Should Tablet Makers Concede the Market to the iPad?

on August 18, 2011

Recent reports, news and analysis have come out that underscore an industry cliche, there is not a tablet market only an iPad market.

From news on the rather weak sales of Android tablets from vendors the last few quarters to the recent news that HP TouchPad sales are dismal, it is clear that the masses have spoken loud and clear – they want iPads.

Those who make tablets entered this market for a variety of reasons. One however I heard often was that they were afraid Apple would “iPod them” in the tablet market. Years ago there was a similar analogy that went “there isn’t an MP3 market just an iPod market.

The logic was if they could get into the market early enough they could hopefully not get “iPoded.”

However this is exactly what we are observing happen today. I believe this will be the case for the next few years. So the question is for the time being should the vendors concede this market and commit those resources to other areas where they have a chance to compete, like Smart Phones for example. Or perhaps they themselves can focus more on RND and create new product categories and innovations all together.

Jim Dalrymple at the Loop makes a great point:

“Apple has spent 10 years working on the iPhone, iPad and the integration with iTunes for app, music and video downloads. The competition would have us believe that in a few short years they too have perfected all of this.”

The bottom line is at this point in time the barrier to entry to the tablet market is actually quite high. There are market forces at work that explain why other tablet makers are having a hard time competing and succeeding.

Harvard Business Review in a foundational strategy article called “The Five Competitive Forces That Shape Strategy,” highlight seven essential points on barrier to entry. I’d like to focus on three that relate heavily to why the barrier to the tablet market is quite high.

Incumbency Advantages

“No matter what their size, incumbents may have cost or quality advantages not available to potential rivals. These advantages can stem from such sources as proprietary technology, preferential access to the best raw material sources, preemption of the most favorable geographic locations, established brand identities, or cumulative experience that has allowed incumbents to learn how to produce more efficiently.” – HBR Five Forces

In this point the HBR article points out how the incumbent has advantages not available to new entrants. Things like brand, forcefully constraining supply chain, holistic experience, preferential access to the best raw materials (at favorable prices), efficient manufacturing and scale, and more are all in Apple’s favor.

Unequal Access to Distribution Channels

“The new entrant must, of course, secure distribution of its product or service.” – HBR Five Forces

Retail is and will continue to be one of Apple’s strongest competitive advantages. I’ve wrote extensively about this “Apple Retail is Key to Their Competitive Advantage.”

By controlling their own retail store, which is in extremly convenient geographic locations all over the world, competitors simply have unequal access to distribution channels.

Also more simply put, in a big box retailer you see vendors competing with each other for retailer and consumer attention.

Walk in to an Apple retail store and you will find zero Apple competitors.

That is what I call unequal access to distribution channels.

Demand-side benefits of scale

“These benefits, also known as network effects, arise in industries where a buyer’s willingness to pay for a company’s product increases with the number of other buyers who also patronize the company. Buyers may trust larger companies more for a crucial product: Recall the old adage that no one ever got fired for buying from IBM (when it was the dominant computer maker). Buyers may also value being in a “network” with a larger number of fellow customers. Demand-side benefits of scale discourage entry by limiting the willingness of customers to buy from a newcomer and by reducing the price the newcomer can command until it builds up a large base of customers.” – HBR Five Forces

This is a big one. Look around and you see tablet makers offering extremely aggressive price promotions. It seems like the prices of competing tablets drop every month. Yet Apple has not lowered the price of their latest generation iPad one single time. What’s more competitors make razor thin margins less than 10%. Let’s just say Apple’s margins on the iPad are significantly more.

In short the cost cutting strategy to undercut the incumbent and gain market share is simply not working.

If competitors are making little to no money, struggling to get distribution, and overall struggling to compete in general how long can they stay in this market?

The reality is the lure of the bright shiny new tablet market is too attractive for vendors to concede to Apple. That however does not change the fact that competing will be monumentally difficult. Even if they did concede I would recommend it only be until the market matured. At which point new entrants have a chance to succeed as the market fragments and consumers begin to shop based on preference. The evolution of consumer markets show us that a standard technology brings a market to maturity and then that market fragments allowing for a more vast variety of consumer choice. The tablet market will mature at some point and at that point consumers may desire a more wide variety of choices.

The brilliance however of Apple in this regard is worth noting. Apple has strategically lured those who compete with them in categores like PC’s and Smart Phones into competing in a category they have no chance in for the foreseeable future.

The result is that Apple competitors are allocating invaluable resources away from other product segments that could be significantly more profitable and competitive for them.

I believe that success will only come to those who want to compete with the iPad by thinking fresh and taking bold and innovative risks.