For most, Apple’s iPad strategy tale is one full of surprise, excitement and downfall. Its story has been told time and again, assuming the last chapter was about to be written. After that, the iPad would become a memory for those lucky enough to have witnessed its fate.
But Apple is stubborn and won’t let one of its most profitable products and businesses to wither and die.
This is the whole story. How Apple’s iPad strategy pivoted and managed to climb the grave it had already been put into.
A Tablet Like None Other
Our imagination has been playing with tablet computers for a long time. Although we saw products early on, even one from Apple under the brand Newton, it wasn’t until Microsoft released its tablet PCs that the concept started to catch on.
All these products lacked the elements necessary for its mainstream adoption. In other words, tablets at that time had an unsuitable user interface, were heavy, clunky and lacked an appropriate ecosystem of developers and accessory makers.
They were crude, unpolished and inelegant. Probably as a consequence, they were adopted in the enterprise where no end user has the power to decide on the tools they will use daily.
Then along comes the iPhone with its multi-touch optimized operating system, a fundamental block in Apple’s iPad strategy. In addition to the iPhone OS, it soon started allowing developers to build apps on top of it. This alone effectively created an industry that has generated more than 50.000 billion dollars in revenue since the inception of the App Store eight years ago. Accessory makers also flourished, to a lesser extent.
What very few people know is that the iPhone started first as a tablet. Multitouch technology was being developed in 2005-2006 and was showed to Steve Jobs at the time. Jobs saw its potential immediately, and ordered the project to be refocused as a smartphone.
When the time was right and Apple had enough resources to focus again on the tablet, the iPhone had built a solid foundation. Mobile and touch optimised operating system. App Store and apps. An accessory program developed under the iPod and the iPhone umbrella.
In order to grasp how successful the iPhone was becoming at the time the iPad was launched, I find the following graph very helpful:
The iPhone was starting to become a mainstream product, almost selling ten million units per quarter. It still had to grow to become the blockbuster it is today, but it gives an idea of its popularity.
It is no surprise, then, that as soon as Apple released the iPad, normal people received it with open arms.
Jobs positioned it as the device that was better at certain tasks than either the iPhone and a Mac. This vision was very successful for Apple’s iPad strategy. At least, for a while, as can be seen in this graph:
But in order to gain some perspective while analysing Apple’s iPad strategy, you need to compare both products’s launches simultaneously:
This figure shows us the immediate success of the iPad compared to the iPhone launch. The iPhone sold 370.000 units on its first quarter. The iPad almost ten times that: 3.270.000 units.
All this made a lot of critics turn around and change their minds about Apple’s iPad strategy. All of a sudden, everyone thought that the iPad would become bigger than the iPhone.
Of course and as we know, that would never come to be true.
The iPad Mini and the Android Challenge
In reality, the iPad was a victim of its own success. The combination of a very popular iPad 2 (decent weight, okay screen, and good battery) and the launch of a smaller iPad mini (with a low price) led to a boom in sales that resulted in iPad sales growth peaking only three months after the iPad mini went on sale.
Neil Cybart perfectly summarizes the initial failure of Apple’s iPad strategy in these few words. The iPad mini was launched only two and a half years after the original iPad debuted. Why?
Although competitors reacted quickly to the announcement of the iPad, none of them managed to make a dent in the iPad’s armour. Despite this, a myriad of tablets started to make a more efficient use of commodity components, the Android operating system and Google’s services, undercutting the iPad in price.
Apple’s management was afraid that these low end competitors would catch on with consumers. These tablets catered users that demanded a cheap device for watching videos, surfing the web and checking social networks. And for this, they were as good as the iPad.
Thus, the iPad mini came to be. The cheapest way to get access to the iOS ecosystem in a bigger screen than the then just released iPhone 5.
That same Christmas, the iPad sold almost 23 million units. What we didn’t know back then is that only two quarters later, the iPad business started to show warning signs. The first drop in unit sales happened during the fiscal Q3 2013.
A couple more quarters later, the iPad started a 10-quarter streak of YoY unit declines.
Isaac Asimov’s Foundation and the iPad
Isaac Asimov’s book Foundation is one of the most famous science fiction sagas, and one of my favourites. In it, Hari Seldon develops a new statistical science called Psychohistory that is capable of predicting future events. Using these techniques, Seldon creates a plan to save the galaxy from the consequences of the eventual demise of the Galactic Empire.
To that purpose, he builds an alternative to the Empire called The Foundation. Seldon’s almost magical science is able to successfully guide the new civilisation through all the challenges. Until one day, a statistical impossibility turns the Grand Plan into ashes: The Mule.
The Mule was a human being with a genetic anomaly that allowed it to control the minds of those around him. The leaders of The Foundation were not afraid at first, since all the past life-threatening events had been predicted by Seldon’s Psychohistory techniques. But then, when the Oracle fails to predict the appearance of The Mule, The Foundation crumbles at succumbs to its power.
It is easy to draw some parallels between The Foundation and the iPad. In both stories, a visionary creates a plan for the success of its project long after his own death (certainly, since Steve Jobs passed away in 2011, rumours have been swirling around assuring he had supervised Apple’s product pipeline for the next 5 years). Both plans get derailed by some unexpected threat that was not predicted.
And, most importantly, both plans had to change in order to survive. Apple’s iPad strategy was adequate at the beginning, but could no longer continue unaltered as Hari Seldon’s original plan for The Foundation.
Steve Jobs correctly prophesied that there was room for a third device between the iPhone and the Mac. But that space was continuously being challenged.
Apple’s iPad strategy needed a reset.
Resetting Apple’s iPad Strategy
With smartphones and iPhone growing their respective screen sizes and computers slashing their weight and inheriting mobile OS’s features, the iPad started to fade away.
As Cybart argues in his post, the mini was a rapid success. But also the reason of the iPad’s fast decline. As much as 70% of the unit sale decrease was due to this model, whereas the rest was caused by the bigger iPad renovation cycle.
Apple’s management needed to switch gears and build a new plan. But, where was growth going to come from?
The iPad mini had already peaked and users were buying cheap tablets to do basic stuff like watching videos. Chasing the lower end of the market was a dead end.
There was only one way the iPad could find a new purpose after its identity crisis: going above the iPad Air.
In an interview with Steven Levy, Phil Schiller makes some clarifying remarks about Apple’s products. He calls it a “grand philosophical theory” (emphasis added):
“They are all computers,” he says. “Each one is offering computers something unique and each is made with a simple form that is pretty eternal. The job of the watch is to do more and more things on your wrist so that you don’t need to pick up your phone as often. The job of the phone is to do more and more things such that maybe you don’t need your iPad, and it should be always trying and striving to do that. The job of the iPad should be to be so powerful and capable that you never need a notebook. Like, Why do I need a notebook? I can add a keyboard! I can do all these things! The job of the notebook is to make it so you never need a desktop, right? It’s been doing this for a decade. So that leaves the poor desktop at the end of the line, What’s its job?”
To what he answers the following, not immediately related to Apple’s iPad strategy:
“Its job is to challenge what we think a computer can do and do things that no computer has ever done before, be more and more powerful and capable so that we need a desktop because of its capabilities,” says Schiller. “Because if all it’s doing is competing with the notebook and being thinner and lighter, then it doesn’t need to be.”
The iPad’s predicament is similar to this last statement. All it did was compete with the iPhone on screen size and with the Mac being thinner and lighter. But again, if that’s all it does, then it doesn’t need to be.
Meet the iPad Pro. A device that is not only a bigger iPad Air (or even bigger than an iPhone) and thinner and lighter than a MacBook, but also more capable. Thanks to the Apple Pencil, the Smart Keyboard and all the hardware and software that make it possible, it can challenge what both devices can do.
Specifically and as Jean-Louis Gassée said a few days ago:
The iPad Pro undoubtedly appeals to a more demanding base of users than the smaller iPads. iOS is “growing windows”, a more visible file system and, in a soon to be available version, will provide easier access to documents on a Mac Desktop or Documents folder. We’ve yet to see if these improvements help Mac users actually create more on their iPads, or if they merely make life more pleasant for those fortunate enough to commute between the two devices. In the longer run, progressively beefing up the simpler/cleaner iOS is a better bet than adding more layers of bug fixes and features on top of the noble and worthy OS X, now macOS.
There is simply much more room to grow the iPad business going up than appealing to lower end users. There is plenty of space between the iPhone and the Mac, in pricing as well as in capabilities.
The question is, would users find value in the iPad’s new and evolved raison d’être?
The End of the iPad’s Predicament
As it turns out, we received the answer to that question during Apple’s last conference call. In it, the company reported another YoY revenue decrease. And also a 27% decrease in net income. The iPhone and the Mac businesses dragged the company’s results.
But in the middle of these bleak results (if having 42 billion dollars in revenues can qualify as such), two segments stood up: services and the iPad:
Services can be somewhat expected. It’s been emphasised by Apple’s management during the last fiscal quarters. The strategic importance of Apple Music has much to do with the increase in services revenue. But the iPad? Totally unexpected for most people.
As Apple’s iPad strategy evolved, I was eager to see when (and if) it would start to show some results. Now we are already seeing them. The iPad business grew from $4.5 billions to $4.8 billions YoY, or 7.4%.
What about units sold?
Not so good. But if you take a look at the iPad’s ASP:
Bingo! An increase in revenue followed by a decrease in units sold can only mean one thing. That Apple had sold fewer units but significantly more expensive ones (as shown above).
In other words, Apple’s iPad strategy is being successful at rebooting the company’s tablet business. The iPad Pro is helping turn around the category that many people thought was doomed.
The iPad’s first years were a hit. No other product has seen such success in such a short period of time. But also, no other product has been dismissed as quickly as the iPad in its subsequent years.
Apple’s tablet needed to challenge what a personal computer can do in order to gain a place in the world. And with each iteration, this challenge has to be renewed. If not, then it doesn’t need to be.