite difficult to see where Lumia fits in the US. There is no obvious opening. The next 75 million first time US smartphone users may be attractive to Microsoft and Nokia but it's not clear why, having waited so long, those buyers will be persuaded by the new brand. Perhaps subsidies will help. As indicated with the first US Lumia launch, the product was priced at a discount to the prevailing price point for a premium smartphone. Perhaps that's the "good enough at a good price" strategy.

    If so, it has not been a home run. Perhaps there is still time for this strategy to play out in 2013 but what if Lumia is not actually being marketed this way?

    At launch Nokia has tried to promote the brand as something "better". Better camera, better charging, better maps, better screen, etc. They have promoted on Twitter with the #switchtolumia hashtag. Microsoft has had the "Smoked by Windows Phone" campaign targeting specifically existing smartphones.

    I don't want to suggest that one positioning is more appropriate or more likely to succeed than another. That's a tough call. Either could be the right choice. What I would suggest however is that there needs to be clarity of thought and communication on the matter.

    Perhaps the launch of the new Lumias (920, 820) is part of a clear positioning toward the high end. But the absence of pricing and distribution and how the operators will be engaged leaves the question open. The strongest criticism of the effort so far is this lack of clarity about how the product is intended to be perceived by the buyer.

    A lack of clarity in positioning is symptomatic of a lack of clarity, or maturity in strategy.

  6. The phone market in 2012: a tale of two disruptions

    Research · 96 comments

    During the first quarter this year HTC, RIM and Nokia all surprised investors with bad news. The effect is evident in the share price of these companies which, in the case of RIM and Nokia is around book value, and in the case of HTC, neared 12 month lows and a 70% drop from peak.

    These "misses" in earnings and expectations are on top of the already woeful news from Sony Ericsson and Motorola, which have not had profits for years and LG, which has been borderline since late 2009.

    In combination, this seems to imply a dearth of profits in an industry that is, by all measures, booming. Units are up 7% with smartphones up 47%. Revenues are up 20% and overall profits are up 52%. This are exceptionally strong numbers. Few industries can measure growth in double digits.

    So if the industry is booming but the majority of participants in the industry are loss making (and surprisingly so) then what is going on? There are two answers: new market disruption and low end disruption.

    The new market disruption is the migration of a large number of demanding customers away from phones-as-voice-products to phones-as-computing-products. The low-end disruption is the migration of a large number of less demanding customers from branded phones to unbranded, commodity phones.

    The New Market Disruption

    The new market disruption is evidenced by the shift of fortunes to Apple and Samsung and away from every other device maker. Here is the profit picture:

    Of the vendors tracked (public companies who report mobile phone divisional performance), Apple obtained 73% of operating profits, Samsung 26% and HTC 1% [1][2].

    The "share of profit" picture is potentially misleading because it could imply that the profits available are a constant. They're not. The absolute profits picture below shows how the industry actually expanded available profits by quite a lot. Two years ago the vendors generated profits of $5.3 billion in the first quarter  and last quarter they generated $14.4 billion.

    Seen this way, the story isn't so much that Apple "took the profits from the incumbents". Rather, it's that Apple created a vast new pool of profits. And one need not look far to find out where they came from: operators. These profits were mostly carrier premiums for the iPhone 4S.

    Before shedding tears for operators, consider that although this does amount to a current transfer of profits from carriers, the decision is a popular one. Hundreds of operators have made it. It's unlikely that they all colluded to be robbed. Indeed, they willingly hand over these premiums because the iPhone ensures a competitive advantage or preserves their customer base from churning. The calculations that go into a decision to range the iPhone are compelling enough that 250 operators made the decision (though, crucially, there are still 250 who have not).

    Following this value proposition to its logical conclusion would suggest that the industry is rewarding those who can supply computers-as-phones which preserve the cash flows of what is essentially a trillion dollar data services business. Vendors which cannot offer this solution saw their businesses implode. At least on the high end.

    The low end disruption

    Simultaneous with this shift of the high end to smartphones-as-app-and-service-platforms came an explosion of growth in unbranded phones. As Apple led and most brands followed the new market, the old market of voice-oriented phones was abandoned to new entrants offering cheap "good enough" phones. Nokia tried to preserve its volumes and margins there but it's becoming increasingly difficult.

    The following chart shows how the "Other" vendors have come to make up about 44% of the market.

    Note that although this "feature phone" segment is not growing, it is still a large market (250 million units a quarter). The entrants in this market are numerous (perhaps in the thousands) and they are offering white label and unlicensed knock-off products. They are also offering unregulated (i.e. without IMEI numbers) products which are technically illegal and sold mainly in underdeveloped countries which have no incentives to enforce regulations.

    This is a consequence of feature phones reaching the point of being "good enough". The feature set and quality are adequate for voice, text, games and even media playback and are priced at $30 or less.

    This commoditization of the low end is pressuring what would normally be the fallback cushion under an underperforming smartphone business. The crisis for the incumbents comes from not only being unable to shift to the new market as fast as needed but also from not having cash flows from a low end that was thought to be sustaining.

    This combination of two disruptions is why we see an explosively large and growing market failing to reward all but two of the participants.[3]

    ---

    Notes:

    1. You can download, view and interact with a motion chart for the industry data here. All data is sourced from company filings except for some estimates where data is missing.
    2. Operating profits are sales minus cost of sales minus operational expenses attributed to the business. When not available, opex is estimated as a percent of total in proportion to sales. Note that operational income excludes taxes, depreciation and other capitalized costs.
    3. We cannot say that the thousands of low end entrants are unprofitable. They are probably enough profits to sustain them and even to attract more entrants, but we have to also recognize that there are likely to be very low margins.
  7. The parable of Nintendo

    Research · 109 comments

    With the launch of the Wii console, Nintendo averted disaster. When the Wii launched in late 2006 Nintendo had been facing the simultaneous attack from the "seventh generation" Xbox 360 which launched a year earlier as well as the PlayStation 3, both of which set as their bases of competition 3D graphics at HD resolutions. Many wrote off the company and called the console market a two horse race.

    Then, in what seemed a desperate downward leap, the Wii was launched into a different trajectory. It addressed non-consumers with a new, more intuitive controller and standard resolution rather than competing for hardcore gamers with more power and richer graphics.

    Because the Wii was asymmetric and addressed non-consumption rather than trying to be a "better" console in what was becoming a horsepower race, Nintendo expanded the console market. Its innovation was interesting enough that many hard core gamers used the console in addition to a PS3 or Xbox and many non-gamers bought it as their first console.

    The result is that 95 million Wii's have been sold vs. 66 million Xbox 360's and 62 million PS3's.

    The effect of the Wii introduction on Nintendo's console unit sales is shown below (pink line).

    The graph above shows that the growth from Wii has stopped. In fact, the console has been in decline since early 2009. Fortunately for Nintendo, the company also developed a mobile strategy. Learning from its Game Boy device, its DS series of portable game consoles allowed the company to diversify its portfolio. The graph also shows the total portable units sold in blue.

    However, this strategy has not been enough to protect the company from the disruptive effect of mobile computing. As the following chart shows, each new generation of portable from Nintendo has failed to break out of a general pattern of overall decline.

     

    Contrast the DS product patterns with the iPod touch and iPad--multi-purpose products whose game functionality is "good enough" but whose communications and general-purpose app catalogs are re-defining the basis of competition yet again.

    Nintendo bet on the 3DS to reboot the franchise. The 3DS product does show the characteristic initial spike in adoption but the level it launched at is far lower  than the level of the iPad. Nintendo has a big hill to climb to even recover the volumes it held in 2009. In contrast, the usurper Apple's volumes are doubling each year.

    When products are compared as "ramps" in terms of growth post-launch the story becomes even clearer.

    Although the iPhone and iPod touch ramped in similar ways[1] to the gaming platforms, iPad took an entirely different path. The 3DS benefited temporarily from a price cut but it seems to be returning to a well-worn trajectory.

    The data points a bleak picture for Nintendo. The Wii was a success due to its competitiveness vs. non-consumption of gaming. But another low end disruption took hold in 2007. Good enough games on phones and mobile computers are taking consumption away from dedicated consoles, both fixed and mobile.

    In addition, the rate at which game experiences are improving on iOS imply that they will overtake the "quality" of consoles in the not too distant future. Differences in distribution models also guarantee lower pricing for software for end users and enabling a far larger catalog of titles.[2]

    This may sound like another story of fortune gained and fortune lost. The inevitable "what goes up must come down" aphorism. We become used to this pattern and assume it to be axiomatic. But there are causes for each success and causes for each failure.

    The lesson here is that a company that disrupts does not necessarily survive. Long term survival depends on the ability for serial disruption. Serial disruption is an uncomfortable state for an organization to exist in. As the story above shows, disruptions are usually enabled by "desperate" necessity. Desperation is not something management is trained to aspire for.

    What management strives for is steady state satisfaction and predictability from intelligent planning.

    ---

    Notes:

    1. Though the iPhone ramp matched the consoles, the growth for the iPhone is persisting at 100% y/y five years into the product. This means it is outstripping all console installed bases by at least a factor of 2.
    2. The catalog is not only broad but deep in the sense that there are many new game concepts and experiments being tried. The app store is a vast testbed for game and entertainment ideas.
  8. Why total net profits are not conserved

    Research · 28 comments

    When cellular phones emerged in the 1980’s wireline phone service was excellent. Penetration was at 99 percent in the United States and prices had never been cheaper. The industry was deregulated and phone companies were competing fiercely over long distance calling plans. In contrast, the new cellular phones were not “good enough” on the basis of what was considered necessary for making critically important phone calls.

    Sound quality was poor, coverage was spotty and battery life measured in minutes. But they allowed a whole new consumption model of communication to emerge. They allowed a caller to call a person not just a place. Over time, this simple value proposition caused a powerful profit formula to emerge. That formula led to extremely rapid improvement in the quality of the network and devices that connected to it.

    It caused such a cataclysmic change that twenty years hence it became possible (even natural) for consumers to “cut the cord” and abandon wireline communications altogether. The “excellent quality” wireline industry was dead to be replaced by the "good enough" wireless industry.

    One consequence of mobile telephony was increased consumption. Voice call minutes increased dramatically because calling could happen anytime from any place. While overall consumption increased, landline use decreased. Then came messaging of various types. Forms of communication enabled by cellular networks that simply did not exist before with landlines.

    As a result there were vast pools of profits available to telcos that seemed to appear out of nowhere. SMS and data plan income was beyond anyone's ability to forecast in the 1980s.

    The same phenomenon is happening with smartphones. Consider a proxy measure: operating profits from mobile phones since the iPhone launched, illustrated below.

    Although Apple went on to capture 75% of the profits, it did so from a vastly expanded profit pool. A similar picture emerges from an illustration of revenues:

    Another way to visualize the evolution of the market is to look at the combined price, profit margin and volume areas for the fourth quarters of 2009, 2010 and 2011.

    Scanning from top to bottom, you can see how volumes grew, revenues grew and profits both grew and were re-allocated among participants (each colored pixel in the charts above is equal to about $1 million.)

    These charts illustrate that there is no "law of conservation of profits" in any market as long as there is sufficient innovation. This is because the there is no "law of conservation of value created". If value is presented, buyers will gladly trade cash for it. Conversely, if there is no value-generating innovation, growth stops and competition reduces to a zero-sum game.

    One of the most exciting aspects of disruptive growth is that although it tends to transfer profits from incumbents to entrants, it also grows the size of the overall market. Sometimes the growth is significant.

  9. Clayton Christensen and Siri

    Research · 165 comments

    At the Open Source Business Conference in March 2004 Clayton Christensen gave a presentation. It's available as an audio file for download here: Clayton Christensen | Capturing the Upside. I strongly recommend listening to the whole thing because it's the quintessential Disruption lecture.

    It has relevance in many areas of analysis, but when I was trying to think of a way to characterize the potential for Siri I recalled one particular passage that I saw as almost clairvoyant. Seven and a half years ago, Clay said:

    ... the next time you go to a computer superstore, go to the voice recognition software shelf and pick up a box there that’s called the IBM ViaVoice.  Now don’t buy it, but just look at it!  They have a picture of the customer on the box, and it’s an administrative assistant who is sitting in front of her computer wearing a headset speaking rather than word processing.

    You think about the value proposition that IBM has to be making to this woman.  She types 90 words a minute.  She is 99% accurate.  If she needs to capitalize something, she just instinctively presses shift and cruises through.  And IBM has to say, “No, don’t do that anymore.  I want you to put this headset on and teach yourself to speak in a slow and distinct and consistent manner in complete sentences.  If you must capitalize, you must pause, speak the command “capitalize,” pause, speak the word you want to capitalize, pause, speak the command “uncapitalize,” pause, please be patient, we are 70% accurate, this will get better we promise.”

    This is not an attractive proposition to this customer.  And IBM has -- I’ve not worked with them at all, but as I understand it -- they’ve spent maybe $700 million trying to make voice recognition technology good enough that it can be used in that market.  This is a very difficult technical hurdle to surmount. Meanwhile, while they are investing that aggressively, Lego comes up with these robots that recognize “stop,” “go,” “left,” “right,” and the kids are thrilled with the four word vocabulary, and then "press -- or -- say -- one" kinds of applications take root, and now directory assistants ask you to say the city and state and so on, and much simpler, and an interesting market is emerging.

    I bet maybe the next place it takes route is in chatrooms because the kids don’t spellcheck or capitalize anyway, and they would rather speak than type.  And maybe then the next application would be, when you see these stubby fingered executives with their BlackBerrys trying to peck out emails, and their fingers are four times the diameter of the keys, they’re only 70% accurate.  If somebody gave them a voice recognition algorithm that really didn't have to be very good so that they could speak their wireless email rather than peck it out, I bet they’d be thrilled with the crummy product.  And ultimately, as it takes route in these new applications, it may get good enough that we can do word processing with it, but it’ll be a long time.

    The thing that strikes me about Siri is how "crummy" it is. It's trying to be an intelligent assistant but it's not nearly good enough. Many have called it "toy like". It was so uninteresting that there was minimal coverage of it after the keynote launch. One can almost forgive the cynics. It was "yet another feature".

    However, it does seem to be good in a very limited set of tasks. It is something you can hire for some minor jobs that you'd rather not do. Basic calendar booking, context aware search and a few delightful surprises. But it's not trying to be much more. It's not trying to be a typist. It's not trying to be a companion. It's not trying to be smarter than you and make you redundant. It's only trying to help lubricate your life. This is what makes it so exciting.

    Like the example of the toy robot that delights the child, Siri delights with simple competence. It's not profound but as Clay points out in his talk, it's a necessary first step. What must follow are many more steps. Siri must get better. And because it will have at least 200 million users, I'm betting it will. So over time it will take on more tasks and will eventually help us in ways that we cannot yet conceive possible today. This is just like the introduction of the capacitive touch screen. Popularizing the touch screen has led to experiences with phones and tablets which we did not think possible four years ago.

    But it takes time. Like any truly useful breakthrough, it takes a long time to mature. And also like any disruption, the potential of Siri is rooted in four principles:

    1. Humble early goals which it accomplishes well
    2. A large population of enthusiastic adopters who give it sustenance
    3. Plenty of headroom in improvement giving it areas to grow into with positive feedback
    4. A patient sponsor who makes a stable living

    There's no magic to it. In fact it's banal. These are only the principles that every parent uses to raise a child.

     

  10. The case against the Kindle as a low end tablet disruption

    Research · 232 comments

    In an Harvard Business Review post Rob Wheeler makes the case for the Kindle Fire as a disruptive innovation. I believe that it is but crucially I disagree that the Kindle Fire is a low end disruption.

    My assessment of the Kindle Fire is based on the two attributes which Amazon highlights as the key selling points which offer a basis of differentiation and potential for asymmetric competition: a low price and a new browsing model. I believe that these two attributes result in two opportunities: one for low end disruption and another of new market disruption. I reject the first and tentatively support the second.[1]

    The price

    It's immediately obvious that the price point of the Kindle Fire is well below alternatives. That forms the basis of disruptive potential, but before we jump to analyzing the disruption hypothesis we should determine whether and to what extent Amazon profits from the device directly. Profitability gives us a clue to where Amazon will apply resources and thus establish its trajectory of improvement.

    We know the margin on the Fire is low because we can calculate the bill of materials for 7" tablets. Gene Munster of Piper Jaffray estimates that Amazon "loses" $50 for each unit sold. We also know that the design Amazon used is essentially very similar to the RIM PlayBook and was sourced from the same ODM. RIM priced the product at $499 but has struggled to find buyers and is reluctantly dropping the price. We also can estimate that Apple with a product having more than twice the screen size is keeping modest (~30%) gross margins for at a price point approximately double that of the Fire. It does seem that Amazon does not have much or any margin to dip into.[2]

    So the Fire can be classified as a low price product. Does that make it a low end disruption?

    Disruption requires asymmetry but it also requires the ability to go up a trajectory of improvement along the basis of performance that a majority of users demand. The first condition is met, but what of the second? In a combined system where one asset is used to leverage another--the subsidized being sacrificed to benefit the profitable--success is conditional on one element being "good enough" while the other "needing improvement". Investment follows accordingly.

    But investment decisions have consequences. The subsidized device is starved of investment while the profitable service is nurtured. We see evidence of short cuts in investment in the off-the-shelf nature of Kindle products: from a second-hand (unsanctioned) OS to a second-hand (ex-RIM) hardware. Meanwhile, Amazon spends heavily on capex for the infrastructure that delivers the profitable content.

    If the hardware is indeed commoditized and cannot be usefully improved, then this model works. If, on the other hand, the hardware and systems software can benefit from dramatic improvements in technology then the model fails. The very asymmetry of a service vs. a product turns into the latter having all the advantages and the former failing to gain traction.

    I'll give three examples of this how service model creates limitations which lead to a failure to disrupt a product model.

    The Game Consoles

    The first is the game console business. In consoles, the vendors maintain long hardware product life-cycles to recover their hardware investment and subsidy by maximizing the number of games attached to each console. If you plot product cycles you realize that the bigger the subsidy, the longer the hardware lifecycle. The result is a very wide turning circle which prevents innovation in new dimensions.

    Consider that the Playstation or the Xbox could have been a low end computing disruption. The original Xbox was in fact a PC. It was supposed to bring PC dynamism to the console business and create a cottage industry of new developers building games on commoditized hardware. However by the second generation the Xbox was a locked down, custom architecture, pure gaming machine. Gone was Intel, gone was the PC architecture and gone was any dream of cheap development.

    This is entirely due to the economics of subsidized hardware. It compelled Microsoft, the world's greatest software company, built on the open and cheap PC architecture to make closed, expensive hardware. Sony followed in kind as did Nintendo. Each generation of consoles was a sustaining improvement on gaming and had no ambition beyond gaming[3]. The subsidy and the dependence on an integrated content value network led to a distinct lack of disruption and an insular industry which continues to seek out increasingly immersive experiences for increasingly demanding customers while itself being disrupted by casual, mobile gaming.

    The Set-top boxes

    The second example is the TV set-top box business. There again, the vendors maintain long hardware cycles in order to recover subsides. There too, the main value driver is the content and its distribution which stipulates the architecture, and through subsidy, defines its evolution. This offers the vendor no motivation to improve the user experience[4], secondary uses or the absorption of new streams of content (like those the internet can offer.)

    Again, the set-top box could have been a budding disruptive opportunity for Microsoft. They invested billions in the 1990s to acquire placement of software on set-top boxes in an attempt to penetrate the living room. And again Microsoft was not alone. Since then Tivo, Google and Apple and many others tried to attach cheap hardware to video streams. They all failed to get on a disruptive trajectory. And again, the blame can be placed on the stifling effect of subsidies and dependencies on services or content which dictate where the value and hence the investments should go.

    The Blackberry

    The third example is the RIM Blackberry. Although RIM made most of its money on hardware and was by no means subsidizing it, the differentiation of their product was undoubtedly its service value. Both as a corporate device with BES and as a consumer device with BBS, customers "hired" the product as a service. By being committed to this model RIM management became blind to the hardware and client OS software innovations coming down the pike.

    Through their own admission, they could not accept a touch screen because it would make the messaging experience too slow and it is messaging that sells Blackberries. They could not accept apps (and hence platform orchestration) as a differentiation because their customers did not hire Blackberries for "lifestyle apps". Merely being differentiated as a service leads to blindness and enough hesitation that you run off the disruptive rails.

    People ascribe myopia or incredible absence of mind to RIM's management but the opposite is true. They were deeply committed and observant of the things which made the Blackberry successful. It just happened to be something that stopped being relevant.

    The iPhone

    I'll add one more "bonus" example on this. The iPhone is also a subsidized product and it seems very successful. How come it won? The answer is in details. As I mentioned, the other products ended up in poor life cycles or incorrect motivations. The iPhone differs in that the lifecycle of the product is much shorter (2 years ownership with 1 year for product updates). The shorter lifecycle works for the iPhone because it has a very high service revenue base to dip into to offset the subsidy. Something none of the content models above could count on.

    Consider that each game console subsidy needs to paid off by a handful of game titles whose royalties to the console maker are modest. Or that the TV box needs to ride on top a service that also has thin margins from a stable or slightly shrinking user base. In contrast, the iPhone enables vast new consumption worth thousands of dollars to the operator. This is the famous ARPU uplift that smart phones enable. Users are doubling their telecom spending when they move to smartphones.

    The margins for Kindle content are thin. Very thin. Apple runs its content business at break even though it transacts billions of items per month. The amount of content that needs to pass through the Kindle ecosystem (with lower prices than Apple charges) will need to be astronomical to make it profitable on the shortened cycle time the iPhone enjoys. Thus the Kindle is likely to languish in a leisurely update cycle with users encouraged to hang on to their devices for years. This is the case at least with the original e-Ink Kindles. How eagerly awaited are new generations? How many users stampede to update the hardware or even upgrade the software? How many users have owned every version of the Kindle?

    Service Scale

    Finally one last point about services. As Amazon asserts, they see Kindle as a service, which, I concede, is asymmetric to a product business. The problem is that services don't scale as well as products. Consider that none of the content streams that Amazon will depend on are available outside the US. The Kindle has not been a strong seller internationally. This is because book rights are limited to national boundaries as are movie rights and song rights. Apple has only this week finally completed the rollout of iTunes music to all of Europe! A process that took almost a decade. And they are still unable to sell music in most of Asia and forget about movies or TV shows.[5]

    The reality is that there are no global service brands. Not in telecommunications (operators are, at best, regional), not in Media (TV, radio, publishing are a local businesses), not in Banking (not even in commercial banking) and not in Retail (even Wal-Mart was humbled trying to export its disruption). The internet has not broken down any of these boundaries and even Amazon has modest reach outside the US for any of their franchises. Services are local but products can be global.[6]

    To wrap up, this discussion on the asymmetry of device-based services to product models leads me to conclude that the Fire will not have the opportunity to disrupt the iPad or tablets in general. Amazon sees the hardware and software of a device as a commodity and the content and its distribution as valuable. This assumes that the device is "good enough" and will not require deep re-architecting or that new input methods can be easily absorbed. In short, they see the tablet as at the end of its evolutionary path. Apple sees the exact opposite. The iPad is 18 months old, and as they say in the ads, they see it as only the beginning.

    ---

    Notes:

    1. Due to length of discussion, in this post I will make the case against the low end disruptive potential and use a second post to make the case for it being a new market disruption.
    2. Presumably, Amazon will also distribute only through Amazon.com and thus not incur channel mark-ups. This means that comparisons with other tablets should be at a price nearer to 70% of retail.
    3. Gaming networks and video streaming are extensions but neither leveraged open architectures.
    4. See also discussion from June 2010 on the challenges to Apple TV that Steve Jobs enumerated.
    5. Apps are another story. Because it controls the medium, Apple can and does sell apps in every country where the iPhone or iPad or iPod touch is available.
    6. Note also that because of distribution through Amazon.com, the Kindle cannot reach as many buyers as a tablet selling through the tens of thousands of points of purchase that operators and retail shops offer.

     

  11. The case for the iPad's future

    Research · 168 comments

    The question of low end disruption should be a concern to any manager. It's one of the most important sources of growth and has led to a vast amount of wealth creation.

    Apple was an early low end disruptor by selling personal computers at a fraction of mini-computer prices. Toyota also offered "cheap" cars as an entrant in the market. Pixar made blockbusters for a lot less than live action studios. Google offers good enough office software without a license. Finally Microsoft built its whole business on low-end business software at knock-down prices.[1]

    All these entrants made fortunes often at the expense of entrenched incumbents. Disruption grows the pie but also transfers a lot of value away from existing competitors.

    So it should not be surprising that new products like the iPad should be scrutinized for their vulnerability to low end disruption. Brian Caufield asks the question if Apple has any future with the iPad given the potential for $99 tablets.

    The question is indeed why not introduce an ultra-cheap tablet, for example from Amazon, which makes up for the low price with an innovative business model like selling content or user behavior data. After all, game consoles are sold this way. This is the classic razor/razor-blade business model.

    The answer to why not is actually not simply that the economics don't work. They might work some day even if they really don't today.

    The answer to why not is that the iPad is not good enough.

    Disruption (low-end or otherwise) happens when a product over-shoots the market. It makes sense to compete on a new basis, be it low price or convenience or customization, if the prevailing basis of competition has led the prevailing products to be more than good enough. If you look through all the examples of low-end disruption, you'll find that the incumbents were motivated to flee up-market and to continue to improve their products even though they exceeded the demands and expectations of mainstream buyers.

    For the iPad to be vulnerable, it has to be way better than the mainstream users' needs. Which asks the question of what needs are being served. If it's book reading, it probably is more than good enough. But if it's replacing a laptop computer, certainly not. Being too feeble is the most common complaint about the iPad. Being a bloated over-functioned and overly complex solution looking for a problem is definitely not on buyer's list of concerns.

    So on this basis, the iPad and other tablets pass vulnerability tests with flying colors. The product is woefully inadequate for mainstream computing.

    The consequence is that people will yearn and beg for more functionality and will drop the last generation for the next without hesitation. This pattern of breathless upgrades is symptomatic of a product racing up a trajectory of improvements which are relevant to buyers.

    So until buyers find the n+1 version of the iPad to be superfluous and over-specced, having too much battery life, too big a screen, too much storage and with more speed and bandwidth than needed, the iPad need not fear the low end.

    ----

    Notes:

    1. Other classic low-end disruptors are: Wal-Mart, GE Capital, Toys 'r Us, Sun Microsystems, Dell, Hyundai, MySQL, Amazon, Visa, Embraer, E-trade, Macy's, Japan Steel, Circuit City, Home Depot, Yahoo Travel.