This article from the New Yorker brings out several good points about how Apple has lost some of its luster over the past months, but is still in good shape on fundamentals, although it did drop to below $400B market cap a few days ago. As we noted in December, Apple was coming under criticism for not being able to scale to demand for the latest iPhone launch and had several other hiccups to deal with, including questionable worker conditions in China and that its principal manufacturer, Foxconn, was rumored to have begun discussions to pick up the slack by investing in new factories in Brazil.
On the other side, Apple was in a bitter legal fight with Samsung, an important supplier and competitor (frienemy), and could not get an injunction to stick after a lengthy lawsuit. A recent ruling in the case reduced damages awarded to Apple from $1.05B to $600M and the appeals process is ongoing. Another cause for concern in our opinion was that Apple had slipped to 6th place in the China mobile segment (the world’s largest and fastest growing major market), where local manufacturers Lenovo and Huawei were eating up share regardless of how much manufacturing was being done by Apple locally. Samsung leads the handset market in China, underscoring another competitive issue – in Korea, Apple is considered the most prestigious handset and it sells very well in the market, while Samsung is considered a premium brand in China due to early and broad Consumer Electronics investments by the Korean conglomerates; Samsung chief among them. China also has affinity with Korea based on the hope they can emulate the incredible economic growth shown by Korea over the last 25 years.
It was looking a little grim, but as noted at the time, Apple’s considerable war chest of almost half a trillion dollars was adequate to stave off short and medium term threats, however, as the above article notes, competitors are closing the gap and have introduced increasingly sophisticated models, most notably Samsung, with its’ Galaxy S line, which is seen as the strongest challenger to Apple’s technical leadership. Samsung’s newest version, the S IV is expected to be introduced this month, and in an example of raising the bar, is rumored to include “eye scrolling” technology.
The Big Picture
Apple has always been in a market crowded with well-funded competitors. Keeping the OS and architecture closed had major implications to the development of Apple, as seen above Apple never gained more than a 10-12% share of the OS market during the 1980-2000 boom of the PC market, which eventually forced them to accept both MS Office and Intel into their products to remain viable and while keeping a stubbornly loyal following for computing devices. It was really when Steve Jobs applied his design genius to a series of personal mobile devices starting with the iPod, which displaced the Sony Walkman, that Apple found a large enough consumer base to really explode onto the scene. iPhone followed with several versions and then the iPad was introduced in 2010 and the rest is history as they say…
The point here is that Apple became the largest technology company by using high-quality, high aesthetic design principles that allowed it to survive in the PC segment and applying them to a new category in the market: coveted personal technology devices that displace Phone, PC, Camera, Voice Recorder, Wristwatch, GPS, Media Player, Personal Planner, and other single use devices/apps combined into a single, small footprint high-tech productivity tool.
While Apple survived the PC Wars, many (including myself), gave them little more than niche player status and came close to counting them out altogether. The current situation is similar in a couple ways as Apple looks forward, but instead of Microsoft and Intel the arch rivals are Google and Samsung. The chart shows how WinTel dominated the PC segment from 1985-2005, squeezing Apple to 10% of the market. Currently, the rise of Mobile Computing brings hundreds of millions of new devices into the market, passing the threshold where Smartphones eclipse PCs in both volume and installed base within the next few years, creating an Android camp and an Apple camp. This has many implications for Apple, a few of which include:
Innovation: Apple needs to continue to innovate at a rapid pace. In the first 20 years of the PC market, consumers accepted a very high churn rate in both hardware and software categories because each generation was substantially more efficient and productive than the previous one. To prevent a backlash from consumers, Apple and other players are going to have to make fundamental improvements like very accurate voice recognition and new visual interfaces, not just new form factors.
Price/Performance: demonstrated Price/Performance increases in the bandwidth, applications availability and usability for less money will drive higher adoption. Again, looking back to lessons in the Personal Computer market, there was a long period of time where $2,000 was what the market expected to pay for a quality PC, and new models came out at a regular pace with faster CPU cycles, larger memory and storage subsystems, expanded OS and App capabilities, while keeping within the price range. This worked for a long time, until the market became too crowded and some vendors, led by Dell, overhauled their cost structure by cutting out the channel, using direct sales and a more tightly integrated and automated supply chain, giving back to the consumer in the form of lower prices - then it was a race to the bottom. Remember when the hot new vendor was eMachines?. The de-facto premium price-point that has been set for iPhones and iPads in the market is ~$700 and to maintain it there will be pressure to continue delivering more for the same price or less, as the slew of competitors undercut Apple’s premium.
Cutthroat Competition: All of these segments are characterized by intense competition, and with Google’s ownership of both Android and Motorola brands, things become even more interesting in the handset segment. As Apple goes it alone against the whole market, similar competitive issues will appear as they did with PCs; many companies adding applications and value to a standard operating system (Android), diffusing the R&D costs among a whole ecosystem of suppliers while Apple concentrates on staying ahead of everyone by themselves. Ensuring a steady flow of high quality finished goods coming from China, concentrated among a relatively small group of suppliers, could also become an issue as trade friction, consumer backlash and other uncontrollable variables come into play in the global supply chain and domestic market.
As Apple looks to expand into Televisions there is a potential to tap into another ~$120B market, however, this is not going to be like the introduction of the iPhone; the market is mature and growing slowly, ironically dampened by the move to Tablet computers and Internet content, with a lot of heavyweight competitors led by #1 vendor in the world - Samsung. And Google is also waiting in the wings. Déjà vu all over again. If Apple can pull a rabbit out they may be able to add enough value to demand a premium in flat screen TVs, but that is going to be much easier said than done, the brand only goes so far when displayed next to a similar product priced 20% less on the Walmart showroom - Apple's retail success is based on a much different formula. No 35% margins here without the same kind of fundamental improvements discussed above; interface improvements, simple but deep integration with other devices and something like a super green carbon footprint on top of the demonstrated product superiority. Maybe.
Again, Apple proved very resilient as a survivor in the PC wars and many underestimated their staying power. The Market Cap remains near $400B and they have room to maneuver, it will just get harder over time, as it does for every company that gets to the top.
Techaisle Analyst Insights
In 2012, a total of 47.2 million households and 1.9 million SMBs purchased a PC for the first time (Techaisle estimates), increasing global PC penetration by 2% in both the consumer and small business segments as an average of 5,200 small businesses and 130,000 households per day purchased a PC for the first time.
According to IDC, a total of 350 million PCs (desktops + notebooks) were shipped worldwide in 2012. Assuming that each first-time buyer in both the consumer and small business segments bought one PC, a total of 49.2 million PCs were first-time purchases. Therefore, the remaining 300 million PCs purchased in 2012 were either for increasing density or for replacements.
There are three elements that contribute to PC shipments. These are:
- Increasing Penetration: businesses or households that purchase and use PCs for the first time
- Increasing Density: purchase and use of PCs for either additional members of a household or employees within a business
- Replacements: replacing older PCs with new PCs
Increasing Penetration
PC market penetration will continue to be driven by emerging market countries. There are 1.26 billion addressable households in emerging markets but only one in four have a PC. Similarly, there are 44.7 million SMBs in emerging markets, but only two in five have a PC. Both of these figures indicate a huge opportunity for new PC sales as there are still 26.4 million SMBs and 994 million households that
have yet to buy a PC – a huge gap indeed!.
It is true that many of these households and small businesses may choose to purchase a tablet first rather than a PC if the planned usage is focused on consuming content through activities such as emailing, browsing, playing games, following news and watching videos. However, it is also true that PCs will
remain an important part of the device market. A tablet’s weight, portability and convenience cannot be ignored, but Techaisle believes that the tablet market may reach the same set of conundrums – lengthening replacement cycles and fully saturated addressable density – that are affecting the PC market today, causing tablet sales to skid. Since 1982 when the first PC was introduced, a combined one billion households and small businesses have yet to purchase a PC. It is hard to say that tablets will fill that void, especially when the market gets flooded with too many configuration choices and a profusion of different brands with unique value propositions; for a majority of buyers, the tablet purchase decision process will become as difficult as for PCs.
Increasing Density
Increasing density is certainly a problem area within mature markets as the household PC density is more than 1 in most countries. However, in emerging markets the household PC density varies from 0.5 to 0.9 devices per person depending upon the country. Similarly, in the case of small businesses the density is also almost 1.0 in mature market countries and varies from 0.4 to 0.7 in emerging market countries. There is therefore potential for PC vendors to increase density in emerging market countries both within households and small businesses. But here again, we may find that tablets become a device of choice thus impeding density increase. However, these conditions will also hold true for tablets in the next 3-4 years when the number of tablets within a household and a small business will reach a density saturation point beyond which no new tablets will be purchased for additional employees or household members.
Replacements
This is where the most brouhaha is currently. PC replacement cycles are getting extended and users – both corporate and consumers – are buying tablets. Notwithstanding the tepid acceptance of Windows 8, the PC buying process has become a daunting task even for the most technological savvy individual. PCs are variously categorized as Ultrabooks, ultra-thins, light and thin, long battery life, anti-glare screen, Premium HD screen, SSD, HDD, All-in-ones – it makes one’s brain dizzy. So the consumer ends up either pushing back the decision or continues to shop for a suitable configuration at an affordable price. “A PC in hand is worth two in a bush” begins to hold true. The consumer may then default to a tablet, which is still a novelty device. But the question remains, at least, within the context of small businesses – are the tablets they are purchasing really replacing PCs? Let us look at Techaisle survey data below based on total sample size of 9,500 SMBs.
Above data (will not add to 100 percent due to multiple responses) clearly suggests that while there are some incidences of replacements, consistently over 60 percent of SMBs either currently use tablets or plan to use tablets as additions to PCs. However, it is interesting to note that the density of tablets in many small businesses is not always 1.0. For example, a small retail store may have 4 employees but uses 6 tablets and 2 PCs. These tablets are used for point-of-sale, display advertising or self-serve terminals. So in effect tablets are doing the work of PCs with more convenience and a smaller foot-print. It is debatable whether retailers would have used PCs for these tasks in the absence of tablets.
This brings us back to the point that we started with. If 300 million PCs were purchased for either replacements or density increase, are tablets then really replacing PCs, or is the PC market itself getting saturated, with fewer compelling reasons to purchase additions or replacements? Are the PC vendors sufficiently targeting the first time buyers, as this group would have the highest potential for increasing penetration and driving increasing density? IDC also said that a total of 128 million Tablets were shipped in 2012. Approximately 32 million Tablets were purchased by SMBs assuming that SMB share was 25 percent. The two charts above when combined with IDC data gives a rough number of 5 million tablets displacing PC sales. The data for SMBs demonstrates that tablets are not replacing PCs, but are being used in addition to PCs.
Techaisle’s bottom line: PC vendors should therefore market PCs to new users and current users with two very distinct messaging to open up the market.
IT markets tend to be complex and fast-moving – but even by IT industry standards, the endpoint device market in 2014 is extremely complex, and subject to significant and abrupt changes. Consider the following trends – some of which have played out over several years, and some of which are scant months old – and how they might affect buyers and suppliers of client technology this year:
#1: Migration to multiple screens: It is clear that today’s SMB endpoint device user is looking to perform specific tasks with the best possible device
- Impact/implications: The ‘Swiss Army Knife’ appeal of the notebook – which doubled as both a mobility device and as a content creation platform – is waning. Tablets, not notebooks, are seen as the key productivity tool; and there is evidence to suggest that the desktop may have resurgence as a content creation option.
#2: Migration away from the traditional Wintel platform: For decades, “endpoint device” has been synonymous with “PC,” and “PC” has implied a device based on Microsoft Windows and Intel microprocessors. Through the course of this decade, that definition has been eroding. With the iPhone and iPad, Apple established iOS as a key smartphone and tablet technology. Google’s Android, with the support of powerful OEMs, has built a leadership position in the smartphone market, and has a great deal of market strength in the tablet market; Techaisle SMB End-Point survey results indicate that it is gaining momentum in the PC market as well. Meanwhile, low-power ARM chips have spread beyond portable devices into the PC, and even the data center.
- Impact/implications: The proliferation of operating systems and underlying architectures creates opportunity for a wide range of suppliers – and confusion for a large number of SMB and mid-market IT managers who need to integrate, support and secure these devices. Suppliers should both exploit niche opportunities and look for strategies and tools that help IT managers to wrap niche products into existing, evolving client device portfolios.
#3: Incursion of new form factors:The acceptance of multiple screens, coupled with the availability of new platform technologies, has created a market where “endpoint devices” span a wide range of device categories: desktop PCs, notebook PCs, tablets and smartphones, as well as thin clients, All-in-Ones, and other device types.
- Impact/implications: These form factors are differentiated by more than size and input technology; they move through different SMB channels at different price points; they appeal to different kinds of SMB buyers, who use different means to learn about and source them. The complexity associated with the proliferation of form factors will challenge marketing organizations that are accustomed to using a limited number of marketing vehicles and channel options to reach a relatively-predictable buying audience.
#4: Opportunities to redefine product categories: Buyer openness to new screen types has emboldened suppliers to redefine categories, or to create entirely new device classes. Some of these attempts (like the Ultrabook) have had limited success, but others, such as the 2-in-1 tablet/PC, show promise.
- Impact/implications: There is arguably more opportunity to define net-new endpoint offerings today than there has been for decades. There is an additional requirement on suppliers to segment accurately, to be in tune with the needs and preferences of target segments, and to move quickly to address new demand drives – but there is also new opportunity to translate this acumen and agility into substantial marketing-driven success.
#5: Solution opportunities: As endpoints become more capable, buyers – especially the emerging class of SMB business decision makers (BDMs) who wield increasing power in IT decisions – will move past the device itself, to a need for solutions (such as mobility) that capitalize on the capabilities of the new units.
- Impact/implications: To date, endpoint device suppliers have focused on building and selling screens, not the solutions that connect the screens. Marketers who understand how to connect their products to business-relevant solutions have an opportunity to differentiate those products, attracting new SMB customers and partners.
#6: Changes in buying points: The impact of SMB BDMs was mentioned above, but this point really should be considered as a trend unto itself. The IT industry has been told for years that BDMs (and especially, CMOs) would displace CIOs as the key IT decision makers. This certainly has not come to pass, and it is not clear that this shift will ever result in CIOs being displaced from their technology strategy roles. However, it is very clear that BDMs possess a great deal of power in many environments, and that their preferences and requirements are an important factor in shaping overall IT priorities.
- Impact/implications: If BDMs gain power by joining rather than supplanting the IT decision maker (ITDM) “at the table”, the net effect is that the decision making unit within SMB customer accounts is getting bigger and more diverse. This may offer new opportunities for one-off point technology sales, but is likely to increase decision time and complexity in many organizations – particularly, within larger businesses.
#7: Product and information distribution logic: In a market dominated by the ITDM, vendors could rely on IT-focused information sources to reach prospective buyers, and IT channels to manage relationships with these buyers. Like the ITDMs themselves, these requirements persist in the current market – but are joined by a new set of inputs. SMB Business buyers do not look for the same types of information that ITDMs require, and they are looking for different kinds of information to help shape requirements and preferences. Meanwhile, the traditional channel plays an essential role in distributing traditional endpoint device types (desktop and notebook PCs), but other channels (carrier, retail) are key conduits for other product types. Effectively managing the mix of information and buyers, and products and channels, is becoming a key factor in vendor success.
- Impact/implications: Increased complexity in information sources poses a challenge for marketers, who must find multiple ways of reaching customers. The imperative for success in this activity is increased by the common belief that buyers are using online resources to get much deeper into the purchase cycle before they contact a vendor; this increases the importance of effective content marketing, as direct sales alone will have difficulty in shaping needs and associated preferences. At the same time, the channel’s support needs are changing, and the vendor’s need to expand its channel by engaging with new kinds of partner businesses is becoming clear. Vendors need to both help traditional partners to succeed in their business transformations, and to establish relationships that reach new buyers within customer organizations.
Any one of these trends would be noteworthy against the backdrop of the SMB endpoint device opportunity, which accounts for a clear majority of all IT hardware spending, and affects literally every user of technology. Taken as a whole, these seven factors indicate potential for substantial market upheaval, creating risk and opportunity for current market leaders and new market entrants alike.
Any one of these trends would be noteworthy against the backdrop of the SMB endpoint device opportunity, which accounts for a clear majority of all IT hardware spending, and affects literally every user of technology. Taken as a whole, these seven factors indicate potential for substantial market upheaval, creating risk and opportunity for current market leaders and new market entrants alike.
To help illustrate potential opportunities and pitfalls in the 2014 endpoint device market, Techaisle has produced the The SMB Endpoint Device Adoption Trends report. This report is based on survey of SMBs, and includes both BDMs and ITDMs across each SMB size category.
About the Report
Coverage:
- Current and Planned purchase Intentions of client devices
- Tablet OS & Application software adoption – Behind the Screen
- BYOD: Employers vs. Employees, or Micros vs. Larger SMBs?
- Across the OS generations: XP, Windows 8 refresh intentions
- The Android Opportunity: Google in the PC Market
- Converged Mobility PCs: 2-in-1 PCs
- PC Purchase Channel and Sources of Information
More details about the report can be found here.
Related Research Articles
Techaisle survey data shows BYOD is a major force in the US SMB Market
SMB Purchase Intentions for Android PCs
Key Attributes of Successful SMB Mobility Solutions
Techaisle’s SMB research on Tablets, PCs and Smartphones usage has found that 28 percent of SMBs are aware of 2-in-1 PCs, and 15 percent are considering purchase in the next one year. Marketers have done a generally good job of building awareness which is highest at 73 percent within the 500-999 employee size businesses in the US. However, marketers have not succeeded in creating consideration to purchase from awareness within mid-market segments.
Globally there are 265 million mobile SMB employees who are telecommuting, traveling and/or using cloud-based services. The potential market is therefore massive. However, most SMB employees are already two-device users and are on their way to becoming a three-device user as they gain power of device choice, bringing personal experiences to work and vice-versa. The odds of a tablet and notebook both needing to be refreshed at the same time is low, and therefore it may be difficult to position a 2-in-1 PC as a replacement for either device. Nevertheless there are seven different potential market opportunity segments and each of these seven opportunity areas has scenarios in which 2-in-1 PCs might gain share – but each has its challenges.
The SMB survey data also indicates that general-purpose devices are losing ground to task-specific devices, a trend that would negatively impact middle-ground opportunity. Further, 2-in-1 PCs will likely be at a price disadvantage to Android PCs, which will begin targeting this same niche. PC OEMs will need to position the benefits of both the 2-in-1 PCs and their unique approach to these devices, while attempting to avoid the confusion that has hampered progress in the SMB market to date.
When we sift through the data on different perspectives on 2-in-1 PCs’ positives and negatives, we see that there are some core strengths to build upon, but that some design changes will be needed before these products can make a serious run at the endpoint device (PCs, Tablets, Smartphones) market’s middle ground. The moving parts needed to enable a 2-in-1 are also viewed as a drawback/potential point of failure for these products. And the overall diversity of approaches to enabling 2-in-1 functionality – ranging from detachable displays to Ferris wheel, flip/fold, swivel/twist and slider-based approaches – has confused the market. Too many options in the marketplace provide choice but also cause purchase inertia. This is a high-stakes issue for 2-in-1 PC OEMs and those with successful designs stand a much better chance of growing with the market than those whose designs are marginalized.
The aggregate opportunity for 2-in-1 PCs is compelling but there is no aggregate marketing strategy that will capture this opportunity. PC OEM marketers will need to align with the market opportunity segment that they can best develop, and ensure that their message and activity content is consistent with the conditions that govern the target area.
The 2-in-1 market is an attempt to fill a ‘middle ground’ that has been created by the trend towards multi-screen endpoint device strategies. Techaisle’s research shows a usage continuum of endpoints. On one side, there are desktop devices capable of creating content. At the other end of the spectrum, there are smartphones that lack the tools needed for content creation, but provide a lightweight, mobile option for content consumption. On this continuum, tablets are also primarily consumption devices, but can be used for light content creation, while laptops are capable of creating content, and can be used as a mobile consumption port. 2-in-1 devices are targeting the space between tablets and laptops. They are attempting to provide better creation options than are found with tablets, while offering a form factor better suited to consumption than is found with traditional laptop.
Techaisle believes that the key to 2-in-1 PC success within the SMB market will be the ability to articulate the benefits of the “middle ground” – the combination of consumption and creation that 2-in-1 PCs can address better than either tablets or traditional laptops.
More detailed data is available in Techaisle’s report titled “SMB End-Point Device Adoption Trends: Tablets, PCs, Smartphones” which covers:
- Current and Planned purchase Intentions of client devices: Tablets, PCs, Smartphones
- Current and Planned Tablet OS & Application adoption trends
- BYOD trends within SMBs
- XP, Windows 8 refresh intentions
- New OS PCs: Chromebook, Android adoption trends
- Converged Mobility PCs trends: 2-in-1 PCs
- Purchase Channel and Sources of Information
