Tablet Industry

1. Tablet Industry • John Rodriguez, Alex Wang, Florian Lecarpentier, Steve Xu

2. Why the tablet/e-reader industry? • Exciting, dynamic market evolution • Increasing demand----opportunities • Part of technological future- better alternative • Role of competitors • Pricing Strategies Implemented

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

4. Results among college students • Number has more than tripled in the last year • 63% of students say tablets will replace textbooks in 5 years • Preference of digital over printed books

5. Overview • I. Industry • Market Summary • Competition • Organization and Major Players • II. Pricing Strategies • Tying • Price Discrimination/Inter-temporal Pricing • Leap-Frogging • III. Analysis and Recommendations

6. Tablets vs. E-readers • Tablet • - More powerful and • resourceful • For a multitasker---functionality • and applications • E-Reader • purpose: read electronic content • Simplistic • Smaller and more portable

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

8. Effective Advertising For Technology • http://www.youtube.com/watch?v=U7UlE-o8DQQ

9. Production and Distribution • Low cost products as driver of forecast growth • ½ of products sold in 2012 8 inch screen or less- ex. iPad Mini • Impact on E-Reader Forecasts • Supply Chain and Demand • Other Economic drivers 2011 2012 2017

10. Target Market • Surge in past few years: college graduates and household income $75,000+ • Different results with E-reader

11. Competition-HHI (TABLETS) Apple 43.6% Samsung 15.1% Amazon 11.5% ASUS 5.8% HHI: 2,295 11‘ 12‘ 12‘ 12‘ 12’ Q4 Q1 Q2 Q3 Q4

12. Competition-HHI (E-READERS) • Kindle 62% • Nook 22% • Sony Reader 2% • Pandigital 2% • HHI: 4,336

13. Competitive Landscape • Barriers to Entry: High and Steady • - Capital Intensive Market • - High Competition (especially in e-reader) & Technological Change • Market still in Growth Stage of Life Cycle • No Government Regulation • Apple/Samsung Patent Lawsuit • August 2012-Samsung products infringed 6 of Apple’s patents • March 2013- Court Reduces Damages to $599 Million

14. 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.

15. 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

17. Major Companies

18. Apple • Consumer electronics and software technology company. • Market Leader • First launched in 2010. • Tablet Offerings • iPad 2, iPad with Retina Display, iPad Mini

19. Electronic commerce company diversifying into consumer electronics. • First launched November 15, 2011. • Tablet Offering: • Kindle Fire

20. 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.

21. Well established computing company producing a wide range of products and services • Newcomer • Offerings: • Surface RT, Surface Pro • Launched in 2012.

22. Price Strategy

23. Price discrimination • Steal consumer surplus • 2nd degree pricing: Push the consumer self-select the product that takes the most of her/his consumer surplus. • Three strategies employed: • Tying/Two Part Tariff • Versioning • Inter-temporal pricing

24. 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.

25. 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

26. iPad mini Wifi 16GB Wifi + Cellular 16GB Wifi 16GB Wifi + Cellular 16GB Wifi 32GB Wifi 64GB Wifi + Cellular 32GB Wifi + Cellular 64GB Wifi + Cellular 128GB Wifi 128GB Wifi + Cellular 64 GB Wifi 64GB Wifi 32GB Wifi 16GB Wifi + Cellular 32 GB Wifi + Cellular 16GB iPad Retina iPad 2 How many versions of iPad are currently sold? 16

27. 8 7

28. Surface pro Surface RT 64 GB 32 GB 128 GB 64 GB 4

29. 5 NEXUS 7 NEXUS 10

30. Versioning • Why? • “Sell variation of products at different prices at different groups to different types of buyers” • Push the consumer to self-select the product that takes the most of her/his consumer surplus.

31. Versioning • How? • Creates differentiation between product …: • Capacity constraint: 16GB, 32GB, 64GB, 128GB… • Functionalities: Cellular Network, Screen definition, Applications available, Linked-Store … • … but also with competitors: • Reduced price elasticity • Create a niche market …

32. Price the ‘Add-ons” • Function of the willingness to pay of the consumer: value of the add-on for the consumer. • Price of the add-on differs from one company to another, depending on: • The target: • Amazon: Consumers using tablets as reader or to shop • Microsoft: Internet surfing/office applications • The company philosophy: • Apple: Upscale products • Google: More accessible products

34. Capacity constraint • Common among competitors • Standard 16GB • Double capacity between each versions • Different price of capacity incrementation whereas production costs are similar.

35. Price evolution of additional GB • Price of doubling the capacity constraint for apple: $100

36. Price evolution of additional GB • Far from the manufacture cost • Price linked to the brand:

37. Price linked to the brand and its target Shop/E-reader Competes with Apple

38. Strong Marketing • Marketing of add-ons: • Push people to choose the more expensive version… • …or the more reliable for the company. (E.g. IPad Retina vs iPad mini)

39. Inter-temporal Pricing • This pricing strategy focuses on the consumer behavior where people value things differently depending on the point in time they will receive it • Value now > Value later (Hyperbolic Discounting) • E-Reader and Tablet companies exploit consumers’ different valuations for the product and different degrees of patience (waiting costs) by marking up their product upon introduction

40. Inter-temporal Pricing • This captures the consumer surplus of early-adopters. When low-value customers wait, they compete for availability with high-value customers and their willingness to pay increase • They later lower their prices to reflect the reduction in value that occurs when the product leaves the market entry stage and more consumers begin to enter the market.

41. Discriminating Early Adopters

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

43. Leapfrogging • When a company launches new tablets, it tries to add functionalities or to improve the design, to justify a price increase. Each company try to release a better product than its competitors • - Used to describe the bypassing of existing technological stages that other firms have gone through.

44. Playing the Leap-frog Game • The technical aspects of implementing new “game-changing” technological innovations in the existing competitive environment. • -Capture competitor’s customers with new appealing features. • - “Leapfrog” ahead of former leading firms, causing them to lower prices.

45. Remember Moores Law? • Leapfrogging is effective when it can be realized, and in accordance with Moore’s Law, the pace of technology in the industry will be outdated by the time they get to the market.

46. U.S. Web activity from Google Correlate

47. Analysis/Recommendations

48. Reimagination of User Interfaces To be successful, Apple, Samsung, Amazon and others in the industry need to anticipate future technologies (in 5-10 years) and innovate based on those predictions. (bigger storage, more functions).

49. Tablet Overtake Market Share of Notebook PC • Adds value to the user's life, and a strong ecosystem of supporting applications. • We anticipate higher growth in the multipurpose tablet market as we move forward

50. Tablet TakeOver • Tablet computers to make the Dedicated E-Reader and Bookstores obsolete. • EReaders marketed to heavy readers, Tablets have much wider appeal, a part of our lifestyle.