I spent yesterday at Asymconf, a day-long event run by Horace Dediu of Asymco. Dediu has a background in engineering and business, including eight years at Nokia, and over the last few years his blog has become well known in certain financial and tech circles for its excellent graphs and analysis of the smartphone industry, with a strong focus on Apple.
It was a very unusual tech industry event. Not a single high-tech company or product was mentioned on stage until after lunch. In addition, the Wi-Fi didn't work and the isolated location -- IBM's Almaden Research Center, in the countryside near San Jose -- was out of the range of most LTE signals. This meant people actually had to switch off their gadgets and listen. And listen we did.
Dediu started the day with a history of California -- the land that nobody wanted, until gold was discovered. Within two lifetimes, "California" as we know it had been created.
Session two was a long discourse on the GDP-per-capita of various world powers in the modern era. The charts were arranged on a 1,000-year time axis to minimize small fluctuations and show grand trends, and as he demonstrated, once a country's economy is "switched on" and begins to industrialize, GDP-per-capita grows exponentially. More interesting, it does not level off. It happened with Britain first, then the U.S., followed by Japan and the Asian tigers.
(A side note: at 100 years old, IBM is the only tech company that warranted a line on any chart during this session. Apple, Microsoft, Intel, and even HP are babies on this scale. Google and Facebook are literal newborns.)
All this was a long way of setting up the question: what are the limits to growth?
In the afternoon, the conversation turned to Apple and its recent stock price slide, including the big drop after its earnings call. The audience participated, and there was lots of talk about Apple's margins, lower-priced iPhones, the competition from Samsung and Android, and how Apple is unique among tech companies because it's a serial disruptor of industries (music, cellphones, PCs) and itself (the iPod mini cannibalized the iPod; the iPad cannbalizes the Mac).
All interesting, but the discussion had a clear consumer focus -- just as Apple's marketing does. The presumption (or hope, from the Apple shareholders in attendance) was that Apple would find a new market or markets to disrupt, like video entertainment, and its explosive growth could very well continue in this fashion.
I think this discussion played the iPad short, particularly in the enterprise.
Tablets are not a new market. They're a classic low-end disruption to the PC market -- the replacement for netbooks.
Or put another way, within 10 years, almost every single PC sitting in a home or business today will be replaced. If I were Apple, and thinking big, I'd ask very seriously: is there any reason those replacements should NOT be iPads?
Let's see, as a thought experiment...
- They don't have the apps. Microsoft Office does not run on the iPad (yet), and there are other Windows applications and front-ends that some enterprises rely on. But legacy apps can be connected through desktop virtualization, and there are literally dozens of new-breed enterprise vendors who are creating cloud services that are built to run equally well on multiple platforms. Some, like Salesforce and Box, are building entire development platforms of their own that are client-agnostic. Over time, some of these newer enterprise vendors will become industry standards -- Salesforce and Workday (to name two) are already almost there. A huge bank with a 20-year old IT system won't replace it all overnight. But today's startups are tomorrow's giants, and a lot of them are choosing client-agnostic cloud-based platforms for the back end.
- Corporate developers don't know iOS. Think of the millions of iOS developers who have cropped up to make apps for the consumer market. That developer ecosystem didn't exist five years ago, and as corporations decide they need more iOS work done, these developers will follow. I met one yesterday -- he attempted to build a couple apps for the App Store, they didn't take off, but he's found a very nice business in building iOS apps for big brands.
- Information workers need a keyboard and a big screen. Debatable for most roles, and easily solvable with a docking station and various sizes of "dumb" monitor for work use, and a detachable keyboard for mobile workers. (In fact, it's easy to imagine Apple creating a nice peripheral business for enterprises in this area.)
- They're not powerful enough. For some tasks like audio production, video rendering, and hardcore number-crunching, that's absolutely true. For some functions raw compute power can be offloaded to a networked server, or to cloud services like AWS and the Google Compute Engine. For other functions, yes, the PC has a role -- just like the workstations of yesteryear. (And the Mac isn't going away.)
- They're not secure or manageable enough. No computing platform is 100% secure, but generally speaking, iOS is a lot more locked down than traditional personal computing platforms -- it only runs signed binaries, ignores browser plug-ins, and has no physical ports from which to introduce malware or steal data. Controls like password enforcement and remote wipe are accomplishable through Exchange ActiveSync or MDM providers like Airwatch, and a lot of these vendors are offering security through containerization of work-related apps and data. Most of the attendees I spoke to at the show said that there are still some gaps, like automatic app distribution and updates, and multiple user accounts, but over time Apple and its partners could address these.
(An interesting side note on security: I spoke to several attendees who expect Apple to use technology from its $356 million acquisition of Authentec earlier this year to integrate a biometric fingerprint reader into the start button of future iOS devices. Imagine how enterprises would welcome that as a substitute for the poverty of passwords.)
- Cheap Android devices will suck up the majority of the tablet market like they did with smartphones. Just today, in fact, IDC released data suggesting that Samsung and other vendors have started to chip away at the iPad's lead over the last year. But one of the more interesting charts Dediu showed yesterday was average selling prices for iPhones, iPods, and iPads. With the iPhone, the ASP has stayed very high, and Dediu categorized Apple's strategy here as a "skimming the top" strategy -- keeping the highest-end, highest-profit segment of the market to itself, while using the carriers' subsidy model to maintain reasonable prices for end users. The iPod, in contrast, started high, dropped, rose again. Here, Dediu categorized Apple's iPod strategy as a market share play -- go for ubiquity. For the first couple years, the iPad looked like the iPhone. But beginning last quarter, with the introduction of the iPad mini, average selling prices dropped. What if Apple is actually deciding to pursue the iPod strategy of maximum market share -- at any price? If so, it won't allow any other vendor to undercut it for long.
- Microsoft won't let it happen. This, to me, is the biggest barrier. Windows 8 may have launched weak, but as I've argued before, it's a long-term play. Microsoft knows the future is in touch-screen devices, and it's trying to ease the transition from its former business to the new world by using Windows 8 on Intel as a bridge for developers, enterprises, and users. In five years, if all goes according to Microsoft's plan, there will be a whole host of Modern-style Windows apps available for Windows on ARM, and Windows RT devices -- from Microsoft itself, if necessary -- will have taken up the low-end of the PC market that Apple was trying to undercut with the iPad. (Windows RT looks like a disaster at launch, but that's simply because the ecosystem is not there yet. Thing long-term, not quarter-to-quarter.) But this time the very future of the company is at stake. Microsoft will use its cash, its relationship with developers, its licensing agreements with large companies, its massive network of partners (who have more to lose than Microsoft) and every other tool it its arsenal to keep the Windows PC -- in some form -- relevant. Look at the ad budget for Surface so far if you don't believe. That said, Microsoft's visions don't always become reality, and it's failed on execution many times in the past.
There are other philosophical arguments one could have about open (and "open") and how a company should treat its customers and partners, but those are beside the point here.
The point here is the iPad still has a ton of upside. Apple could easily look at the PC market now and think "most of that should be ours." Not 15% of it. Not just the consumer PC market, which is less than 50%. More like 80% of it.
That seems like a lot clearer business goal than building a TV set or trying to break Hollywood's grip on the entertainment industry.
So the limit to growth for the iPad is the current PC run rate of about 400 million units per year, plus whatever the natural PC growth rate (say 5% to 10% per year) would be during the period in question. That's the absolute upper limit, and it's about five times as many iPads as Apple is selling today.
How close will Apple get to that limit? The answer could be a big factor in the company's growth for the next decade.