March 16, 2012 Off

A few thoughts on iPhone 5, iPad mini, and iTV

in Assorted Thoughts, General Information

It’s been fascinating to watch Apple build its arsenal of products in the last decade – not only because of their remarkable success, but because of the deliberate, disciplined way in which they did it.  Each built on the framework set by the last – the iPod mini and Nano relied on the same intuitive experience introduced in the original iPod, the iPhone leveraged the millions of people who understood how to buy music through iTunes, and the iPad rode the wave of iOS’s intuitive touch-based navigation.  The Macbook Air was created to show us what an iPad would look like if you attached a keyboard, and the Macbook Pro will no doubt soon evolve to a slighly larger Macbook Air (goodbye, optical drive!).

Another element of this evolution that may sometimes go unnoticed is the elegant way in which Apple has positioned each new product with respect to the others.  For the moment I’m going to focus solely on mobile products, and I’m going to take a leap and say that there are two basic dimensions on which to measure this positioning – screen size and price.

I’m using screen size as a proxy for a device’s ability to consume and create content.  The types of media one can consume or create increase with screen size. I can enjoy songs with a Shuffle (no screen) but I can consume movies, music, and apps with an iPhone.  The 10.7” iPad is built for media consumption but also introduces limited content creation capabilities.  As you shift to the 11” – 17” Macbooks your ability to create content increases dramatically.  Basically, the bigger the screen the more stuff you can do.

The other dimension is price.  It makes sense that as your ability to consume and create content increases, the device has more inherent value to you, and you would expect the price to increase.  As you can see in the plot below, Apple has mapped its devices’ ability to do stuff and the price you are willing to pay for that privilege in an extraordinarily consistent fashion (note that the data points are the dots underneath the pictures, not the pictures themselves):

Apple mobile device pricing vs screen size

This plot leads directly to a discussion about the gaping hole that exists between the iPhone and the iPad.  You can bet that Apple has this same diagram somewhere and has been planning to plug that gap for some time now.  This is where the rumored iPad Mini fits, and you can see that it makes perfect sense.  I’m guessing Steve Jobs wasn’t being entirely honest when he said he didn’t think that the size offered a good experience.  It might not be as good as the experience you get with an iPad, but you’re going to gain a little in portability and pay a little less.  In fact, you could argue that it has already proven to work, in a more limited fashion, on what I would consider the only other legitimate “tablet” product on the market – the Amazon Kindle:

Apple mobile pricing vs screen size, with Amazon Kindle comparison

The Kindle, even the Kindle Fire, clearly doesn’t offer the same capabilities as the iPad – particularly in content creation.  But it represents the best in content consumption in the 5”-8” screen sizes, as it is small enough to carry most places but big enough and capable enough to comfortably watch a movie or play a game like Angry Birds.  Apple would obviously be crazy to cede this territory to Amazon and, if the recent rumors are true, they aren’t planning on it.

The great thing about this chart is that it allows us to very easily make some guesses on iPad mini pricing.  Given that the current iPod Touch (3.5” screen) is priced between $200 and $400, and the iPad (10.7” screen) is priced between $400 and $900, I would bet that the iPad Mini will start at either $250 or $300 with three models of varying storage capacity.  $250 would keep it more competitive with the Kindle Fire, but I’m not sure Apple will be willing to stomach the margins at that price.  So, my estimate is that the iPad Mini comes in at prices of $300, $400, and $500 for the wifi only versions, and $400, $500, and $600 for those with cellular capabilities.

Similarly, rumors suggest that Apple has been working an a new iPhone with a larger screen.  Given the size of the gap between the iPhone and iPad in their current lineup, Apple can easily pull this off while leaving the iPhone 4s, measuring at 3.5”, at the $100 price point and the iPhone 4 for free.  My prediction for the iPhone 5 (or perhaps The New iPhone) is that Apple moves as far away from the 4s as they can without making a stupidly large phone.  I think the sweet spot is a screen size of 4.65”, or similar to the Samsung Galaxy Nexus.  For price, they’ll stick to their tradition of maintaining the same pricing as the last generation:  $200, $300, and $400.

Putting it all together, and by the end of 2012, this is what the spectrum of Apple mobile products looks like – all connected by iCloud, running similar software, and supported by the largest ecosystem of content consumption opportunities in the world.  Not bad:

Apple mobile pricing vs screen size with iPhone 5 and iPad Mini

Let’s bring Apple’s non-mobile devices back into the fold and eliminate the devices that are primarily used for content creation, the MacBooks.  It’s easy to ask the same question that Apple inevitably did:  where to next?  The answer is simple – having solved the problems of personal consumption and creation, move right on the x-axis to bigger screens intended for multi-person consumption.  The following chart presents a simplified view of the opportunities that might exist for Apple when they go beyond 17”:

Apple product opportunities beyond 17"

This is where it gets a bit tricky.  The dramatic decrease in the cost of televisions for a given screen size has significantly reduced the market for televisions in the 20” – 35” range.  I would imagine the vast majority of televisions purchased in the last year were between 40” and 50”.  If I was Apple, that’s the spot I would target first:

Apple pricing vs screen size, including iTV and AppleTV

My prediction is that the iTV will come in three sizes:  37”, 42”, and 46” for $999, $1,399, and $1,799.  Moreover,   I expect that they will use mid-range LCD panels in the first generation of iTV and charge a 20% price premium compared to other manufacturers with similar technology.  I say this because:

  1. I think Apple has realized that the difference between the best and average displays has narrowed considerably, particularly for the average consumer.
  2. Apple is still a relatively risk-averse company, and using the latest technology (think the television equivalent of a retina display) would cost far more in production and R&D costs for an unproven product in the marketplace.  If or when the iTV succeeds, they’ll introduce a high-end unit with improved technology.
  3. Apple loves its margins.  High end displays will cut into those margins if they want to price the television competitively.

The question becomes whether Apple will offer enough in this package to justify the 20% premium.  Recall that there is already a product on the market called AppleTV which will connect any old flat screen to the Apple ecosystem for $100, and I don’t expect this product to get killed off.  Think of it as a teaser product, an easy way to test the waters before diving in headfirst.  I have no doubt this is why Apple has priced the unit so aggressively – they’re simply building demand for the inevitable television.

I do believe that Apple will provide a device that justifies the cost, and here is why.  Remember when Steve Jobs presented the original iPhone?  He prefaced the introduction by saying he was introducing three devices – a music player, a phone, and an internet connectivity device.  Apple is going to use the exact same strategy with iTV, except they’re going to introduce the world’s best television, a home video communication device, and a new gaming console.

Let’s start with the television.  Three things are certain.  The UI, of course, will be trademark Apple – simple, intuitive, elegant, and seamlessly integrating DVR, cable television, Blu-Ray, etc.  The television design will be drop-dead sexy in its simplicity, likely in a similar unibody aluminum casing as the Macbook line.  It will also, as rumored, integrate Siri for voice navigation.  I have some doubts as to how useful this will be, but I think the natural language processing will make it more useful than the novelty that you find on the Xbox.

There is one additional feature I’m hoping for, though I really don’t expect it.  I hope that Apple does something incredibly innovative with the remote control.  I’d love to see at minimum an entry-level iPod Touch included as the remote.  It’s a great way to cross-sell newcomers into Apple’s mobile products.  Even better, I’d like to see an entirely new touch screen device that is the same size as the iPod Touch but even thinner, as the storage requirements would be nil and batter consumption low.  Unfortunately, I imagine we’ll actually just get the nice little aluminum remote they deliver with an AppleTV.

Let’s talk about the iTV as a video communication device.  I expect the iTV to have a built in HD-capable camera for video conferencing, and I think people are dramatically underestimating the importance of this feature.  Imagine you are watching Monday Night Football.  Your wife, on a business trip and about to head to bed in her hotel room, initiates a FaceTime session.  Based on your preferences, the television either:

  1. Gradually reduces volume to mute while shrinking the game to picture-in-picture size
  2. Pauses the game and immediately begins recording on an internal flash drive so you can pick up where you left off when your conversation is finished, intelligently skipping commercials until you catch up to the live stream.

Your wife’s video stream occupies the majority of the screen and you and the kids are able to say goodnight together without reaching for the phone, grabbing your iPad, or flipping open your MacBook.  I believe Apple is looking to fundamentally change the way we communicate by making video calling a simple, intimate, and expressive experience.  Of course, there will always be a way to shut off the camera and leave the audio running if you happen to be in your pajamas.

Lastly, Apple will present the device as home for the next generation of gaming.  The most recent updates to the AppleTV interface reveal that Apple is clearly planning to accommodate  apps in their future television devices, and games will be the obvious first choice for these applications.  They’re likely already working with a game developer to prepare a sexy demo for the keynote.

These games won’t have graphics to compare to the latest stand-alone game consoles, but they will only be a click and short download away from use with a range of input device options from an iPod touch, an iPad (mini), or a standalone controller Apple will sell you at a nice high margin.  If you’re a game developer, you’ve suddenly gained access to an entirely new market that is already accustomed to purchasing through the Apple ecosystem – for a 30% cut, of course.  I leave open the small chance that Apple will collaborate somehow with Nintendo in this space – possiblye  by compatibility with Wii controllers and games, or maybe just a set of popular Nintendo games among the first announced.

To be sure, televisions are a competitive market and there are many points at which Apple could make a wrong move.  However, I believe the executives at the major television manufacturers are vastly underestimating Apple’s ability to leverage the iTunes/iCloud ecosystem to deliver a better value proposition that the current offering.  Consider this recent quote from Samsung’s AV manager, Chris Moseley:

“TVs are ultimately about picture quality. Ultimately. How smart they are…great, but let’s face it that’s a secondary consideration. The ultimate is about picture quality and there is no way that anyone, new or old, can come along this year or next year and beat us on picture quality,” Moseley told Pocket-lint. “So, from that perspective, it’s not a great concern but it remains to be seen what they’re going to come out with, if anything.”

Compare that to a few now-famous quotes from another Apple product launch:

 “We believe there is enough evidence to suggest Apple will launch such a device. In our view, the appearance of the iPhone (or something like it) poses little risk to RIM’s business.”

Chris Umiastowski, TD Securities

“We’ve learned and struggled for a few years here figuring out how to make a decent phone. PC guys are not going to just figure this out. They’re not going to just walk in.”

                Ex-Palm CEO Ed Colligan 

It’s like they all belong to some crazy self-denial, when-all-else-fails-rely-on-the-tech-specs club.  What these guys didn’t realize then, and what apparently Mr. Moseley is having a tough time processing now, is that Apple isn’t selling a phone or a television.  Apple has rarely competed on specs, because usually the specs aren’t that great.  Apple will compete by selling a single, elegant medium for media consumption, communication, gaming, and who knows what else once the developer ecosystem gets rolling.  Personally, I’m looking forward to the first quadcopter dogfighting game, where each quadcopter is equipped with a video camera and AirPlay.

Apple doesn’t sell a product, it sells solutions.  Chris’s “picture quality” will always be important to some subset of videophiles, just like there is a subset of the population that requires $5,000 speakers and $60,000 performance-tuned BMWs.  Like the PC industry of the last decade, parity has been reached in television technology for the average consumer.  Most of us can’t tell yu the difference between 120Hz and 240Hz, and frankly we don’t care.  We just want a nice looking device that makes it easy to record Castle, chat with grandma, and play Angry Birds.

I’m not sure where Apple will turn after the television market.  They’ll certainly have a nice set of TV iterations that improve the screen and other functionality, and that should sustain them for a few years.  I have a gut feeling that Apple still has its sights set on the education market and may begin working on the gap between personal consumption devices like the iPad (10”) and group consumption devices like the iTV (37”).  My best guess is something like a folding, two-panel tablet (one side for content, the other side for notes, each 10.7”).  For some reason, I just don’t believe that the most recent textbook announcement from Apple was nearly as far as Steve wanted to go.

None of the above is rocket science, I certainly don’t have any inside information, and I’m basically just making educated guesses, but it’s always fun to pull a few data points and think about the possibilities.  I’m looking forward to seeing how accurate I am come fall, when I expect both the television and the iPhone 5 (the New iPhone?) to be introduced.



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