a16z Podcast - a16z Podcast: Apple and the Fate of Tablets

Episode Date: April 25, 2014

Apple’s recent earnings sent the stock soaring. What drove that investor exuberance had everything to do with iPhone sales (and the China market), and very little to do with the iPad – the sales of which were essentially flat over the past year. Chris Dixon and Benedict Evans look at the fortunes of the world’s best-selling tablet, and what that means for the balance of power in the computing world. Are smartphones supplanting tablets for most uses? Are developers so focused on creating apps for the latest handsets the tablet is becoming an afterthought?

Hi, this is Chris Dixon. This is the A16Z podcast. I'm here today with Benedict Evans. We're going to talk about Apple. Hi, Benedict. Apple had their earnings yesterday. What do you think? It was a set of puzzles. The iPhones say unit sales were better than expected, and the stock shot up, not surprisingly. And China's doing well, and the iPad isn't. And so there's a set of interesting questions in there. the iPad is the thing that certainly I'm looking at most in those numbers because if you look at them on a look at unit sales on a trading 12-month basis which strips out the spikes from new product releases basically the sales went up in a straight line until about a year ago

and they've been flat for the last year and for the first quarter or two you could say well you know every Apple product has a sort of product cycle and the new one comes out and the sales go up and then they go down a bit and then they go up for the next one but that isn't actually what's happened it's just been flat and that's never actually been the case for the iPhone and so

and some people say this because the upgrade cycle is longer I mean so there's a couple there's a bunch of things to sort of talk about in order there is annual competition

there is the upgrade cycle there is the extent to which it's a useful product for people coming from a PC or for people coming from a smartphone the thing about upgrade cycle is on a kind of purely

mathematical basis if the upgrade cycle is any given number that shouldn't change the growth rate if the upgrade cycle lengthens then that should pull the sales down but it shouldn't of itself suddenly cause a halt in growth for that to happen you have to kind of run out

of new people to be buying the thing and that's really what happens to the issue isn't it true that it at least the tablet appears to be more expensive to people because it's not subsidized the way mobile is and therefore it could just be a rich person's device yeah but

you say that but it's but it's also only what's $300 so it's not I mean a luxury device it's like you've got everything

like you've got a laptop you've got a phone and if you've got excess money you say hey I'm going to have a tablet so when I'm lying on the couch I can you know But that's the presumption isn't it as to what is the use case

is it a PC or supplement or is it a PC replacement and I think You know, but that is the question. So if you have a, so there's an argument that says, look, most of what people do on their home computer is browsing the web or playing games. And you can actually do all of that perfectly well on a tablet,

particularly like a 10-inch tablet. And in addition to that, you have all sorts of great dedicated apps from e-commerce companies, from all sorts of things that you might want to look at. And so a tablet ought to be able to substitute a lot of your desktop PC use, your laptop or your computer use. And in the meantime, you have the PC replacement cycle lengthening out, very obviously, so people are not buying new PCs or buying them at much longer intervals in order to replace their existing PC.

So you would hope or expect to see tablets coming in and being the new purchase that you buy instead of a new PC rather than as well as a PC. But it doesn't seem like that's happening yet. It seems like what's happening, as you say, right now, is that being bought as an accessory. And you have that PC, and that PC is now four years old, five years old, six years old, seven years old.

It's still actually a perfectly good PC. It's running Windows 2000 or Windows XP or, you know, Windows 7 or something, and that was a actually perfectly good operating system, and the computer that you buy now wouldn't be noticeably faster, really. And so there's no compelling need to replace that. and so you don't have that decision

well am I going to buy a laptop or am I going to buy a tablet and so yeah you're right you're kind of so far it's in that well I'm going to get one as well market I mean coming at this from another angle

there's two ways that you could look at a tablet one is that it's less than a PC or that it's an alternative for a PC but another is that it's an accessory for a smartphone in that you or I would probably feel well I couldn't have my entire computing experience on a smartphone. I need something else, certainly with a bigger screen, perhaps with a

keyboard. But it seems like where the tablet is being squeezed is that you've got a bunch of people saying, well, I'm going to keep my PC, and my PC is still going to be my main device. And you've got another bunch of people, probably quite a much larger group of people, who are saying, actually, my smartphone is all I need. And I don't need a PC at all. Or my PC is going to stay upstairs in the study turned off, and I'm going to use my PC. are going to use my smartphone for more and more and more of my computing use. So it almost kind of gets squeezed in between. And the ironic thing here is say that for the last three or four years,

everyone who said PCs aren't, tablets aren't going to work, was saying tablets will not work because you need a PC to do all of these things. But it seems like actually, then that's not just wrong, but it's completely wrong. What's happening is people are not just saying, I don't need a PC. They're saying, I don't even need a tablet. I can get away with just using a smartphone. So people are jumping all the way down. So here's my argument, and I know you're going to, I think you're going to disagree, but let me put it forth, which is imagine an alternative universe where there was no iPhone, no Android phone, but there were tablets.

So tablets were introduced in whatever, it was 2010. So we have this major new platform that came out. What you would see is you would see, for example, all these meetings you and I have, you join me in them where we meet with entrepreneurs, and they come in. And today what they're saying is, I've got in half the meetings or something, they come in, they say, I've got a great new idea for a smartphone app, effectively, right? Yeah. And there's just massive amounts of innovation going on around that. And what I think we would see in this alternative universe where there were no smartphones, but there were tablets, is we would have all those same entrepreneurs would be coming in saying, I've got a great new tablet app. And but because these two kind of, we had two major platform revolutions that that overlap.

closely, the smartphone and the tablet, I think that the smartphone has crowded out app development from the tablet. It's so rare, it's like, it's a special event when someone comes in and says, I've come up with a new tablet. Yes, everyone has an iPad version of their mobile app, but they aren't developing for that platform. So I feel like it's a crowding, a developer crowding out issue. I think I see the same data. I'm not, I think I think about it slightly differently in that the the opportunity from a device that people carry

in their pocket everywhere is bigger. I'm not saying it isn't bigger, but I think it's newer and more exciting. But I'm saying it's because you know you have far more smartphones than you have tablets and the mere fact that they're in your pocket everywhere all the time.

With a cellular connection. Which means you can do stuff like Uber for example. Yeah, exactly. Like Uber couldn't, that kind of new functionality of like delivery Uber for X couldn't really happen with tablets the way it can with smartphones. Yeah, but also just things like, I don't know, Instagram.

Yeah, you could build Instagram for a tablet for a tablet, but you wouldn't because you build it for a phone because it's with you all the time. And the stuff you would build for tablet would be very different. It would be like how can you compose emails intelligently on a touchscreen or a lot of it would have more UI productivity apps,

office. Now we finally, by the way, at an important point is office is now finally going to be, which you know, you're talking about laptop replacement you need office probably but not just office but like whatever comes after office is a touch version of office like we haven't seen that yet yeah I think that's true I mean

there's the kind of the default way that people think about this is there's pieces which you split into desktops and laptops if you bother to think about it that much and then there's mobile and mobile those tablets and smartphones because they're both running on this new they're both these battery powered portable

touch-based things. I think that's the wrong way to think about it. Exactly. I'm actually the wrong way of thinking about it. Actually, if you look at the, there's a long-term chart that I did of computer sales where you have desktop computers back since 95 and then laptop computers growing from almost nothing to grow half the market and then shrinking very rapidly in the last two years. And then tablet computers growing, becoming like the third arm of that and by far the biggest chunk of that. But it is a kind of a large screen sitting down computing experience doing something doing a kind of a full fat relatively sophisticated product and um there's stuff that you call another way to think of it is in the christiansen sense of jobs to be done right

yeah the tablet and the pc probably have more overlap in terms of the job to be done than the tablet and the smartphone have overlap yeah i mean i think the the other thing i was going to say is that there's a um there's a sort of there's an argument says well i can do this on my PC, I can't do it on my tablet. And that reminds me a lot of the argument 10, 15 years ago, you know, should I get a desktop or a laptop? And there are a whole bunch of things that you couldn't do on a laptop and that you would say you'd buy a desktop computer and over time that changed. And more and more things became possible to do on a laptop and today there's very little. And I think the same thing will happen with tablets. And in particular, I think a lot of the

tasks that people today do that require a keyboard and a mouse either will become possible on a touchscreen or those tasks themselves will change. Like, you know, you won't be spending all day doing a PowerPoint sales report, you'll just send somebody a link to a SaaS dashboard or something. So, but I do think, as we said, that tablets sit in the same box as laptops and PCs, at least as much as they sit in the mobility box. I think you just made an extremely important point, which is there's really kind of three moving pieces when you have a new platform. There's the platform itself, a tablet. There's the applications on the platform. And by the way, with every major platform shift in the history of computing, brand new applications were invented,

So, you know, for the DOS era, there were, you know, it was VisiCalc and, and, what was it, a word perfect, right? So you had the original spreadsheet and word processor. And then in the GUI era, you had PowerPoint and Photoshop. And in the tablet era, there should, I would argue there should be the sort of these new killer apps. They've been, the developers have been crowded out by the smartphone. That's my belief. But you've made an important point, which is you have, so you have the platform, you have the apps, and then you have the humans who change. And people forget how much people will take.

to adapt to the new computing environment. So, as you said, it could be that in the future, people just send shorter email. It's not even the future, right? I mean, like the younger generation now uses WhatsApp instead of SMTP. And people will just send shorter emails. They'll write shorter reports.

They'll send the link to the SaaS app. Human behavior will change dramatically. I mean, this is the whole podcast that we did with Steve Sinovsky, and this is having run Microsoft Office, he has his quite firm thesis. Basically, there's a portion of people who are doing Excel or PowerPoint or Word who actually need Excel and PowerPoint and Word

and those specific tasks. But there's a much larger portion of people who are using it because that's the tool. And then their business processes get shaped around the availability of the tool. And then they look at an iPad and they say, well, I've got these business processes that I need to do and I can't do them on that device.

And it's like, well, yeah, actually the underlying function of your business does not require you to be doing those things necessarily. It's just the processes that have grown up around the presence and the fact of Microsoft Office that requires you to do those things. And, you know, absolutely right. You will start, you know, we've invested in some of them.

You start seeing companies and tools and ideas for accomplishing those sort of underlying business needs in very different ways. But, you know, to kind of circle back on the point, it's like there's this division between the people for whom the iPad is not ready for them to move to form an office PC yet. And there are the people who are not almost not ready to upgrade from a smartphone to a tablet yet

who holds a smartphone in their hand and say, do you know what? I don't spend all my day looking at a screen. I spend all my day doing something else. You know, making pots or driving a bus or working in a store or doing any number of other things that do not revolve around seeing in front of the screen.

And I need a little bit of internet. I need the web. I need some email. I need some Facebook. I need a whole bunch of other services. But I don't need a PC for that and I don't need a tablet for that. and I can sit on the couch in front of a movie

and look up the personal life of that actor or how to buy that product on my phone and that will work really well and so the tablet seems like it sits in between I mean just as another strand to point out it's not that people are buying Android tablet instead of iPads that's not what's going on that's not why the sales are stalled because if you look at the and this is actually another interesting

kind of question around what people use these things for when you look at the tablet market feels like there's basically two tablet markets there is the post-PC premium vision of the future that Steve Jobs laid out and that everyone kind of looked at and thought wow that's interesting and Apple has like

probably two-thirds to three-quarters of that market and it massively outsells the Nexus 7 the Nexus 10 didn't sell at all it's very well it's very comfortably outsells the Galaxy tablets Kindle Fire does quite well in the U.S. because it's very cheap, but it's not really sold anywhere outside the U.S.

in a couple of other markets, so it's kind of insignificant globally. And then you've got another market, which is $100, $125, $75, even $50 for a very plastic, basic, generic thing that's running Android. And is this mostly in China? And it's partly in China. It's also, frankly, in developed markets as well. So Tesco, in the UK, sold a couple of hundred thousand, a very base, cheap. And these are used for watching movies and media kind of stuff?

Yeah, they're used for what, well, nobody can see them. So you can see the volume of sales, but you then can't see the usage data. And this is my point, that a bunch of people buy a tablet, having bought into this vision of what a tablet's supposed to be, it's a PC replacement, does all this wonderful stuff. And you look at the usage data, and Apple has 80% of tablet web traffic. And Apple seems like they've got like two-thirds-three-quarters of the volume sales in that segment. And then there's another segment of vast numbers of black plastic generic Android tablets being sold but not used online, not used for to buy anything, not used for apps. Seems like they're being used a little bit as kids tablets, a little bit to play games, a bit to play video, as photo frames. Or maybe they're sitting on shelves abandoned because you saw the iPad out and you thought, I'll buy one of those and you went into a store and went, wow, I can't an iPad for only $75 and you took it home and you turned it on and they're like, this isn't very good.

And you put it in a drawer. The new netbooks. Yeah, it's a new network. It's what you saw happening to some extent with Kindles as well. So this is my point. It's not that there's a competitive issue here. It's not that Apple's getting killed by Android.

It's just that premium vision feels like that's gone so far and now it's kind of slowed down a bit. And the smartphone is actually taking on that vision of let's take the internet, a computing experience to hold the audience. So the other thing, thing in the uh in apples earnings that was interesting was the apple tv yeah so they gave they gave a number um so

this time last year from memory tim cook said that they sold 13 million apple TVs in total um about and now he said they sold 20 million so they did 7 million in the last year or might be 8 million or might be 6 million you know you don't know exactly and that the total revenue in 2013 was a billion dollars and if you do the mass that works out a couple of hundred million dollars in content revenue. So it's revenue from the device plus content. So people buying movies and renting movies on it. Is it good, bad? Like how do you tell you?

It works out at, I can't remember. It's like $20 per device per year, which is not terribly exciting. Do you think they're becoming a real force there? Is it still a hobby as Steve Jobs? It feels, it's all still very pre-I-Pod, isn't it? It's like all the tech is there, not necessarily in the right order. and it's not the user experience I mean it's not just an Apple TV

it's also for the Chromecast and for the Rocco and the Voodoo and the Boxy and all these things they all got a box that's quite cheap that's got a certain amount of content doesn't actually have the stuff you really really want to watch the user indirect experience isn't that much better from watching you know it's still like a remote control

and you press stuff up and down 15 times and it's not quite there yet somehow And so there's a set of puzzles. I mean, again, we did a podcast a week or two ago about TV. There's a set of puzzles about what would have to change for TV to unlock and all these gears to unmesh and for stuff to start changing. And there's a bunch of very specific US issues around the fact that everyone pays a huge cable bill for channels they don't want. That doesn't really apply anywhere else.

It doesn't apply in the UK, but the use of the Apple TV in the UK is still quite low. And the I player, the BBC makes all of its content available for free online. on any device at any time, the iPad app, Smart TV app, you name it, it's there. Their peak viewing is 700,000 streams, and TV peak viewing is 25 million streams. So it's like, it hasn't quite caught fire yet. And, you know, we've yet to see, you know, whether all of these different rumours around Apple doing content deals or Apple buying, doing partnerships with people will take off. I mean, as Tim Cook said, it kind of feels wrong to call it a hobby when it's a billion dollars a year.

But it is kind of a hobby in the scale of Apple. Apple, it's, you know, for anybody else, that would be a fantastic business. But it's not, it's not that transformative experience that changes what it is to watch TV the way the iPhone was for a phone. All right. Last question. We think they're going to release anything big this year, watch? New iPhones?

I guess we're expecting new iPhones. Yeah, new iPhones are given, new iPads are given. There are three things one can speculate about. There is a watch or some wearable of some kind or potentially a platform of some kind. for other people to do wearables or to connect to new iPhones. And the puzzle there, I think, is that with the iPhone and the iPod, you knew what the problem was, but you didn't know what the answer was. You knew, if somebody had said to you,

would you like to be able to carry every song ever written around with you in your pocket? You just said, yes, the question was just, well, how do you build that device? And the same applies to the iPhone. For wearables, it's not quite so clear what that universal problem that everybody has, What could you say to anybody in the street that would make them buy it? This will give you, what's the equivalent of, you can have every track ever in your pocket. I think a lot of people are thinking it's going to have a health angle to it so you want to live longer and be healthier. Yeah, that's not as easier and straightforward as sell.

I mean, it may be the case, but it's a harder, it's not as easy to communicate immediately and directly why you should get that. Then the second thing is TV, which we've kind of touched on. And the third is sort of the miss that's played and floating around wherever is Apple doing a cheaper the phone because right now the average selling price of an iPhone is $600 thereabouts and the average selling price of Android is $250. And the 5C I guess was kind of a letdown. The 5C would appear to have sold just as well as the 4S sold last year. That's to say it was a continuation which is what Apple's always done. Yeah it was a older model. Exactly. It was a refinement of the existing strategy. It didn't sell worth a damn in China. In fact the 4S apparently sold fantastically well

in China. Apple didn't even mention the 5C on the call yesterday. So, but then the thing is Apple, you know, Apple has always said we want to make products we can be proud of. And three years ago, you couldn't make a cheaper phone that would be proud of in that sense. You'd have to make too many compromises. If you remember what the cheaper Android's of two or three years ago looked like, that was about right. Today, Apple could make a $300, $300 phone and it would be a great phone. It would run iOS 7. It would be a lovely thing. The question is how and when, how do they do that, how do they not cannibalize the high-end product? When do they decide the right time to do that is?

Do they have a 300-1, a 400-1, a 500-1 and a 600-1? But even then, from a kind of from a stockholder point of view, I mean, you can kind of do the mental arithmetic, they do, say they do a $500, say they do a $300 phone and they make a 30% gross margin on it, and they sell 50 million units. Well, that would blow an enormous hole in the middle of Android, but it wouldn't actually move Apple's own grace margin.

margin more than 10 or 20% yeah okay we're out of time thanks a lot