27. April 2014 · Categories: Apple

With iPad sales y/y essentially flat, some people worry about iPad having plateaued, and no longer taking the world by storm. The basic worry behind this is that the iPad has become good enough, and so people will start to lengthen their replacement cycles, as they are doing now for PCs. But to which extend is this true?

As far as computing power is concerned, the A7 chip is already very close in performance per cycle and core to the latest Intel chips. This suggests that any further increases will have to come from using faster clocks, where we only have quite limited room to grow left. This leaves other attributes to provide desirable improvements.

The iPad would still benefit greatly from further weight reductions, as well as getting Touch ID, while the camera on the iPhone could do with some better low light ability. Also both would benefit from becoming more resistant to the elements, but otherwise I am at a loss what I would want to see improved. Now I did not see Touch ID coming, so there could still be positive surprises out there.

But I believe that people are already well served, and this will make them less likely to upgrade. For the carriers, the iPhone is already very good at generating photo and video traffic, and getting the customer a new model would no longer significantly increase his data usage. This leaves as a good reason for subsidizing a new phone increased spectrum efficiency, but carriers are still busy expanding LTE, and have not started on deploying a successor.

Apple depends mainly on two things to achieve huge margins in the iOS business:

  • carrier subsidies allow them to price the iPhone $200 higher than otherwise possible, and effectively hide from the end user the huge margins of the iPhone

  • pricing each doubling of flash capacity at $100 provides strong price discrimination

Both are only possible as long as iOS provides superior value compared to Android. But as can be seen with the Mac, Apple is perfectly capable of maintaining a value differentiation. Also Apple will rather sell you a quality product for a healthy margin that you will then replace less often, as it is an easy win-win: 35% every three years is better than 10% every two years, and it is better for the customer too, 270% instead of 330% over six years. Of course, this setup will not support 50% iPhone margins, which means a 100% profit markup.

To see when iOS becomes good enough, Europe will be the first market where carrier subsidies will come under pressure, since they have a single standard allowing you to keep your old phone when switching carriers.