Massacre of the tablets

Business School 2011: Lessons Learned. In the first of the series, we watch as the second anniversary of the iPad launch approaches in a technology landscape littered with the remains of disappointing and failed tablets which were rushed to market too quickly in an effort to cash in on iPad-mania

By Matt Hartley
Published Dec 24, 2011
7 minute read
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Photo by Tyler Anderson, Illustration by Andrew Barr/National Post
Photo by Tyler Anderson, Illustration by Andrew Barr/National Post

Even before it was released, Steve Jobs didn’t think much of the BlackBerry PlayBook.

It was no secret that Apple Inc.’s celebrity chief executive didn’t think too highly of BlackBerry maker Research In Motion Ltd. Over the years, Mr. Jobs seemed to delight in pointing out how the iPhone was outperforming RIM’s BlackBerrys at every opportunity, regularly taking shots at the Waterloo, Ont. company and its products.

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But in October, 2010, Mr. Jobs took his heated war with RIM one step further when he made a surprise appearance on a call with investors to deliver a scathing rant about RIM’s future and its business strategy, before launching into a tirade about the futility of seven-inch tablets, just a few weeks after RIM had unveiled the BlackBerry PlayBook.

The PlayBook, just like all other seven-inch tablets, Mr. Jobs believed, would be dead on arrival.

“Seven inch tablets are tweeners; too big to compete with a smartphone and too small to compete with the iPad,” Mr. Jobs said, before pointing out that the iPad’s competitors, despite producing smaller tablets, were having trouble bringing the prices of their touchscreen computers down to the level of the 10-inch iPad, which sells a base model at US$499.

“These are among the reasons that the current crop of seven-inch tablets are going to be DOA — dead on arrival.”

At the time, Mr. Jobs’ condemnation of his competitors was directed only at tablets of the seven-inch variety. But now, 14 months later, it appears the Silicon Valley legend may have seen the writing on the wall earlier than anyone else, and that his disparaging remarks could now be applied to tablets of all sizes which have attempted to compete with the iPad.

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Apple’s competitors — including RIM, Hewlett-Packard Co., and manufacturers such as Samsung Group Ltd. and Motorola Mobility Holdings Inc. who had adopted Google Inc.’s Android software — were put in the unenviable position of playing catch up, scrambling to develop iPad contingency plans.

Apple’s competitors were thus faced with a difficult decision: either create an iPad competitor as quickly as possible, rush it into the market and hope to ride the rising tablet tide, or sit back and watch the market develop while looking for an opening, while running the risk of being left behind by the rest of the industry.

As the the second anniversary of the iPad launch approaches, the technology landscape is littered with the remains of disappointing and failed tablets which were rushed to market too quickly in an effort to cash in on iPad-mania.

It now appears that almost every one of the promising early followers in the tablet space were lambs to the slaughter, costing their parent companies billions in the process. RIM’s PlayBook was a disappointment from the start, landing to disappointing reviews, missing features and a dearth of applications. HP scrapped the TouchPad after just a few weeks of soft sales in the midst of a leadership crisis at the world’s largest computer maker. And while Motorola’s Xoom tablet stole the show at the annual Consumer Electronics Show in Las Vegas last January, but consumers balked at the US$799 price tag.

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But now, a new generation of tablets, headlined by Amazon.com Inc.’s Kindle Fire, portends to reshape the market for touchscreen mobile devices. With different cost structures, new business models and dramatically lower price points, these new entrants appear to have evolved from sober second thoughts and a “wait and see” approach.

“It’s certainly something we’ve seen in other areas of business; you make more of an informed decision when you hold back — you can see where the gaps are in the market,” said Mihkel Tombak, director of the Master’s of Management of Innovation program at the University of Toronto.

“Certainly there’s a lot lower risk in terms of development costs in that you can have much more focused development and you can save a lot of money in terms of the product that you develop, and that gets reflected in the cost of device. You’re either a very close follower, or you hang back and see where the gaps are and save yourself a lot of money.”

Two years after the launch of the iPad, Apple still controls nearly two-thirds of the global tablet market. According to data from IDC Corp., Apple sold 11.1 million iPads in the third quarter of 2011, up from 9.3 million in the second quarter, accounting for about 61.5% of the global tablet market.

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While Samsung maintained its No. 2 ranking, the Korean company captured just 5.6% of the market. HP’s TouchPad fire sale — the company slashed the price of the device to just US$99 in to liquidate its tablet inventory — helped the company take the No. 3 spot with about 5% of the market.

Meanwhile, RIM’s PlayBook captured just 1.1% of the market in Q3, a number which is expected to fall to just 0.7% in Q4 thanks to the rising threat of the Kindle Fire, according to IDC. Neither RIM nor Motorola was among the Top Five tablet manufacturers in Q3.

One of the reasons devices like the PlayBook, TouchPad and Xoom struggled to compete with the iPad was price.

Initially, both the TouchPad and PlayBook offered a base model that cost US$499, the same as the iPad. The Xoom’s nearly $800 price tag for a 32GB device was more expensive than the comparable iPad.

Unfortunately, none of Apple’s competitors offered the breadth of applications or content services — such as movie and music downloads — that could match Apple’s iTunes and App Store.

Instead, these manufacturers treated the tablet market more closely akin to the PC wars, and hoped their devices could compete on “feeds and speeds,” by playing up the inclusion of Flash technology and USB ports (features the iPad lacks).

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“Rushing into a market sometimes inhibits a company from developing a competitive advantage over any other company,” Mr. Tombak said. “Other companies can then just mimic what they’re doing and soon the profits are competed away.”

What the technology industry soon learned, was that unlike PCs, consumers were picking up tablets primarily as consumption devices; tools they could use to watch movies, read books, and surf the Internet. One of the key selling points of the Kindle Fire is Amazon’s content deliver service, Amazon Prime, which gives users access to thousands of books, movies and television shows over the Web.

“All of Apple’s competitors before Amazon had flawed product strategies, in that they were leading with feeds and speeds, rather than content services, and they were doing so at too high a price point,” said Sarah Rotman Epps, a senior analyst at Forrester Research Group, a market research firm based in Cambridge, Mass.

Although Android devices represented about 32% of the global tablet market in Q3, that number is expected to rise to 40% in the holiday quarter thanks to the explosive success of Kindle Fire, which some reports suggest is shipping as many as a million units a week.

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Estimates vary, but experts say it costs Amazon between $185 and $205 to produce each Kindle Fire, which means the company is breaking even or taking a loss on each device, hoping to generate a profit on the sale of content and driving increased traffic to its online retailing presence.

It’s a strategy not unlike the video game industry, where manufacturers have long aimed to break even on consoles in an effort to generate a profit on games and software.

“Amazon can almost give them away and justify doing that as a cost of customer acquisition to win them in the bookstore and in the electronics shop,” said Ken Wong, a professor of marketing and business strategy at Queen’s University in Kingston, Ont.

“We’ve always seen this. At the start of every product innovation that ushers in a new category, there’s a lot of costs that are tied not just to the R&D and the commercialization, but just production costs because the parts aren’t in great supply….”

Considering the line ups which greeted HP’s TouchPad once its price was slashed to $99, and RIM’s decision to offer steep discounts on the PlayBook heading into the holiday season, one wonders what would have happened to these devices if RIM and HP had opted to sell them at $300 from launch day, even if that meant taking a loss on the device?

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Of course, waiting to see how a market develops before diving in headfirst is easier said than done, especially when your competitor creates a new product category and is able to pad its bottom line with a virtual monopoly.

RIM shareholders were anxious to learn how the company planned to counter the growing influence of the iPad in the months leading up to the PlayBook’s unveiling, and waiting wasn’t really an option. While as the world’s leading computer manufacturer, HP was expected to answer the iPad.

However, it’s not just Amazon which has waited to enter the tablet fray. Software giant Microsoft Corp.’s forthcoming Windows 8 operating system is designed to power both PCs and tablets, and Ms. Epps predicts the Redmond, Wash. giant could command as much as 15% of the tablet market by 2016.

Meanwhile Google executive chairman Eric Schmidt recently revealed that the search engine giant is planning a Google-branded “Nexus” tablet running Android, borrowing a page from the company’s smartphone strategy.

“There are definite advantages to waiting to enter the market, but timing is really everything,” Ms. Epps said.

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