Tech on the Side: Apple numbers: languishing iPad sales a function ofthe phone subsidy model
Oct 20, 2014

Tech on the Side: Apple numbers: languishing iPad sales a function ofthe phone subsidy model

The ability to make phone calls on a modern smartphone is now just one app among many. For most people it isn't even close to the most used app with Facebook, YouTube, messaging, games, and the like dominating usage. And it is also an app with many competitors like Skype and Google Hangouts and other VOIP phone services that will likely continue to grow in the future (imagine a future where mobile graphs are facebook account or email account centric, not phone number centric).

With the increase in phone size led by Samsung and picked up by Apple with the 5.5" iPhone 6+, we now get a spectrum of device screen sizes from 3.5" up to 10"+ at most sizes and price points in between. While some apps are still segregated by screen size (features or whole apps that are phone only or tablet only), for the most part you can do any of these apps on any device size. Except, of course, for phone calls. This is the main differentiator between phones and tablets, and when thought of as "just another app", it makes it seem rather arbitrary.

I generally am a big fan of extra screen size which makes a richer and more immersive experience - particularly for video, reading, and games - than smaller sizes. The unavoidable trade off is somewhat reduced mobility, and the avoidable trade off is whether it is a "phone" or a "tablet". People can choose where exactly they fit on the "bigger size vs lower mobility" trade off.

I have an old pre-Android Samsung stick phone and recently preorded the iPad Air 2 as an upgrade for my aging iPad 2. Effectively this means that I have the biggest - and thus best for me - experience for almost all the apps and then for that one app of the phone I am unbundling the experience by having to carry around the aging legacy phone for that rarely used phone app, but I get the benefit of a legacy plan so cheap that no cheaper are currently available in Canada after the 2 year contract switch.

New numbers from Apple show that my experience is certainly a rarity. While the iPhone is still growing well and a massive moneymaker, sales of the iPad have stalled for several quarters. Instead of the larger screen and better experience growing usage, the standard seems to be that people buy a smartphone first, and then they might also buy a tablet, in much smaller numbers. Especially with 5.5" iphones, it is hard to see why one would also get a 7.9" iPad mini. I think the larger device offers a better experience, but not enough to justify two devices to take around with you. Even aside from the cost, most won't want to carry both and there will always be unnecessary friction in the user experience between multiple similar devices. It is a truism that the best device is the device you have with you, and most won't have two.

Part of this may simply be that people disagree with me on the size vs mobility trade off, with people preferring the mobility of the smaller size. And part may be that for that one app - the phone - you really need to use a pair of earbuds or a bluetooth device as holding it up to your ear is cumbersome which creates an advantage for smaller devices. So it may be that people really do prefer that smaller size.

However, I think another part of this is based on the result of the subsidized phone model. A brand new top of the line iPhone or Android costs $199 on a subsidized plan, making the headline number pretty damned cheap. Most of this subsidization comes from selling overly expensive plans for that one phone app - extra minutes and the like. Back in the day, operators charged insanely high costs for very low data text messaging until message over the internet plans operating on effectively arbitrage forced first world operators to bundle text messaging for free, more representative of their true costs. However, these kinds of subsidization plans for tablets are either nonexistent or off in the background somewhere not usually notice.

This model where one primarily buys a voice+data plan on a subsidized smartphone where it is mainly the voice part that is paying for the subsidization, arbitrarily encourages people to continue buying phones and not tablets. This then means that when people decide to buy a tablet as well as a smartphone, it is usually not data equipped which then limits its mobility and encourages the smartphone use.

There are certainly advantages to smaller screen devices. But I contend that a reasonable portion of the large asymmetry between "phones" and "tablets" is not a function of people preferring smaller screen devices that are easier to carry and easier to use the phone app with. It is a function of an outdated business model that creates this sharp asymmetry between the two. Add in the culturally reinforcing effects that people tend to follow the buying patterns of others, and the upside down asymmetry between Apple's phone and tablet businesses can be largely explained. For myself, I'm happy with the 10" iPad Air 2 as arguably the best mobile device - phone and tablet - on the market with my cheap old legacy phone hidden in my bag for the rare times I actually want to make calls outside of wifi availability.

Consequences for the tablet market:
A somewhat strange phenomena is going to occur next quarter. The iPhone ASP is going to up now that the iPhone 6+ is a 100 premium (and that the value proposition on increased memory is higher). But the iPad ASP is going to go down as there is a new $250 dollar entry tier and the iPad mini 2 (almost as good as the iPad mini 3) is now $300.

 Indeed, Apple tablets are distinctly secondary in quality to their phones. This is most clear for the iPad mini 3 which didn't even get the new A8 processor (basically just Touch ID and the gold colour option). While the iPad Air 2 got much more significant upgrades, it still is behind the iPhone in terms of cameras, and new features like Touch ID are coming a generation behind. All of this paints the picture that tablets are having to drop in price and be somewhat less feature laden than their smartphone counterparts.

This is, I think, part of the same analysis on the subsidy phone model and the dynamic of phone first, tablet possibly second. As tablets don't get the big initial cost subsidy, and are perceived as an extra, they have to be cheaper, and hence they don't get all the features to drive down costs. This reinforced the idea that tablets are lesser than phones and perpetuates the asymmetry. If the tablets were getting all the latest perks - and and given the same priority in subsidy that phones get - I suspect a lot more would be sold.

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CuJoYYC said...

There is no such thing as a "subsidized plan". There are no subsidies. The Telcos LEND you the money and you pay it back plus an undisclosed interest rate over two years.

Not sure why people continue to perpetuate this myth that the Telcos love us so much that they choose to subsidize our phones.

bazie said...

Sure. I'd phrase it that the initial cost is subsidized and payed for by higher future costs so I think the word still applies, but you are absolutely right that it isn't any free give away. I'd prefer to get rid of the system.

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