iPad may change the rules of the media game

this was published by DNA at http://www.dnaindia.com/money/comment_ipad-may-change-rules-of-the-media-game_1344723 on feb 8th

The iPad may change the rules of the media game

Rajeev Srinivasan

In the breathless commentary on Apple's iPad – both for and against – there were several things that were not given due attention. Yes, it is a gorgeously large iPod Touch, that is, a big iPhone without the phone function. No, it is not clear which market segment will consider it a must-have gadget. But there is much more.

Apple clearly produces what Steve Jobs calls “insanely great” products, but the industry joke is that the uber-charismatic Jobs possesses a “reality-distortion field”, so that if you get within a few feet of him, you fall under his spell. Maybe the adoring media are suffering from that effect.

Intriguingly, Apple started succeeding only when it moved away from product innovation and into business model innovation. Despite cool and elegant products starting from the Apple I and the Macintosh, it kept losing ground to arch-foe Microsoft, which realized that the operating system was a distribution channel.

Since Windows runs on 2 billion computers, Microsoft pushed other products through the channel – Internet Explorer, the lucrative Office franchise, and hundreds of thousands of third-party products. Apple could not deliver this large audience – size matters – and software makers built products only for Windows. This became a vicious cycle, and Macs became niche products.

With the iPod, Apple turned this game on its head using iTunes. That was the real breakthrough, not the iPod itself: business model, not product innovation. With iTunes, Apple was distributing third-party products, including music, movies, and podcasts. The operating system, eg. Windows, became irrelevant.

ITunes is the third most ubiquitous software product around, after Windows and Adobe's Acrobat. Result? Apple has become the world's biggest music distributor. Incidentally, they sold a lot of iPods too, which of course was their goal. For the end-user, it suddenly became easy to pick up music that was legal and inexpensive, and so they did, abandoning illegal downloads.

Similarly, with the iPhone, it is not the touch-screen or other eye-candy that made the product successful, but the App Store: an easy-to-use distribution channel for third-party applications. It was not a new concept. In the smartphone/PDA space itself, there was a Palm Store as long ago as 2000, with a few thousand applications. However, Apple was the first to enjoy the network effects and has 140,000 applications now.

Apple wants to apply these lessons to the media market. Books alone count for $24 billion a year, three times as big as the music industry. Add to this struggling newspapers and magazines, savaged by classified ads and other ad spending migrating online. If Apple can help newspapers charge small amounts for content, it may revive big-name publishers now threatened with extinction.

On the other hand, Amazon's Kindle e-book reader is directly threatened by the iPad. The other vulnerable product is the netbook family. Add a docking station with a keyboard, and the iPad is a web-surfing desktop, or a cheap Mac. Its display as large as a netbook's – around 10 inches. Apple previously dismissed netbooks, saying it was impossible to build a decent one for $500.

Indeed, that is the first big surprise with the iPad – the $499 entry price point, unusual for Apple's premium image. Surprise number two – the chip is Apple-owned, a result of its purchase of PA Semiconductor some time ago. Apple has for the first time become a vertically integrated manufacturer, making everything from chip to OS to browser to applications.

And surprise number three – there is no subsidy from the telecom carriers for the 3G models: there is no contract with AT&T (with those early termination penalties consumers detest), and you can just buy a monthly $30 unlimited data plan with no strings attached.

Thus Apple is trying out another first: a device that it controls fully in terms of major components, and even the demand chain, and which it is willing to subsidize until it reaches volume – surely at $499, it is losing money. This means the product is really important to Apple.

This is not to say that Apple has not placed some wrong bets in the past: an example was the Newton tablet, too early to market. But a successful bet was in Apple's early days, when it subsidized Canon's laser printers and created the whole industry of desktop publishing.

It would be poetic justice if Apple rides in like a white knight and rescues the publishing industry. The iPad may well be the calculated risk that allows Apple to disrupt one more industry, as it has done with music and telecom already. There are downsides – publishers may discover they don't like ceding too much power to Apple. And as far as consumers are concerned, especially those in developing countries, they may find themselves priced out of a lot of currently free content.

Rajeev Srinivasan is a management consultant focusing on innovation

825 words, January 29th, 2010