In the 1890s, King Camp Gillette had what was then novel business idea: sell durable razor handles cheaply to lock in lifelong customers of disposable blades. By trading short-term loss for long-term, reliable profits, his company became wildly successful, and — more importantly — created a foothold that its competitors spent decades trying to overcome. Over a century later, there’s Apple. The iPad is a handle. Apps are blades. And the lead is even more insurmountable.
That Gillette himself invented razors-and-blades marketing is over-simplified history, if not outright apocryphal. But the soundness of the method is indisputable. And while Apple’s certainly not the first company to employ it, the iPad may be the best execution yet.
Price Perfect
For all of the factors that have contributed to the iPad’s dominance — a tremendous first mover advantage, hardware leadership, brand affinity, a robust accessories aftermarket — the one that’s mattered most has been price. Remember: it took competitors a full year to come up with a decently competitive tablet, and months more to match Apple on price. The result? Two out of three tablets sold today — ebook readers included — are iPads.
And to be honest, as great as the iPad is, it’s not the only tablet people want (see: the TouchPad fire sale and Kindle Fire). But it’s the best bargain. A strange alchemic mix of retail savvy, favourable supplier deals, and the willingness to eat relatively thin margins have put Apple in the curious position of price leader. Or maybe not so curious, when you consider what they stand to gain.
Blades By The Billion
The trick to any good razors-and-blades model is to make sure that your customers are truly, immutably locked in. In the digital world, that means the most bountiful garden is the one with the highest walls. That means Apple’s App Store.
As of mid-year there were over 500,000 apps in the App Store, downloaded over 15 billion times by 200 million users. Apple’s cut? 30 per cent of every app purchase. Another 30 per cent of every in-app purchase. 40 per cent of iAd revenues. Apple doesn’t break out iTunes/App Store revenue, specifically, but it approaches $US1.5 billion. Per quarter.
That’s 30 per cent just for keeping the lights on in the App Store. It’s the easiest money Apple makes. Apps, movies, music, TV shows; these are Apple’s blades, and they’re why it’s virtually impossible for other tablet makers to compete.
Hard To Handle
The problem that other tablet OEMs face is that they’re in the handle business. Sure, they slap their own app storefronts on some poorly thought out skin. But they still face a two-fold problem: iOS has more, better apps specifically designed for tablets. And even if all else were equal, most Android app purchases are going through Google’s Android Market.
So there’s not a lot of app money coming their way. In fact, for those companies to make tablets a profitable business — or at least, as profitable as it is to Apple — they have to achieve better margins with either a higher price or cheaper components. Either choice drives consumers directly to the iPad.
Android may have given Samsung and Lenovo and Toshiba a shortcut to a workable tablet, but playing rent-an-ecosystem isn’t where the money is.
In other words: they’re selling handles.
The Contender
And then there’s the exception. A company that loses money on every tablet it sells and is glad to do it. A product that undercuts Apple so dramatically that it’s in almost an entirely different category. It’s Amazon’s Kindle Fire, and it’s a wild success for the exact same reasons as the iPad.
The Kindle Fire runs Android, yes. But no one locks people in better than Amazon. Developers who sell their apps through the Amazon Appstore — a curated, boutique version of the Android Market — cough up the same 30 per cent to Amazon that they would to Apple or Google. And they’re happy to do so; they see more action from Kindle Fire users in a week than they otherwise would in a month. Combine that with Amazon’s unparalleled book and magazine business, and you’ve got a one-stop (highly profitable) shop.
If the Android Market is a Wild West saloon, the Amazon Appstore is Walmart.
But maybe even that’s not enough. There’s a reason Amazon has been sniffing around webOS and RIM these last few months, and it’s not to fill beds in the Jeff Bezos Foster Home for Platforms. Amazon does a good business pretending Android is its own — but what if it had an ecosystem to itself? Then maybe they don’t just keep pace with the iPad. Maybe they pass it by altogether.
An Insurmountable Lead
But that’s a lot of maybes, and probably more trouble than it’s worth. Which means that Apple will continue to sell tablets that are cheaper, better, and more versatile. And even if someone manages to make a better handle?
Without a blade, they’re toast.