Taking Back the Market

Touch Shifts the Apple Empire

Tim Nash - 2010.02.05

Great Mac sales was the headline news for last quarter's financial results. Most analysts (including me) thought the iPhone would do better. The gap between iPhone and Mac sales, however, is still widening. With an average selling price of around $600, the iPhone brought in $5.3 billion and Macs $4.45 billion. When the sales for the iPod touch are added in - up 55% over last December - the difference between the OS X hardware platforms in both unit sales and revenue is much larger.

iPad running new Mail app

The iPad will widen this gap.

Many people don't like computers. They don't understand them or want to understand them. They tolerate them because they need to use them at work or need to hit the Internet at home. Life is just too inconvenient without them.

What they want is a sealed appliance that works, using natural gestures they don't have to remember. The more of these people who use touch, the less they will want to use a GUI like Windows. Remembering how to use a computer or a program is unnecessary and too much like hard work.

It was this sealed appliance approach that Jobs previously tried with the Cube, but that required a keyboard and mouse, etc. It was just another computer. With the iPad, an external keyboard, mouse, etc. is optional. You don't need it to reach the Web, and that is a huge psychological difference if all you can do is "hunt and peck" on the keyboard.

The computing world will fracture into those who need to touch type and those who like to touch.

Apple Is in the Lead

The iPhone/iPod touch platform took over from Macs as the main Apple revenue driver in Q3 FY08, the July quarter. With over 75 million shipped, probably twice as many people use OS X on an iPhone or iPod touch as on a Mac or MacBook. As Steve Jobs pointed out in the iPad launch, Apple is now the largest mobile company by revenue, although for those who believe units are more important than revenue and profits, Nokia (Symbian) and Microsoft (Windows) are still ahead.

For Apple, more of the future looks to be ARM-based. The iPad shows what can be achieved with a custom version of the ARM processor designed by the engineers who came with the PA Semi purchase. The A4 is fast without killing battery life, and it moves Apple away from standard chips without losing the benefits of the ARM reference designs.

The chips are still relatively cheap, can be updated every year, and, unlike with the PowerPC, there is no risk of falling behind the other volume CPU manufacturers. ARM will continue to be the standard mobile chip until Intel can produce an x86 with great performance that isn't power hungry. Only then will Intel be a serious competitor outside of laptops,* but if it takes too long, the software catalog on ARM-based devices will rival that on Windows, and Intel will have lost its main advantage.

No doubt Apple will also look to move the A4, or a variant, to the iPhone to widen the perceived performance gap with RIM, Android, and Nokia. While most people will choose a carrier based on coverage and cost, whether for work or home, accessing the Web and running apps are next on the list for many wanting a smartphone. So the faster they can visit websites and the faster they see the apps respond, the more likely they are to buy an iPhone (or an iPod touch).

Apple's customization of the ARM architecture will also make it more difficult to copy the design and do a Psystar. The longer it takes to reverse engineer the chip, the more lead time before competitors can catch up. This means the Chinese Shenzhen copies will continue to be surface only iPhone lookalikes, and competitors with more resources will be forced to design a better phone or exist on thin commodity margins.

IPS screens on the iPad and iMacs could lead to iBooks, Apple's ebook reader, being right across the range. While there have been teething troubles with the 27" iMac, judging by desktop sales (up 70% year-over-year), customers can see the difference. If these screens, with their great color reproduction and wide viewing angle, are added to MacBooks too, how long before the ebook reader appears on the mouse and keyboard range?

Ebook Potential

This could really drive an ebook takeover of the college market. Students already need a computer. Textbook publishers could offer site licenses and update as often as necessary. Students could get their reading lists as part of tuition fees. With the best ebook reader and screen, Apple will be even more strongly entrenched in education. So in this sense at least, Apple stands at the intersection of Liberal Arts and Technology.

As a first step, the technical and scientific journals could go this route. Publishers already bundle their titles and negotiate site fees with the universities, and this would reduce costs, speed distribution, and allow for much more color illustration. As soon as this is seen as working, reference manuals are likely to follow, because it allows for more frequent updates, annotation, and adding sections to other documents. In a few years, widespread ePub readers could start undermining Adobe's PDF empire.

With its $500 million LG contract, Apple has locked up a good source of IPS screens, no doubt on favorable terms. As with flash memory, rival manufacturers will have to scramble and pay more for components if this market really takes off. The aggressive pricing on the iPad will make it difficult to profitably sell a rival tablet, and the low price of netbooks means that ePub readers will have to work on current screens.

While people can see the difference, many of them will pay more for the Apple advantage. LEM

* For me, netbooks are nothing more than cheap laptops.

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Tim Nash is a Director of WattWenn which has a new approach to scheduling the production of TV and movies to make the most of budgets. The views in this article are his own and are prejudiced from spending more years working for computer companies than he cares to remember.

Tim lives with his wife, her website on the area ariege.com, two daughters, a cat, and a dog in the French Pyrenees. He lapsed for a while after the Apple II, but became a Mac fan when his wife introduced him to the Macintosh IIsi. If you find his articles helpful, please consider making a donation to his tip jar.

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