Tablet IndustryTablet IndustryJohn Rodriguez, Alex Wang, Florian Lecarpentier, Steve XuJohn Rodriguez, Alex Wang, Florian Lecarpentier, Steve Xu

Why the tablet/e-reader Why the tablet/e-reader industry? industry?

Exciting, dynamic market evolutionExciting, dynamic market evolution

Increasing demand----opportunities Increasing demand----opportunities

Part of technological future- better alternative Part of technological future- better alternative

Role of competitors Role of competitors

Pricing Strategies Implemented Pricing Strategies Implemented

QuestionQuestion

• How many people own a tablet and/or e-reader? How many people own a tablet and/or e-reader?

Results among college Results among college studentsstudents

Number has more than Number has more than tripled in the last year tripled in the last year

63% of students say tablets 63% of students say tablets will replace textbooks in 5 will replace textbooks in 5 years years

Preference of digital over Preference of digital over printed books printed books

Overview Overview • I. IndustryI. Industry

A.A.Market Summary Market Summary

B.B.Competition Competition

C.C.Organization and Major Players Organization and Major Players

• II. Pricing Strategies II. Pricing Strategies

A.A.Tying Tying

B.B.Price Discrimination/Inter-temporal PricingPrice Discrimination/Inter-temporal Pricing

C.C.Leap-FroggingLeap-Frogging

• III. Analysis and Recommendations III. Analysis and Recommendations

Tablets vs. E-readersTablets vs. E-readers•TabletTablet •- More powerful and - More powerful and •resourceful resourceful -For a multitasker---functionality For a multitasker---functionality •and applications and applications

•E-ReaderE-Reader-purpose: read electronic contentpurpose: read electronic content-SimplisticSimplistic-Smaller and more portable Smaller and more portable

TechnologyTechnologyStarted by the iPad in Started by the iPad in 2010 Emergence of 2010 Emergence of Alternative Operating Alternative Operating Systems (OS)– Source Systems (OS)– Source of Product of Product Differentiation Differentiation Designed to make most Designed to make most of touch interface—of touch interface—User Friendly Key User Friendly Key Success FactorSuccess Factor

Effective Advertising For Effective Advertising For Technology Technology

• http://www.youtube.com/watch?v=U7UlE-o8DQQ

Production and Production and DistributionDistribution

2011 2012 2017 2011 2012 2017

• Low cost products as Low cost products as driver of forecast driver of forecast

growthgrowth

• ½ of products sold in ½ of products sold in 2012 8 inch screen or 2012 8 inch screen or

less- ex. iPad Miniless- ex. iPad Mini

• Impact on E-Reader Impact on E-Reader Forecasts Forecasts

• Supply Chain and Supply Chain and Demand Demand

• Other Economic Other Economic drivers drivers

Target MarketTarget Market

Surge in past few years: Surge in past few years: college graduates and college graduates and household income $75,000+household income $75,000+

Different results with E-Different results with E-reader reader

Competition-HHI Competition-HHI (TABLETS)(TABLETS)

Apple 43.6%Apple 43.6%Samsung 15.1%Samsung 15.1%

Amazon 11.5% Amazon 11.5% ASUS 5.8%ASUS 5.8%

HHI: 2,295 HHI: 2,295

1111‘‘ 12 12‘‘ 12 12‘‘ 12 12‘‘ 12 12’’Q4 Q1 Q2 Q3 Q4 Q4 Q1 Q2 Q3 Q4

Competition-HHI (E-Competition-HHI (E-READERS)READERS)

Kindle 62%Kindle 62%

Nook 22%Nook 22%

Sony Reader Sony Reader 2% 2%

Pandigital 2%Pandigital 2%

• HHI: 4,336HHI: 4,336

Competitive LandscapeCompetitive Landscape

Barriers to Entry: High and SteadyBarriers to Entry: High and Steady• - Capital Intensive Market - Capital Intensive Market

• - High Competition (especially in e-reader) & - High Competition (especially in e-reader) & Technological ChangeTechnological Change

Market still in Growth Stage of Life Cycle Market still in Growth Stage of Life Cycle

No Government Regulation No Government Regulation - Apple/Samsung Patent Lawsuit Apple/Samsung Patent Lawsuit

August 2012August 2012-Samsung products infringed 6 of Apple-Samsung products infringed 6 of Apple’’s s patents patents

March 2013-March 2013- Court Reduces Damages to $599 Million Court Reduces Damages to $599 Million

Organization• Production • Tablets

• Parts are produced by multiple manufacturers• Manufacturing outsourced• i.e.: Apple iPad includes parts made by

companies such as Samsung, Toshiba, and Dynapack International and assembly is executed by Foxconn.

• Apps• Produced both independently and by Apple, Inc.

Organization• Retailing

• Manufacturer-Direct sales are prominent

• 50% of eReaders

• 30% of Tablets

• Brick-and-mortar stores will be increasingly important for distribution

• Consumer Electronics stores (i.e. – Best Buy)

• Bookstores

• Cell Phone Stores

Major Companies

Apple• Consumer electronics and

software technology company.

• Market Leader

• First launched in 2010.

• Tablet Offerings

• iPad 2, iPad with Retina Display, iPad Mini

• Electronic commerce company diversifying into consumer electronics.

• First launched November 15, 2011.

• Tablet Offering:

• Kindle Fire

• Specializes in internet-related products and services with a growing presence in communications hardware.

• Partners with electronics manufacturers to produce Tablets such as Samsung.

• Offerings:

• Nexus 7, Nexus 10

• Android Operating System-used in many tablets including the Kindle Fire and Samsung tablets.

• Android tablet launched in 2011.

• Nexus tablet launched in 2012.

• Well established computing company producing a wide range of products and services

• Newcomer

• Offerings:

• Surface RT, Surface Pro

• Launched in 2012.

Price Strategy Price Strategy

Price discriminationPrice discrimination

Steal consumer surplusSteal consumer surplus

2nd degree pricing: Push the consumer self-select 2nd degree pricing: Push the consumer self-select the product that takes the most of her/his the product that takes the most of her/his consumer surplus. consumer surplus.

Three strategies employed:Three strategies employed:

Tying/Two Part TariffTying/Two Part Tariff

VersioningVersioning

Inter-temporal pricingInter-temporal pricing

Tying• The practice of selling one product or service as a

mandatory addition to the purchase of a different product or service.

• Tying of:

• Tablets and apps

• Apps and content

• Users can’t use their tablets without apps and can’t use many free apps without the purchase of content.

• Tablet’s utility increases with the number of apps one downloads.

• Gain revenues through paid app sales as well as greater tablet appeal with increase in free app users.

Tying• …Enables a Two Part Tariff

• One-time large fee for the actual tablet hardware followed by…

• Marginal costs of each individual eBook, digital file, or app the consumer buys

• Form of 2nd degree price discrimination as consumer self-selects their total price while exposing their willingness to pay through app and content purchases

• Facilitated by information product characteristics

How many versions of How many versions of iPad are currently sold?iPad are currently sold?

Wifi 16GBWifi 16GB

Wifi + Cellular Wifi + Cellular 16GB16GB

Wifi 16GBWifi 16GB

Wifi + Cellular Wifi + Cellular 16GB16GB

Wifi 32GBWifi 32GB Wifi 64GBWifi 64GB

Wifi + Cellular Wifi + Cellular 32GB32GB

Wifi + Cellular Wifi + Cellular 64GB64GB

Wifi + Cellular Wifi + Cellular 128GB128GB

Wifi 128GBWifi 128GB

Wifi + Cellular Wifi + Cellular 64 GB64 GB

Wifi 64GBWifi 64GBWifi 32GBWifi 32GBWifi 16GBWifi 16GB

Wifi + Cellular Wifi + Cellular 32 GB32 GB

Wifi + Cellular Wifi + Cellular 16GB16GB

1616iPad 2iPad 2

iPad iPad RetinaRetina

iPad miniiPad mini

77

88

128 GB128 GB64 GB64 GBSurface proSurface pro

64 GB64 GB32 GB32 GBSurface RTSurface RT

44

NEXUS 10NEXUS 10NEXUS 7NEXUS 7

55

VersioningVersioning

• Why?Why?

““Sell variation of products at different prices at Sell variation of products at different prices at different groups to different types of buyersdifferent groups to different types of buyers””

Push the consumer to Push the consumer to self-selectself-select the product the product that takes the most of her/his consumer that takes the most of her/his consumer surplus. surplus.

VersioningVersioning• How? How?

Creates differentiation between product …:Creates differentiation between product …:

Capacity constraint: 16GB, 32GB, 64GB, Capacity constraint: 16GB, 32GB, 64GB, 128GB…128GB…

Functionalities: Cellular Network, Screen Functionalities: Cellular Network, Screen definition, Applications available, Linked-Store definition, Applications available, Linked-Store ……

… … but also with competitors:but also with competitors:

Reduced price elasticityReduced price elasticity

Create a niche market …Create a niche market …

Price the Price the ‘‘Add-onsAdd-ons””Function of the willingness to pay of the consumer: Function of the willingness to pay of the consumer: value of the add-on for the consumer. value of the add-on for the consumer.

Price of the add-on differs from one company to Price of the add-on differs from one company to another, depending on: another, depending on:

The target: The target:

Amazon: Consumers using tablets as reader or Amazon: Consumers using tablets as reader or to shopto shop

Microsoft: Internet surfing/office applicationsMicrosoft: Internet surfing/office applications

The company philosophy:The company philosophy:

Apple: Upscale productsApple: Upscale products

Google: More accessible productsGoogle: More accessible products

Capacity constraintCapacity constraint

Common among competitorsCommon among competitors

Standard 16GBStandard 16GB

Double capacity between each versionsDouble capacity between each versions

Different price of capacity incrementation Different price of capacity incrementation whereas production costs are similar.whereas production costs are similar.

Price evolution of Price evolution of additional GBadditional GB

Price of doubling the capacity constraint for Price of doubling the capacity constraint for apple: $100apple: $100

Price evolution of Price evolution of additional GBadditional GB

Far from the manufacture cost Far from the manufacture cost

Price linked to the brand:Price linked to the brand:

Price linked to the brand and its Price linked to the brand and its target target

Shop/E-readerShop/E-readerShop/E-readerShop/E-reader

Competes with Competes with AppleApple

Competes with Competes with AppleApple

Strong MarketingStrong Marketing

Marketing of add-ons:Marketing of add-ons:

Push people to choose the more expensive version…Push people to choose the more expensive version…

……or the more reliable for the company. (E.g. IPad Retina vs or the more reliable for the company. (E.g. IPad Retina vs iPad mini)iPad mini)

Inter-temporal Pricing

• This pricing strategy focuses on the consumer This pricing strategy focuses on the consumer behavior where people value things differently behavior where people value things differently depending on the point in time they will receive itdepending on the point in time they will receive it

- Value now > Value later (Hyperbolic Discounting)Value now > Value later (Hyperbolic Discounting)

• E-Reader and Tablet companies exploit E-Reader and Tablet companies exploit consumersconsumers’’ different valuations for the product different valuations for the product and different degrees of patience (waiting costs) and different degrees of patience (waiting costs) by marking up their product upon introductionby marking up their product upon introduction

Inter-temporal Pricing

• This captures the consumer surplus of early-This captures the consumer surplus of early-adopters. When low-value customers wait, adopters. When low-value customers wait, they compete for availability with high-value they compete for availability with high-value customers and their willingness to pay customers and their willingness to pay increaseincrease

• They later lower their prices to reflect the They later lower their prices to reflect the reduction in value that occurs when the reduction in value that occurs when the product leaves the market entry stage and product leaves the market entry stage and more consumers begin to enter the market.more consumers begin to enter the market.

Discriminating Early Adopters

Tale of Two E-Readers*Prices based on *Prices based on suggested retailsuggested retail

Leapfrogging

• When a company launches new tablets, it tries to When a company launches new tablets, it tries to

add functionalities or to improve the design, to justify add functionalities or to improve the design, to justify

a price increase. Each company try to release a a price increase. Each company try to release a

better product than its competitors better product than its competitors

- Used to describe the bypassing of existing - Used to describe the bypassing of existing

technological stages that other firms have gone technological stages that other firms have gone

through. through.

Playing the Leap-frog Game

• The technical aspects of implementing new The technical aspects of implementing new ““game-game-changingchanging”” technological innovations in the existing technological innovations in the existing competitive environment.competitive environment.

-Capture competitor-Capture competitor’’s customers with new s customers with new appealing features. appealing features.

- - ““LeapfrogLeapfrog”” ahead of former leading firms, causing ahead of former leading firms, causing them to lower prices. them to lower prices.

Remember Moores Law?• Leapfrogging is effective when it can be realized, Leapfrogging is effective when it can be realized,

and in accordance with Mooreand in accordance with Moore’’s Law, the pace of s Law, the pace of technology in the industry will be outdated by technology in the industry will be outdated by the time they get to the market. the time they get to the market.

U.S. Web activity from Google Correlate

Analysis/Analysis/Recommendations Recommendations

Reimagination of User Interfaces

To be successful, Apple, Samsung, Amazon and To be successful, Apple, Samsung, Amazon and others in the industry need to anticipate future others in the industry need to anticipate future

technologies (in 5-10 years) and innovate technologies (in 5-10 years) and innovate based on those predictions. (bigger storage, based on those predictions. (bigger storage,

more functions). more functions).

Tablet Overtake

• Adds value to the user's life, and a strong Adds value to the user's life, and a strong ecosystem of supporting applications. ecosystem of supporting applications.

• We anticipate higher growth in the multipurpose We anticipate higher growth in the multipurpose tablet market as we move forwardtablet market as we move forward

Market Share of Notebook PC Market Share of Notebook PC

Tablet TakeOver• Tablet computers to make the Dedicated E-Reader Tablet computers to make the Dedicated E-Reader

and Bookstores obsolete.and Bookstores obsolete.

• EReaders marketed to heavy readers, Tablets have EReaders marketed to heavy readers, Tablets have much wider appeal, a part of our lifestyle.much wider appeal, a part of our lifestyle.

E-Readers, Bookstore Troubled Outlook

• Closing brick-and-mortar storesClosing brick-and-mortar stores

• Need might exist for Need might exist for ““bookstore bookstore experienceexperience””

• -A rumored plan to split the e-book -A rumored plan to split the e-book division off from Barnes & Noble's division off from Barnes & Noble's brick-and-mortar stores brick-and-mortar stores 

Increased Competition•Early adopters mostly are already heavy users.Early adopters mostly are already heavy users.

•Priced above most consumersPriced above most consumers’’ $300 psychological $300 psychological threshold, are still too expensive for mass-market threshold, are still too expensive for mass-market adoption, need to lower the price.adoption, need to lower the price.

•Capitalizing on multimedia capabilities and Apps that Capitalizing on multimedia capabilities and Apps that appeal to a broader audience and as their prices appeal to a broader audience and as their prices inevitably decline.inevitably decline.

- Subsidize device by purchase of tied information - Subsidize device by purchase of tied information goods:goods:

EBooks, movies, and music, Apps from Online Stores EBooks, movies, and music, Apps from Online Stores

•

eBook/App Pricing Strategy• Industry moving toward offering a larger scope of Industry moving toward offering a larger scope of

lendable bookslendable books-Increase Network Externalities and effect-Increase Network Externalities and effect

• Limited time offersLimited time offers

-- ““Weekly and Daily DealsWeekly and Daily Deals””

- eBooks + Apps are free for limited time only- eBooks + Apps are free for limited time only

- Discounted best-sellers popular media - Discounted best-sellers popular media

• Broad range of pricesBroad range of prices more price discrimination more price discrimination

A Story to Each Segment

• 1/3 of consumers in the US use their tablet to watch 1/3 of consumers in the US use their tablet to watch video. ½ of tablet owners stopped using television video. ½ of tablet owners stopped using television to watch certain types of content. to watch certain types of content.

• Portability with superior functionality is what our Portability with superior functionality is what our Generation demands (ex. multitasking, mobility). Generation demands (ex. multitasking, mobility).

• User friendliness and good designUser friendliness and good design unique unique experienceexperience drive sales drive sales

Example

Opportunities

• Large barriers of entryLarge barriers of entry

• A market in the tablets for online paid content A market in the tablets for online paid content from increase in internet traffic. from increase in internet traffic.

• Offer incentives in creating applications that Offer incentives in creating applications that fully exploit the capability of the tabletsfully exploit the capability of the tablets

• More investments into applications and user More investments into applications and user interface for B2B usage (ex. Restraurants, interface for B2B usage (ex. Restraurants, offices, stores, etc.) offices, stores, etc.)

Questions?