The iPad will prove to be the most disruptive consumer product, ever, since the iPod. (Note: Both created by Apple.) The iPad is not just a mere a stop along the spectrum between smartphone and laptop. Rather, its particular combination of features – screen size, mobility, portability of the form factor, and Internet connectivity – propels the iPad in use cases, beyond any product previously. Here are eight reasons why the iPad, early yet in its product cycle, will serve as an ongoing catalyst for Apple over the next several years.
The iPad proved itself as an E-Commerce channel this Black Friday. The iPad generated more online sales during this past record-breaking Black Friday than any other mobile device. Online shopping set all-time records on Black Friday, accounting for $1.042B in sales, up 26% from last year. This growth from online shoppers exceeded a sales decline for in-store shopping of 1.8%, making E-Commerce increasingly important for retailers, particularly on the day of the year known to push retailers from red to black. And, iPads accounted for the greatest percentage of online shopping, achieving almost 10% across all devices, and 105% growth over last year. It exceeded online shopping activity of iPhones (8.7%) and Android devices (5.5%).
Part of the reason is that people prefer to shop on tablets than smartphones, most likely due to the convenience and experience of the larger screen. Monetate reported that in the first quarter of this year, traffic to e-commerce sites on tablets exceeded that from smartphones. But, if it were only an issue of screen size, all tablets would have achieved outsized market share of mobile shopping. This was not the case. iPads accounted for a whopping 88% of mobile shopping from a tablet device. As more iPads are sold, investors should expect an even greater percentage of E-Commerce to be generated by them. Retailers and marketers will take notice and develop apps and advertising appropriately…
The iPad is an effective channel to promote products and to convert visitors to customers. People love to watch video on iPads. According to Cisco, video accounts for over half of all Internet traffic on mobile devices, and mobile devices will access over 70% of online video within four years. Video is effective in converting potential customers into buying customers. Invodo, a private company, creates videos for retailers, and found that mobile shoppers are three times more likely to view a video than a desktop shopper. And video converts into sales. comScore reports that e-commerce visitors who watch a video are 64% more likely to make a purchase than those that don’t.
iPad owners, more than other tablet types, are a coveted target audience for retailers. NPD estimated that more than 40% of iPad owners have income over $100K versus 26% of non-iPad tablet owners. This translates into a higher average order value per transaction on a tablet (almost $125) compared to the PC (about $100) or smartphone (just over $75). Again, retailers and marketers have all the incentive to develop to iPads, creating a perpetuating cycle. Content begets users begets more content.
Tablets are the consumer electronic product of choice this Holiday Season, and iPad leads the list among those surveyed. David Pogue of the New York Times was asked to join NPR to answer questions from callers regarding consumer electronics gifts for the Holidays. Of all the consumer product categories (digital cameras, smartphones, game consoles, computers, etc), tablets stole the show. All of the callers asked which tablet to purchase. Pogue recommended the Amazon Kindle PaperWhite as in the e-reader category, the Barnes & Noble Nook in the color e-reader category and the iPad in the tablet category – because of the benefit of the 275,000 apps developed to it. No other tablet offers as much content to its users as does the iPad.
Apparently, kids agree. Nielsen surveyed children 6-12 and teens, and the iPad remained the number one most desired gift this Holiday Season, as it was last season. Last year, that translated into a 57% market share across the tablet category. Market share moved up to almost 70% for the first two quarters of 2012 before settling back at 57% for the last quarter. However, the iPad may have suffered from “iPad Mini anticipation”, much like the iPhone in Q2 2012. But, in the last twelve weeks, the iPhone market share roared back to 48%, exceeding Android’s 46% share, most likely due to pent up demand in anticipation of the new product introduction.
It seems like this may have been the case on Black Friday. Early reports suggest that the iPad is a real winner. Gene Munster from Piper Jaffray compared purchases at the Apple Store to purchases at the Microsoft store at Mall of America on Black Friday and found that Apple sold almost 5 times as many items per hours observed as did the Microsoft store. And, according to eBay and PayPal, iPad2s were moving at a rate of 250 per hour from 12am to 8am PT.
The iPad is the tablet of choice in China. (And that’s a big market.) The iPad debuted in China in July. In this past quarter, the iPad dominated tablet market share in China, taking 71.4% of the market. Apple sold 2.6M iPads in China, or 19% of the total iPads sold. As I've written before, the potential for China remains large with the growth in the sheer size of China’s middle class. The middle class in Asia Pacific is already larger than that of the US: 525M vs 338M. And by 2020, Asia Pacific’s will grow by three times while the US will remain roughly the same, resulting in enormous purchasing power. Today, Apple has just six stores on main land China and one in Hong Kong, to serve this burgeoning middle class compared to 250 stores in the US, meaning there is a long runway yet in China.
The iPad is experiencing unprecedented adoption in the education market. Earlier this year, Apple introduced and updated iTunes U and iBooks to tailor iPads for school use. Shortly thereafter, Houghton Mifflin Harcourt conducted a study and found that using an iPad for Algebra 1, 78% of the students tested Proficient or Advanced, compared to 59% who did not use the iPad.
Educators are taking notice. In the June quarter when most of educational buying takes place, iPad sales to schools doubled. Over 2,500 schools are using iPads. "The adoption rate of iPad in education is something I've never seen from any technology product in history," Tim Cook, Apple CEO, said. "Usually education tends to be a fairly conservative institution in terms of buying, or K-12 does, and we're not seeing that at all on the iPad."
And, it is easy to deploy iPads in schools: over 80% of high school curriculum is available on iBooks. Check out this list for the extensive deployment of iPads in schools.
The iPad is being deployed across the enterprise market. In just two years, 94% of the Fortune 500 have deployed or are testing the iPad. It offers the advantages of mobility and portability for field sales and it offers over 275,000 apps that can assist with productivity. Apple has extensive support for enterprise development, and the iPad is secure. Earlier this year at CES, the SAP CIO discussed their rollout of iPads to 14,000 employees, and the benefits.
For many applications, the iPad integration into the enterprise is easy. According to IT managers, iPads can be connected to Microsoft Exchange and Active Sync, providing IT managers with the ability to add security, enforce passwords and erase the device if it is lost.
Some of iPad deployment in the enterprise is reminiscent of Palm Pilots. Executives adopted the Palm Pilot, brought the Palm Pilot to work and, all of a sudden, IT departments needed to support them. The same phenomenon is happening with iPads in many cases. For some enterprises, this is a blessing when employees bring their own devices to work. It reduces capital investment on the devices and employees are happy with and more knowledge of the device.
The iPad has the potential to dominate the tablet industry as the iPod still leads the MP3 market. The iPad, like the iPod, is designed for content consumption, and Apple is able to create a delightful experience around content. Like the iPod, the iPad demand is relative to the competitive products and features, and is not subject to carrier influences. And, like the iPod that offered a greater quantity and variety of content than the competition, the iPad offers greater quantity and variety of apps than the competition. And while there are competing products out there, the iPad still rules in terms of most coveted product, at least for now. Read The iPad Will Mirror the iPod’s Market Dominance. Here’s Why and Why It Matters for more details. The iPod achieved 70% market share and contributed gross margins of 51%, and dominated a category as it exploded. The iPod only served the consumer market, and it only leveled off with cannibalization from the iPhone. On the other hand, the iPad serves consumer, enterprise, education and government markets, and has more tentacles to be entrenched than did the iPod.
The iPad is profitable. The gross margins on the new iPad Mini range from 40% to 55%, and lower for the iPad 3 released earlier this year, depending on the size, the model, and the connectivity. Apple’s overall gross margin was 40% in the last quarter, so blending in these margins should not be dramatic. And, most likely, margins will improve the following quarter. And, vis-à-vis the competition, Apple’s iPad margins exceed the competitors’. According to IHS iSuppli, margins on the Amazon Fire are roughly 30%, while those for the Google Nexuz 7 range from 20% to 33%.
Conclusion. The trajectory of the iPad has just begun. The iPad reached $28.5B in revenues in two years while it took the iPhone 3.5 years to achieve the same results. 100M iPads were sold in its first 2.5 years, unprecedented adoption for any new category. More iPads were sold in the June quarter than any PC. NPD predicts that the tablet market is expected to grow 6 times the size it is today within four years.
The iPad Mini is poised to accelerate iPad’s market leadership. When Apple introduced the iPod Nano in 2005, iPod sales more than doubled from a previous level of 24M units to over 58M unites, and remained at a level of over 50M units for 3 years. It is expected that the iPad Mini could have an equal effect. In the first weekend, iPad Mini and Fourth Generation iPads combined sold 3 M units. The original iPad took 80 days to achieve the same feat (although its country roll out was slower.) One thing is certain, the iPad Mini provides consumers an option at the smaller tablet size that did not exist last holiday season.
The iPad is a disruptive consumer electronic device, which has only begun its growth. To date, the iPad has been making progress within many different markets with success, and no visible signs of competition in those market places, outside of consumer. And, within consumer, the proof will be in the pudding when Q4 2012 market share numbers are released. It looks like Apple is set up well for a strong holiday quarter.
