Technology

Apple's Hard iPad Sell


Apple will need to convince consumers that they need an iPad. However, failure to do so wouldn't be a disaster for the company

With the introduction of the iPad, Apple's (AAPL) status as a cultural icon reached new heights. Based on an unscientific survey of newspapers archived by The Newseum, pictures of or stories about the tablet-style computer appeared on front pages in at least 47 states and the District of Columbia and no fewer than 24 countries on six continents—in places as varied as Bulgaria, Uruguay, Turkey, and Portugal. When is the last time you saw a company command that kind of attention without first filing for bankruptcy, contributing to the collapse of the global financial system, or building a car with a gas pedal that sticks? The media's crush on Apple is not just alive and well, but it has gone global. In the last decade, Apple has revolutionized the music and wireless industries with its iPod and iPhone, respectively. The recent buzz around Apple reflects high hopes that with the iPad, Apple can similarly transform a third industry: publishing. But based on early reviews, the iPad as introduced may not deliver. Newspapers look to the iPad to reinvigorate their rapidly shrinking industry by spurring demand for whiz-bang downloadable applications that feature content you can't get on the Web. Book publishers see the iPad as a vehicle to stimulate buying of electronic books and fuel competition that forces e-book leader Amazon (AMZN) to give publishers more leeway on pricing. Software developers who have been successful selling apps on the iPhone hope to cash in even more on new ones that take advantage of the iPad's larger screen. Challenge of Building a New Market

Yet it's hard to see how the iPad, in the form unveiled last month, will come close to transforming daily life as much as the iPod or iPhone. When the iPod arrived in 2001, consumers were already well-acquainted with personal music players like the Sony (SNE) Walkman. The iPod simply made that experience considerably better. The same goes for the iPhone. By the time Apple's phone hit store shelves, a billion people had cell phones. Millions already had smartphones. The iPhone made using a smartphone infinitely more pleasurable. The challenge with the iPad will be less about improving an established market than building a new one. Don't get me wrong. I am a fan of the iPod Touch and therefore get the point of the iPad. I often use the Touch to catch up on e-mail, catch up with friends on Facebook, and send tweets to Twitter. When I travel, it becomes my newspaper and—thanks to the Amazon Kindle application—a less-than-ideal book reader. I even use it to catch video from time to time. The iPad had me at the bigger screen. Then again, I am a tech enthusiast. I've talked to a lot of people who don't seem to get what the iPad is for, no matter how many times I explain it to them. Dave Letterman joked about it in his Top Ten list on Feb. 1. Among the surprises in the $3.8 trillion federal budget: "A $1 billion research grant to figure out what the hell the iPad does." On Saturday Night Live, Weekend Update host Seth Meyers said: "This week Apple released a thing that does stuff that its other stuff already does."

Joking aside, consumers seem genuinely baffled by why they might need it—all the more by why they might pay $500 or more for it. Since they're already carrying smartphones and laptops, why bother with something in between? Missing Killer Software

For the iPad to succeed, it's going to have to prove itself as a lot more than just an overgrown iPod Touch with a digital bookstore tossed in. The iPad's success or failure will come not from the device itself but from what people can do with it, Charles Wolf, an analyst at Needham & Co. in New York, explained in a Feb. 3 research note. The device will need to capably handle content that would "otherwise provide an inferior experience on smaller devices, or more traditional products," like phones and laptops, he said. And that will mean unique software that takes advantage of the hardware features like the large screen. I'll concede that these are still very early days. Don't forget that while the first iPod was interesting, it needed music through iTunes to make it a worldwide sensation. The iPhone was wonderfully innovative hardware, but it took an ever-growing bevy of apps for it to fundamentally change what people expect from a phone. Without a killer app, is there really such a strong demand for a large-screen device that plays music and movies, browses the Web, and displays e-books? Apple clearly thinks so or it wouldn't devote the money and resources to make the iPad. There's plenty of time for Jobs & Co. to unveil iBooks, or iNewspapers, or a collection of many things. Here's a suggestion: The iPad might make an ideal universal control for all the smart gadgetry—TVs, entertainment systems, thermostats, alarm systems, surveillance cameras, and baby monitors—found in so many 21st century homes. I bet some third-party developer is thinking along those lines even now. Some consumer education is nevertheless going to be necessary. This is something Apple excels at: I sometimes see those ads showing what an iPhone can do in my sleep. Failure Would Hurt Apple How?

But what if consumers never get it? Apple hasn't had a hands-down failure (the PowerMac G4 Cube) for about a decade, and let's just say for the sake of discussion that this turns out to be one, and that Apple shuts down the iPad line at the end of, say, 2011. Apple would still be an astonishingly strong company. At the end of 2009, Mac shipments had nearly doubled to 10.4 million from 5.3 million in 2006. Mac revenue nearly doubled, too. In Apple's most recent quarter, iPhone unit sales doubled from a year earlier, while a change in accounting rules caused revenue from that device to nearly quintuple. Apple's $39.8 billion in cash is the highest among tech companies. If the iPad failed, little about that would change. Indeed, expectations for iPad sales are relatively modest. In his note, Wolf expects Apple to sell about 2 million in 2010 and maybe 6 million in 2011. He also expects about half of iPad sales to come at the expense of sales of the iPod Touch. That's a shift Apple can live with; the iPad will likely command higher profit margins in time, if not right away. But back to the possibility of iPad failure. What would that mean? Clearly, Apple can keep growing untroubled by such a stumble. The Mac would keep eating away at the share of PCs based on Microsoft's (MSFT) Windows, and the iPhone would continue giving Research In Motion (RIMM) and Nokia (NOK) headaches. At the same time, it may also signal that the transformation of Apple from a late-'90s casualty of the PC wars into the most important technology company on the planet is near completion, and that its upward trajectory might begin to level off. That's the logical conclusion of the skeptical case, anyway. And as we all know, Apple has a funny way, in the fullness of time, of proving the skeptics wrong.


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