The iPad Really is Magical!

Steve Jobs proclaimed it, so is it really?  Alan Kays, one of the fathers of modern computing and the visionary behind the Dynabook has indicated that Apple may have it right with this latest device.  Even before the announcement by Apple, people have been asking my opinion of the product and I’ve been a bit guarded on making any prognostication.  After reading the thousands of articles about the device, talking with some people who have hands on experience and others who are building competitive devices, it has become clear that the device is magical, but in an unexpected manner.

While Apple is traditionally viewed as a hardware company and still generates the vast majority of their revenue from hardware sales, services like iTunes have given them a gateway into selling digital merchandise.  The iPad allows for a greater transition into a digital service provider with on-going revenues from a loyal “subscription base” ALL without charging a subscription fee!  Let me deconstruct this.

Apple sells unique hardware devices – iPhone, iPod Touch and the iPad.  Each of these runs the same proprietary operating system which is plugged into a proprietary content, application and media ecosystem.  For these 3 devices, you can only purchase application approved by Apple (who receive a 30% cut) and for any content that you want on the device, Apple has provided a low friction manner in which to acquire content whether it’s movies, audio and now e-books.  And of course Apple also receives a percentage of these transactions as well.  In aggregate the amount of money Apple makes from each of these transactions may be low on a per user per item basis, the cumulative effect is two fold. 

Apple recently sold its 10 billionth song – even if Apple’s profit on this entire transaction is a penny.  That would result in $100 million dollars since iTunes Music Store was launched in 2003.  For a company of Apple’s size, that isn’t a tremendous amount of revenue, but it’s also not insignificant.  Remember that the majority of media purchased from iTunes is only playable on a device or in software made by Apple.

Perhaps the most interesting factor has more to do with the ability of Apple to monetize this new relationship with their consumers.  In any projection of future business, a company assumes some percentage of existing customers will continue to purchase their products (e.g. customer loyalty).  With this number and a projection of product obsolescence, you can determine the replacement rate.  Apple has historically had the highest level of customer loyalty and replacement rates simply because of the way it provides this set of ecosystem value.  With the latest product, Apple is able to not only leverage the past success of their product, but also leverage the unique applications and ecosystem.   Since users continue to purchase via the Apple online “store” for their Apple products, these users are in essence no different than subscribers of the service in the same way that users pay an on-going fee for their cable or cell phones.  Instead of paying a monthly bill, the users are paying up front for the cost of the hardware plus paying for each transaction that takes place.

This small on-going relationship is critical to Apple’s success, particularly since no other hardware or software company has mastered this concept.  Amazon’s Kindle is similar, but doesn’t yet have the same economy of scale and Microsoft’s Zune and upcoming Windows Phone 7 will attempt this strategy, but with a multitude of hardware OEMs the overall success is necessarily diluted by the potential for encouraging users to maintain and engage in the long-term ecosystem.

The iPad is magical simply because it helps to extend the ecosystem and on-going subscriber base to the Apple vision.  Any product that Apple releases that leverages their ecosystem will be magical simply because it helps Apple to generate a long term relationship with their customers.  As to the particular implementation as a “Tablet or Slate” for the consumer, it’s a good approach and may resonate well with consumers, but from a technology standpoint, the device could have been utterly transformative if it had included more natural user interface elements – e.g. Handwriting, Inking and Speech.