Apple iPad is Nice, Probably Not a Game Changer Yet

After seeing Apple’s unveiling of the new iPad tablet yesterday my overall conclusion is that the product is very solid and will probably find a niche with certain users, but it hardly seems to be the game changer for old media that many had hoped for.

Essentially the iPad is a thin, light-weight, extremely mobile device that can be described as a supersized iPhone or a thin netbook computer. You can surf the web, check email, play iTunes, and download iPhone-like apps customized for the device.

The real issue I see is that the iPad is not all that different than a netbook or iPhone, other than its physical design. The only unique feature of the iPad seems to be a new e-book store. In addition to buying songs, movies, and television shows from iTunes you will be able to buy e-books from an e-book store, modeled after the iPhone app store and the iTunes media store. Think thin netbook combined with an Amazon Kindle.

The clear loser here is Amazon, whose Kindle overnight gets a strong competitor. The clear winners were supposed to be the content publishers, including magazine and newspaper companies, not just book publishers. On that end, I think the expanded distribution of e-books will be good for those publishers, but the gains for newspapers and magazines is less apparent.

The problem those publishers face today is that most are giving away their content on the web and the advertising revenue they earn from web visitors pales in comparison to the subscription revenue they used to collect. Some have been able to charge for web content (Wall Street Journal) and others are starting to put pay walls on their sites (New York Times) but with so many free news sources on the web, it will be hard for most publishers to convince consumers to pay a monthly fee for their content.

I am not convinced the iPad solves this problem. The content companies will build apps for the iPad, just as they did for the iPhone, but the core issue is the same; will people pay for the content when there are other free options? If the answer is yes, then the publishers will get stronger going forward. If not, nothing will change.

If you put your content on the iPad for free, that is no different than the free web site people are using to access your content. If people are not willing to pay to use your web site today, why would they be willing to pay for an iPhone or iPad app with the same content?

Even after seeing the iPad in action, I think the content game is unchanged. If you truly have valuable content that is unique and in strong demand (Wall Street Journal), you can make good money with online content. If not, people will simply go to free news sites and your profits will evaporate as subscription revenue continues to decline.

Where does this leave Apple stock? They will likely sell a good number of iPads going forward so the product is certainly an incremental positive for the company and the stock. Believe it or not, the shares have been treading water for a while now, and therefore are not overly expensive. At $207 per share Apple sports a P/E ratio of about 18x based on $11-$12 of earnings power this year. Add in the $27 per share ($25 billion) of cash that is wasting away on their balance sheet and you can see that the stock is not super-cheap but is not overly expensive by any means.

Full Disclosure: Peridot Capital was long shares of Apple at the time of writing, but positions may change at any time

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6 Thoughts on “Apple iPad is Nice, Probably Not a Game Changer Yet

  1. Without taking a side here I just want to point out that the very same argument could have been made when the iPod first came out – there were already MP3 players out there and who would have expected that people would actually start paying $0.99 for songs they could easily find for free if only they searched a bit more.

    The success was the combination of pricing, the easy access and the apparent visual appeal of the iPod solution.

    Due to the larger screen size the iPad may be able to also accomodate some advertising while still presenting good quality content. This would be harder on a smaller screen Kindle.

    Unfortunately the iPad is not as good for reading because of the different display technology. That is , by far, my major concern with it.

    And I am looking for an answer from the Android camp (not particularily Google though). They have everything they need to compete except the sleak device design and the ebook-optimized store application. Both are easy to do when you have what to look at.

    Then plug-in the ad revenue based model already set up in Android and seriously backed up by Google and watch.

    I still think this is what is ultimately going to win.

    You can’t beat free….unless you’re Apple 🙂

  2. Chad Brand on January 28, 2010 at 10:59 AM said:


    Don’t you think the shutdown of Napster played a role in the adoption of paid digital music? The lawyers went after free downloading and the few services that stayed online were filled with malware that scared people even more.

    I think digital pricing served to shift from CD sales to digital downloading (since digital is at worst the same price and often cheaper) but I wonder what iTunes music sales would look like if a free Napster was still around and not looked down upon. iPod unit sales would still be the same, but the music industry would be the loser.

    I think the difference here is that even if all of the major newspapers and magazines go to the paid model (the equivalent of shutting Napster and adopting iTunes), there will still be plenty of free options online for getting news. In that case, why pay? With music, there are less attractive free options.

    Should be interesting…

  3. As per last quarter’s report, cash on balance sheet was ~$40bn or $43/share.

  4. Chad Brand on January 28, 2010 at 4:09 PM said:

    Yes, it’s $40B if you include $15B of long term investments (expected holding period of more than 1 year), which I excluded.

  5. Supersized iTouch really, not iPhone. Yeah, definitely not a game changer on Rev. 1. But estimated 3-4MM units this year and double that next. That $4B+ incremental revenue by 2011.

  6. Luminess Air on February 3, 2010 at 9:59 AM said:

    worrying more about their end user. This often is the one means which i buy books anymore. The prices for brand new hardback books is actually outrageous. That is not really to yet mention the obscene selling prices that they charge for paperbacks. Score an additional success for company greed.

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