APPLE'S IPAD IN BIG TROUBLE

Original Story: USAToday.com

Less than two years ago, Apple's (ticker: AAPL) iPad absolutely dominated the tablet space. As of mid-2012, Apple still claimed nearly 70% of the tablet market, while Android tablet manufacturers were struggling to make any headway.

Furthermore, the iPad Mini's fall 2012 arrival was an open secret by then. As a result, tablet market analysts expected Apple to further solidify its dominance of the tablet market over time.

However, the opposite has occurred. Not only has Apple's market share lead crumbled, but iPad sales growth has also come to a crashing halt. Tablet rivals such as Amazon.com (AMZN) and Samsung are gaining momentum by closing the quality gap with Apple and offering lower price points. Unless Apple can deliver vastly improved iPads later this year, the iPad's growth days are over.

Where did all the iPad buyers go?

It's hard to imagine right now, but just two years ago, Apple was growing iPad revenue by more than 60% and iPad unit sales by 80% -- even without an entry in the growing 7- and 8-inch tablet market! Last year, despite the addition of the iPad Mini, unit sales growth slowed to 22%.

Furthermore, Apple introduced the iPad Mini at a lower price point to combat cheap tablets from Amazon.com and other vendors. This led to a sharp drop in the average iPad selling price. As a result, iPad revenue grew only 3% in FY13. While iPad production costs are falling, it's safe to say that with iPad unit sales growth outpacing revenue growth 22% to 3%, iPad margins dropped dramatically.

iPad revenue growth did tick up to 7% last fall on a 14% increase in unit sales. However, that may prove to be Apple's best quarter of the new fiscal year. Demand appears to have fallen off a cliff after the holiday season.

As of Dec. 28 -- the last day of Apple's fiscal Q1 -- the iPad Air and iPad Mini Retina combined to account for 8.6% of all iPad usage, according to Fiksu. By the last day of Q2, usage for the new iPads had grown to 14.1% of the total, a 5.5 percentage point increase.

Considering that Apple benefited from "channel fill" in Q1 -- selling the new iPads to build up inventory at third-party retailers -- iPad unit sales could easily have fallen 40% sequentially this quarter. That would entail a significant step backward from Apple's 19.5 million iPad sales in Q2 last year, when Apple was meeting pent-up demand for the original iPad Mini.

The iPad Mini Retina is a flop

If I had to boil down Apple's iPad problems to a single issue, it's that the new iPad Mini Retina is a flop. After five months on the market, the iPad Mini Retina accounts for just 3.7% of all iPad usage (as of Thursday). By contrast, the third-generation iPad (the first to offer a Retina display) still accounts for 13.6% of iPad usage, even though it was on the market for less than eight months in 2012.

To some extent, weak sales of the iPad Mini Retina could be the result of a crowded iPad market. For just $100 more, tablet buyers can get a whole lot of extra screen real estate with the iPad Air. Alternatively, the original iPad Mini is $100 cheaper and offers "good enough" specs for many users.

However, there's also a quality issue. To be sure, the iPad Mini Retina has gotten good reviews from some respected publications. That said, many reviewers have found that Amazon's Kindle Fire HDX offers a much higher-quality display than the iPad Mini Retina.

This is a big problem for Apple, which spent most of 2012 training consumers to demand high-quality Retina displays for their mobile devices. Not only is Amazon offering lower price points -- the Kindle Fire HDX starts at $229 for the 7-inch version and $379 for the 8.9-inch version -- but it's also offering better quality on at least one critical feature.

Will Apple reclaim the lead?

In some respects, Apple's commanding lead in the tablet market remains intact. There are far more iPad-optimized apps than tablet-optimized Android apps. Even though Apple's technical lead has shrunk (or disappeared, perhaps), it still offers a superior overall user experience. That's a major reason iPad usage still dwarfs usage of all other tablets combined.

The iPad can still be a meaningful contributor to Apple's profitability even if sales growth remains small. As long as engagement remains high and the installed base of iPads increases, Apple can take a page out of Amazon.com's playbook by making money while people use their iPads: by selling apps, books, movies, and so on.

Indeed, strong iPad usage is undoubtedly one of the factors driving big gains in Apple's revenue from iTunes and the App Store. This revenue stream will become increasingly important to Apple's earnings in the next few years. However, what Apple shareholders really want to see is a return to solid sales growth for the iPad -- even if it continues losing market share.

Apple needs to double down on display quality if it wants to reignite iPad sales growth.

To reignite iPad sales growth, Apple may need to become somewhat more aggressive on pricing for the iPad Mini Retina. More importantly, it needs to make the display at least as good as what Amazon and other competitors are offering (and preferably better). Adding a faster processor and a fingerprint sensor may help sales a bit, but improving the display is the X-factor.

Foolish final thoughts

While I remain bullish about Apple's long-term prospects, the iPad no longer appears to be a major part of the Apple growth story -- aside from its role in driving content and app sales. iPad sales have stagnated in the last year, and the introduction of two new iPads last fall provided only a modest short-term sales bump.

To reverse this discouraging trend, Apple needs to double down on its pursuit of perfection for the next iPad Mini. If Apple can deliver an updated iPad Mini Retina with a best-in-class display this fall, it could rejuvenate iPad sales, especially if Apple can lower the price. Otherwise, investors may need to look to other product lines for long-term growth.

Publishers see Signs the iPad can Restore Ad Money

Associated Press

 

Good news for the news business: Companies are paying newspapers and magazines up to five times as much to place ads in their iPad applications as what similar advertising costs on regular websites.

This doesn't mean Apple's tablet computer will live up to its hype as a potential lifeline for the media industry. Online ads still generate a small fraction of news companies' advertising revenue, and it's an open question whether print ads will return to what they totaled before the recession.

But early evidence suggests the iPad is at least offering publishers a way to get more money out of advertisers. That bolsters the hope that portable touch-screen computers could start turning the economics of digital advertising in publishers' favor.

"I think it will redefine publishing and also redefine how advertisers connect with our audience," said Lou Cona, executive vice president at Conde Nast Media Group, the privately held publisher of such magazines as Vogue, GQ and Wired.

Still, a lot will need to go right for publishers before the iPad and imitator tablet computers become a significant source of income.

For one thing, media applications will have to be compelling enough to keep people engaged for longer periods. That's especially true if a publisher wants to charge for a news app, because free articles on the Web are just a few taps away on the iPad's browser. Expect media companies to hold back more material from their free websites and offer it exclusively in tablet apps.

Also, tablet computers will have to get into many more readers' hands - but without becoming so mundane that advertisers are no longer willing to pay a premium for what now is rarefied space.

There are many reasons publishers don't make as much online as in print. While newspapers and magazines offer a limited supply of ad space - the number of pages they publish - space online is virtually limitless. Advertisers that don't want to pay full price can give their money to online ad networks, which get discounted rates on slots publishers can't sell on their own.

That supply/demand equation hasn't played out yet on the iPad. In iPad applications such as USA Today's, there is a finite amount of space and no ad networks are in the mix. And the app gives advertisers new possibilities. A reader can click on Courtyard by Marriott's USA Today ad and then with a flick of a finger scroll through images of the hotels' updated lobby design. Another tap and a high-definition video appears, full of happy hotel guests.

Jason Fulmines, director of mobile products for USA Today's corporate parent, Gannett Co., says the newspaper is charging Marriott about $50 for every thousand times, or impressions, the ad appears. The average rate for USA Today's regular Web site is less than $10, he said. In the printed newspaper, the cost per thousand impressions on a full-page color ad that runs nationally is $103.

Fulmines declined to say how many impressions USA Today is promising on the iPad or how much ad revenue it projects from the iPad this year.

The newspaper's markup on iPad ads appears to be common. Phuc Truong, managing director of the mobile marketing company Mobext U.S., said publishers have been asking two to four times the usual rate of online advertising.

Aside from paying higher rates for each iPad ad, advertisers have been willing to increase their overall spending with a given publication. That has been the case at The Wall Street Journal, said Brian Quinn, the Journal's vice president and general manager for digital ad sales.

"Out of the gate, there was an exuberance about this," he said.

There is no guarantee publishers can keep this going. For instance, one reason JPMorgan Chase & Co. leapt at the chance to sponsor The New York Times' app for the first 60 days was the opportunity to showcase its Sapphire credit card to early buyers of the device. That card is aimed at the top 15 percent of earners, and people who bought the iPad (for $499, at least) presumably have extra cash.

Chase is impressed by what it's seen on the iPad, but for reasons that cut both ways for publishers.

The good news, according to Chase Sapphire General Manager Sean O'Reilly, is that the company's ad is getting clicked on about 15 percent of the time that it pops up. Even if that's partly because people are fumbling with the touch-screen navigation, it's a surprisingly high figure; the average "click-though" rate for an online display ad is about one-tenth of a percentage point. Put another way, 84 percent of people never click on a Web ad in an average month, according to Gian Fulgoni, chairman of comScore Inc., a company that analyzes Internet behavior.

The trouble is that some publishers hope the iPad will help break advertisers' addiction to concrete metrics like this.

Online, advertisers have been ruthless about seeing a return on their money. They have thrown out an industry maxim, "I waste half the money I spend on advertising, I just don't know which half." Companies gather information on every step of the process, from the moment someone clicks on an ad to the point of purchase. They don't want to shell out for ads that don't pay off.

Publishers, on the other hand, want to return to the days when advertisers paid high prices for a big, eye-grabbing color ad in a newspaper or magazine that readers spent a lot of time with.

Conde Nast says the average reader spends 60 minutes with each monthly issue of its magazines' iPad apps. The average visitor on the Web spends just 2.1 minutes per month at Vanityfair.com and 3.8 minutes per month at GQ.com, according to comScore. "We're looking to prove engagement in terms of hours, not minutes," said Scott Dadich, creative director for Wired magazine.

That could require a new way of measuring how well ads work. Advertisers would have to agree to follow more complex measurements, such as new tools from comScore that don't just watch how many people click on an ad. Instead comScore offers to show whether customers who have seen an ad then did a Google search for the product or bought it at a store. ComScore gathers such offline data by studying panels of Web users and cross-referencing them with databases of say, loyalty card activity at a grocery store.

"The click is just not a metric that reflects the effectiveness of the advertising," Fulgoni said.

Among the other hopeful signs for publishers: The New York Times says 300,000 people had downloaded the newspaper's free app by mid-May. Around that time Apple said it had sold about 1 million iPads since their April 3 debut, meaning more than a quarter of early iPad buyers were at least curious enough to take a look at the Times' app. (That percentage is likely to drop; Apple now says it has sold 2 million iPads.)

Wired might be the most aggressive magazine in trying to push the iPad's potential. Wired's app lets readers peruse the magazine the way they would in print, but with extra touches such as video clips or graphics that can be rotated with a finger swipe. Nissan, which has a 30-second TV-style commercial for the Infiniti in Wired's first iPad edition, is one of nine advertisers that generally place spots in the print edition and are taking advantage of these bells and whistles in the tablet app.

Wired's app costs $4.99 per issue, which brings up another wild card: Whether publishers can balance methods of seeking revenue from readers and advertisers.

On the Web most content is given away, in hopes of luring the widest possible audience for advertisers. Publishers are eager to avoid repeating that on tablets, but charging for apps carries its own risks. There might not be enough readers willing to pay, which would reduce the audience that can be sold to advertisers.

Wired says its first effort is working out. By Wednesday, just one week after the app went on sale, more than 66,000 people had paid for it. In an average month, the printed magazine sells 82,000 copies on newsstands.

A Slap for Apple

NY Post

 

Adobe's Flash video software has become a flashpoint in negotiations between Apple CEO Steve Jobs and Big Media.

On a day when Apple execs probably cheered the fact the company had surpassed Microsoft as the world's most valuable tech company, Jobs was grappling with resistance from Tinseltown over Apple's ongoing fight with Adobe.

Sources said several large media companies, including Time Warner and NBC Universal, told Apple they won't retool their extensive video libraries to accommodate the iPad, arguing that such a reformatting would be expensive and not worth it because Flash dominates the Web.

Though the iPad has been a huge hit, media companies are feeling emboldened in their rebuffing of Apple by the launch of rival touch-screen tablet devices, such as the ones coming from Dell Computer and Hewlett-Packard, sources said.

In addition, one media executive pointed out that Apple's ability to dictate terms to the media giants will be weakened further by Google TV, a software product that enables viewers to watch online video on their big-screen TVs.

Jobs banned Flash software from running on Apple devices, arguing that the world's most popular video software is unfit for his devices. Instead, he favors video software written in Web software language called HTML5.

Said an Apple spokeswoman, "We believe in open standards like HTML5."

The media companies' refusal to cave in to Jobs marks another setback at a time when Apple has had its share of both good and bad news.

In the plus column, Apple's $221.1 billion market cap yesterday topped Microsoft's $219.2 billion, making it the most valuable tech company. However, Apple is facing scrutiny from the Justice Department over tactics it uses in pricing songs sold on iTunes.

Apple shares closed down $1.17 to $244.05. Microsoft shares fell $1.06 to $25.01.

In the Apple vs. Adobe fight, Big Media's decision not to acquiesce to Apple's demands will be a boon to Adobe, which has gotten beaten up by Jobs' withering criticism of Flash.

Time Warner, in particular, is against the walled-garden, subscription-only model promoted by Apple in part because Time Warner is promoting its "TV Everywhere" initiative, which aims to make content platform agnostic so long as users can prove they are pay-TV customers.

Not surprisingly, Disney, which counts Jobs as its largest shareholder, has created an iPad app that lets users watch ABC shows for free.

CBS, using an iPad-enabled Web browser, is also working with Apple, but to a limited extent, offering only a handful of shows.

Both Fox News (which, like The Post, is owned by News Corp.) and CNN offer free video clips using HTML5 on the iPad.