Friday, January 29, 2010

iPad Launch: It's the business model, stupid!

In 2001, when Steve Jobs went up on stage to introduce the original iPod, he left his audience struggling to see the point. The iPod wasn't the first personal music player on the market. It wasn't the smallest, or the lightest, or the one with the biggest storage capacity. It only worked with Macs. Almost everyone thought it was doomed to failure.

When Jobs took the stage again on Wednesday, before performing an equally unconvincing presentation of Apple's new iPad, he dropped an interesting little factoid on the audience: Since that underwhelming launch in 2001, Apple has sold 250,000,000 iPods. By now, the music industry is wondering how Apple is making more money out of music than they are - it's hard to find good numbers, but worldwide music sales in 2008, online and off, were about $10 billion. Going on its latest quarterly figures, announced just a day before the iPad, Apple is a $60 billion/year company, and at least a quarter of that can be linked to music.

Compared to some of Apple's more phantasmagorical product launches - especially the original iPhone launch - it was a bit of a snooze. Barely five minutes into it, everyone was trying to understand why we were watching Jobs browse through the New York Times and National Geographic websites - this was nothing new, nothing unexpected - but it was fast-paced action compared to watching Phil Schiller edit a spreadsheet on the iPad. Much like the iPod launch all those years ago, somebody forgot to bring the wow. It's a big iPod Touch. So what? The iPad has that distinct feeling (so uncharacteristic of Apple products in the Jobs 2.0 era) of being a solution in search of a problem.

As did the iPod all those years ago.

Much like the iPod, the significance of the iPad is not immediately apparent. Much like the iPod, it's not first to market, nor does it offer any single feature we haven't seen before. Much like the iPod, there will be a bunch of knock-offs within a few months that will beat it on price and headline features. The device itself is not the issue. The issue - and it's a huge issue - is how content is going to be distributed, consumed and most importantly how it's going to be paid for in the years to come. To paraphrase Bill Clinton, it's the business model, stupid!

Now, I don't think Apple will sell a quarter of a billion iPads any time soon, if ever. In fact, I predict rather lukewarm sales figures for the first year. It'll take a while for a few of the more glaring limitations - such as running third-party apps in the background - to be fixed with a software update, and I'm pretty confident the second generation of the device will add things like a built-in camera, microphone and speakers [Update: thanks to fufurasu for pointing out that the iPad already has a mic and speakers] to the mix and bring the price down even further. I don't think Apple cares. It'll make good money from the fanboys and the early adopters.

But that's not the point. The point is that Apple has already changed the way we buy and play music with the iPod; but the revolution was slow, it was stuttering, it's far from over, and it's far from perfect. The main reason is that Apple had to strike deals with the music labels to make the iTunes store possible in the first place. For me, the true revolution came with the App Store. Here, Apple was unfettered by the problems of agreeing licensing deals with existing rights holders, and it managed to completely re-invent the way we buy and consume software.

As a software engineer by trade, I cannot stress enough what effect this has had on the industry. The idea that a small group of people, or even an individual, could write a simple but useful piece of software and make money off of it - not by showing annoying ads all over it or partnering with an affiliate program, hoping their users will buy stuff from others of which they get a tiny cut - but real, hard cash from retail sales; this idea was unheard of a couple of years ago. But when the right model appeared, with the right end-to-end experience, on the right device, suddenly this entire ecosystem of small mobile app developers sprung out of nowhere and a profusion of innovative software has suddenly come into existence. Most importantly, this is no bubble. These app vendors aren't the next Twitter, leveraged to the hilt by VC capital in the vain hope that their immense popularity will somehow be translated into profits. These companies are making cold, hard cash and turning real profits from a business model that is entirely sustainable.

Go back and read that again if you missed its immense significance. If you're still missing it, try and follow this reasoning: What if the App Store wasn't confined to the iPhone? What if we could get these apps on larger devices - tablets, laptops, set-top boxes. What if people dropped their $0.99 on apps that could run on all of these? Now, what if Facebook, or Twitter, weren't websites, but apps that sold for $0.99 (I still don't understand why Facebook's iPhone app is free - or crap). Would we still be making a big deal about Facebook being "cashflow positive" (code for "not really profitable, but getting there, honest") or have every tech pundit waxing lyrical about the wonders of Twitter, all the while ignoring that it's a huge black hole into which investor capital disappears, never to be seen again?

The Web is great at getting information out, but the only way people have figured out how to run a business by doing that is advertising. Advertising is OK, but it won't support content that has a high production cost (music; TV shows; movies; scientific research; high-quality journalism; the list goes on) and it just doesn't scale to profitability unless you're Google, or at least Facebook.

If you still don't get it, go back to the presentation and pay particular attention to the New York Times app. All these years and newspapers have been trying to find a way to sell their stuff online, and here it is. An app running on the iPad - all the high-quality content, with all the goodness of the electronic format (search, copying, embedding of video, multiple views, the works) in a form factor that you can actually read on the train to work or on your breakfast table. And the best bit? It's got a revenue model built right in. As Jobs pointed out, Apple has twenty-odd million people with their credit cards on file at the iTunes store, ready and willing to buy music, movies, TV shows, apps - and now books and periodicals too.

The iPad won't take over the world, it's not going to sell anywhere near the numbers that the iPod and the iPhone have, but in the next couple of years we're going to see entire industries wake up to the fact that they now have a way to make money in the digital world. The model will be copied, and it will appear in other platforms, but Apple will have been first, will make a tidy profit and will continue to dominate the high end of the market while Taiwanese and Korean manufacturers fight over the leftovers. And if Jobs and his amazing team are still in charge, in a decade's time he'll be up there presenting the next thing that people just don't get, but ends up changing everything forever.


  1. Point of information: The iPad has a microphone and speaker.

    I agree about the business model, but I also think that the significance of the iPad is greater, and has to do with UI. There is no menu bar, no visible file system, no windows, no dialogue boxes, yet you can use iWork on it to do fairly advanced work. Here is a new UI, built for touch and large screens, and everyone who's played with an iPhone knows how to use it. If you are eagerly waiting for a future of a "Minority Report" UI, then the iPad has taken us further in that direction than anything else; in a device that can be the a only computer a student will need.

  2. Good spot about the mic and speakers.

    You have also hit the nail on the head! In three years an entire new UI paradigm completely divorced from the old keyboard & mouse has not only been defined, but accepted and entered people's consciousness. Multitouch-savvy users now tap, flick and pinch as easily as they used to press, point and click. It's an entirely new canvas for developers to paint on.