Monday, February 28, 2011

Apple's iPad 2: The Price Is Right

Apple has invited the press to an event on Wednesday that will include the introduction of the iPad 2. What will be the most talked-about feature of this new device?

First, let's stipulate that most of the hardware specifications of the iPad 2 are known, more or less, thanks to endless blogger speculation: one or two cameras, a faster processor, twice the RAM, some tinkering with battery, screen, thickness and bezel. In other words, in the big scheme of things, nothing too exciting. Do you know many people who have held off buying the iPad because it lacks a camera, dual-core CPU or 512 megs of RAM? No, me neither.

If this was all Apple had in mind for the iPad 2, it would be a snoozer event. One would think that Apple isn't knowingly going to leave it like that.

When Apple planned for the iPad 1, it had no idea about the success it would enjoy with the device in the quarters that followed. It focused on creating a rock-solid product, which could at least skim the high-end of the market. After all, the iPad 1 came at prices ranging from $500 to $830, or as high or higher than the average non-Apple laptop.

By March 2010, Apple probably planned for under 10 million iPads sold over the next 12 months, a goal which it exceeded handily. This time around, Apple is probably looking to sell 60 million units worldwide starting this March.

When you go from planning under 10 million units to 60 million, you can negotiate much better manufacturing prices. Components can also be optimized for cost, to a different degree. Apple is pre-paying for critical parts, such as memory and displays, taking risk out of the contract manufacturers, which pressures the price down. This probably means that despite some minor hardware bumps (camera, RAM), Apple could remove close to $100 in cost from each iPad.

Here is the bottom line: This logic points to Apple making the key feature of the iPad 2 its price, specifically a $100 price cut. The iPad 2 could start at $399 and range up to $699 for versions with more storage or 3G or 4G modems.

What about the remaining inventory stock of the iPad 1? That's easy: Drop the remaining units on hand by $200 to $299 or so as the shelves clear out.

Apple's ability to take cost out of the iPad 2, as well as superior volume discounts achievable at 60 million annual units, poses a nasty dilemma for its competitors Motorola, Research in Motion, Samsung, Dell, Hewlett-Packard and all the others. The various Android licensees will eventually catch up to Apple's head-start in the market, but 2011 is looking increasingly unlikely for Google's Android to match Apple's iPad volumes. Especially with an Apple $100 price cut, the competitors will have to reload for 2012 or take a gross margin hit.

Apple's competitors are unlikely to get off the ground competing with the iPad unless their tablets start at $199, unsubsidized. The two main reasons Apple commands a price premium are 1) the superior shopping experience of the Apple stores, and 2) iTunes. Right now, Android -- and soon RIM and HP -- are unable to match these two key Apple advantages.

Naturally, Apple has several things up its sleeve other than a $100 price cut for its new iPad 2 series. This is likely to include new software and services, such as a revamp of iTunes, enhancements to MobileMe and NFC (near field communications) payments, to be announced at some points throughout 2011. That said, as far as the iPad 2 is concerned, what will dominate the conversation won't be some new hardware specifications -- but rather the $100 price cut.

These theories of mine are not based on any form of "sources familiar with the matter" or anything equivalent. My statements are purely based on combining various classes of leaks published by the major blogging sites, together with my own logic as to how the market works and what is therefore likely to happen. That said, you can read here what I predicted about the iPad 1 more than a year ago:

Wednesday, February 23, 2011

Apple Is Eating HP's Laptop Lunch

Hewlett-Packard Tuesday night reported a 12% decline in the "consumer" portion of its personal systems group. That's mostly laptops. With this news fresh in mind, I decided to visit 15 of the cafes located closest to the HP headquarters, mostly within a 2-mile radius, to see what the people closest to HP were using in terms of laptops.The survey took me about 90 minutes to conduct, and is, of course, of limited statistical significance. But still, out of the 100 laptops and tablets observed in 15 of the cafes closest to the HP headquarters:

Apple MacBook: 45
Lenovo: 14
Dell: 14
Apple iPad: 9
Sony 6
HP 4
Toshiba 3
Acer 2
Asus 2
Samsung 1

Aside from its statistical limitations, one can, of course, criticize this kind of quick survey from other angles, such as enterprise-vs.-consumer, HP employees or owners don't visit cafes, or don't visit cafes located down the street from HP, or whatever. That said, based on the kind of publicly reported market shares, in which Apple normally scores not too far from 10% and is in a similar category to HP, this kind of quick survey looks like a nasty leading indicator for HP in the laptop sales department.

Why is Apple outselling HP, as well as everyone else, in the laptop category? It's not because of price, because most people can tell that Apple laptops generally start as high as two times that of HP and other laptops. No, people are willing to pay more for Apple laptops as a result of the superior shopping experience in the Apple store, the superior service at the Genius Bar, the easier-to-use services such as iTunes and TimeMachine. Of course, most people know that Apple's actual hardware product design leads the pack by a significant margin.

I decided to visit the largest electronics store located closest to HP's headquarters, within walking distance, called Fry's. It offered numerous HP and other laptops with terrible merchandising, including no Internet connectivity, no batteries, and often missing or incorrect price tags or spec sheets. Product names were incomprehensible and bewildering, such as "XYZ-1200s PQ/55-T" or something similar. Looking at the salespeople and the service desk, I felt like I was about to negotiate the price of a hand-knotted rug on a Sunday bazaar in Damascus. If I were in the market for a laptop today, there is no doubt the deal would happen at the Apple store, and not here.

With Apple clobbering the competition -- HP in particular -- in the laptop department, what's next on the horizon? Let me suggest that laptops built on the Google Chrome OS are likely to take the market by storm, starting this summer and accelerating into 2012. The first Google Chrome OS laptop, which I have had since early December, is superior to its competition in many respects, especially considering that it would probably sell for $299 (my guess). It boots four times as fast as my MacBook Pro and has zero software complications of any kind. In other words, it's basically a maintenance-free laptop, which will likely be sold for the same price ($300) as a comprehensive three-year warranty for a Windows or Mac laptop. With Google Chrome OS, parents and corporate IT administrators would need less time to help children, employees and the elderly fix their PCs.

Apple is eating HP's laptop lunch right now, but with the Google Chrome OS laptops -- built by Acer, Samsung and potentially others -- hitting the market this summer at superior prices and lower cost of ownership, everyone including Apple has reason to worry a lot. Google Chrome OS may just end up the technology story of the year, and nobody is talking about it yet.

Friday, January 28, 2011

Nokia's Big Operating System Choice

Nokia claims that it will unveil its long-term operating system roadmap on Feb. 11. We all know why this is crucial. Most of us have not seen a Nokia smartphone user since before the last Iraq war, and Nokia smartphones no longer show up on airport radar or sonar systems.

Just by looking around, one must conclude that Apple, Android and BlackBerry have a joint 99% or greater market share, with Nokia being focused on some obscure lagging-indicator geographies in far-away lands.

The U.S. may be in the process of spending and regulating itself into an economic basket-case, but in the area of smartphones, it holds the indisputable thought leadership position. Apple and Google lead the way, with Canadian neighbor BlackBerry still growing like a weed, and the main competitors are Hewlett-Packard (Palm WebOS) and Microsoft -- not some company in Scandinavia or Asia.

So let's handicap Nokia's options for trying to salvage a future for itself. There are four major options at hand for Nokia:

1. Android. Sometimes it's best to not over-think it. Android has already, in a short time, become the most well-developed smartphone ecosystem, despite several important flaws, including lack of corporate/government grade security. Android gives the user the greatest amount of choice with respect to form factors, hardware vendors, and carriers.

Most major smartphone reviewers have been asking for more models such as Samsung's Nexus S, which offers the "pure" Google experience without any value-subtracting interface overlays common to devices produced by vendors such as Samsung itself, HTC, SonyEricsson, Motorola and others. It gives the end user a superior software experience, and upgrades to the latest versions of Android faster than any other device.

In addition, Nokia would be able to enter the market the fastest by offering this "pure" Android experience just as with the Samsung Nexus S. It could do so in a variety of form factors -- portrait keyboard, landscape keyboard, no keyboard, small screen, big screen, etc.

Nokia could also write its own software overlay to Android, as most other major vendors have done. While I think this would be a waste of time, because consumers just don't want it, it's certainly possible.

It is also more than fully possible to do both - first, offer the pure "Nexus-like" Google experience in the interest of go-to-market time, and then add its own "special sauce" some months or a year thereafter.

2. Microsoft. The problem here is that Microsoft defines the end product very tightly. Screen resolution, placement of buttons, and even some of the chips, are determined by Microsoft -- not vendors such as Samsung, HTC, Dell or LG. It is therefore unlikely that Nokia would be interested in this arrangement.

That said, Nokia's new CEO Steven Elop comes from Microsoft, and perhaps he could cut a new type of deal with Microsoft. Perhaps Nokia would be able to get an exclusive version of the OS, where it could differentiate more than the existing batch of products that became available last October/November.

3. Acquire someone. With Palm gone (to HP last year), there is now only one musical chair left that Nokia could reasonably acquire, and that is Research in Motion, which would be expensive. It also would solve almost every problem Nokia has with its position in North America, smartphones in general, and a future OS for both smartphones and tablets, as a result of RIM's recent ownership of QNX.

That said, RIMM stock is way too cheap for RIM to want to sell out at a price anywhere near the current $62. The premium would have to be absolutely astonishing, well over 100%, for RIM to accept such a deal. It is, therefore, extremely unlikely.

4. Continue with some combination of its existing operating systems: Symbian and MeeGo. If Nokia does this, it is equivalent of walking into the desert without a hat and lots of bottled water. Nokia would face a steady continued decline into further irrelevancy.

What would be the stock impact of these choices? If Nokia does any combination of 1 (Android) and 2 (Microsoft), the stock should rally significantly. If Nokia does 3 (acquire RIM), the stock impact should generally be positive, but will depend on the price at which RIM would be willing to sell ($150/share?). If Nokia does 4 (Symbian/MeeGo), one can safely short Nokia all the way down to zero, sort of like Kodak or one of those PC/mainframe companies of the 1980s, the names of whom we have all now forgotten unless we look them up on Wikipedia.

Bottom line: The good news here is that Nokia has good choices, and that they are not mutually exclusive. Nokia has the scale to go with BOTH Android and Microsoft -- hey, HTC is doing it, so why couldn't Nokia?