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Apple launches surprise attack on the corporate market

Following a rumour on Sunday that Apple was preparing the ground for an increase in storage for its iOS devices, the firm surprised everyone by launching such a product yesterday. It announced that a 128GB version of its full-sized retina iPad will be in the shops next week.

It was an unusual move by Apple, and may signal more such ‘iterative’ launches in the future. New iPhones and iPads have, up until now, been announced as part of a range refresh heralding a new product generation. So why break the pattern now? One reason may be that Apple views its iPads as more akin to its Mac computer line-up, where speed bumps are more commonplace and don’t require a major media launch event. If iPads really are replacements for PCs, then this makes sense.

Which brings us to the second point: Microsoft. It’s Surface Pro tablet is aimed squarely at the corporate market, by also being a full-featured Windows 8 computer. It announced last week that the device goes on sale on February 9. The Surface Pro comes in either a 64GB or a 128GB version, with the high-end model retailing for $999 plus an additional $130 for the keyboard-cover.

Note the date; February 9. No coincidence that Apple has announced its new (and cheaper) 128GB iPad will go on sale February 5 – four days before the Surface Pro. Nice timing, Apple.

The Surface Pro needs to perform better in the market than its pure tablet Surface RT model. However, Microsoft just can’t get a break, with new allegations that its operating system uses far too much of the available storage, leaving less for purchasers to use. A company spokesperson confirmed to the media that the 64GB model only offers 23GB (or 36 per cent) of usable memory, as the OS and installed assets take up 41GB of the total memory. The 128GB fares better, but only just, with 45GB allocated to the OS and installed assets leaving 83GB for users. Mind you, it does come with USB ports and a microSDXC slot for expanding storage, which is a vast improvement on the iPad’s total lack of external storage. Apparently, Apple’s iOS gives users access to over 85 per cent of advertised storage, depending on the device and OS version.

In announcing the new iPad, Apple issued a press release quoting VP of worldwide marketing Phil Schiller as saying:

“With twice the storage capacity and an unparalleled selection of over 300,000 native iPad apps, enterprises, educators and artists have even more reasons to use iPad for all their business and personal needs… iPad continues to have a significant impact on business with virtually all of the Fortune 500 and over 85 per cent of the Global 500 currently deploying or testing iPad. Companies regularly utilizing large amounts of data such as 3D CAD files, X-rays, film edits, music tracks, project blueprints, training videos and service manuals all benefit from having a greater choice of storage options for iPad.”

No room for doubt here; Apple is after more business users, especially those who require performance computing power and decent storage.

Schiller said that there are now over 10m iWork users out there. Really? Well, perhaps like me, they have bought and installed iWork apps and don’t really use them, or use them out of necessity. iWork is no Office – it’s more suited to individuals and sole traders (and please Apple, no more templates that are so obviously targeted at ‘soccer moms’, it’s not helping your effort to be taken seriously). To be fair, Keynote is superb, but Pages and Numbers are far too lightweight and just don’t work well with laptop-based Office files. Perhaps the rumours that Microsoft will finally release native iOS versions of its Office suite will provide the missing piece, although Apple does like to try and do everything itself and those iOS Office rumours have been circulating for well over a year.

This bucks the trend in the Android sector of releasing ever-cheaper tablets, but it also introduces a third factor here – margins. Apple has pegged its new 128GB iPad at $799 for a wifi only model, rising to $929 for the addition of LTE. That’s $100 more than the corresponding 64GB models. Would you pay an additional $100 for 64GB of additional storage? It’s very tempting. As for margin impact, we can’t tell yet, but whilst this additional 64GB isn’t going to be cheap, it’s going to be nowhere near $100. We’re going to wait for research firm IHS to provide us with guidance here, but we suspect the extra materials cost could be around $30.

The bill of materials for Apple’s 64GB iPad was estimated by IHS to be $398, with the 64GB NAND flash chip costing $67. That was back in March. Since then, a comparison with the Surface RT suggests that flash costs haven’t fallen that much. But it’s the incremental rise in memory that we’re interested in. When the iPad Mini came out, IHS estimated that for each incremental memory jump (16GB to 32GB, and 32GB to 64GB), the additional flash memory cost to Apple was $9.60 and $19.20 respectively, allowing it to generate a profit of $171 for the 64GB model above that of the base 16GB model.

Assuming incremental costs for the higher memory follow a similar pattern, the new 128GB iPad could be costing Apple around $30 more than the 64GB version – a $70 gross profit increase. That’s great news for Apple’s margins.

The higher-priced model also maintains Apple as a premium brand company. Which brings us to the rumours of a low-cost iPhone in the pipeline, rumours that just won’t go away. But perhaps now they should. If the new iPad demonstrates Apple’s commitment to the high-end of the market, offering the maximum capability for the market’s needs, it also suggests that the firm isn’t as interested in the low-end market. And why should it? Its stock price is being hammered mainly because of a slight drop in gross margins, so why on earth would it pursue a strategy that guarantees even lower margins? It’s not going to. It’s been hugely successful in its business plan of providing well-made, innovative products that are priced at where Apple wants them to be, not where the competition says they should be.

So don’t expect cheap Apple products. Instead, look for more performance at the higher end of the market. Apple has slowly been penetrating the corporate market for some time now – a situation which would have been unheard of ten years ago. There’s still a huge business opportunity there, greatly helped by the BYOD trend. But it needs to produce products that are capable of the performance required by business users. And the answer is not to leave it all up to the cloud – it’s way too early for that, just look at the relative lack of success of Google’s Chromebook. Businesses still rely on onboard storage – far more so than consumers – and whilst this remains the case, any PC substitute needs to offer storage that matches that of ultrabooks and cheap laptops. 64GB was far too little, 128GB is much more competitive.

I’m sorry Microsoft, I really wanted Surface to be a big success, but I’m now having serious doubts. Apple isn’t going to give up its tablet dominance anytime soon. If you are serious about Surface, you need to up your game – improve the product, decide what market you’re going after, and for goodness sake address the hopeless distribution model and let more people actually get to see them. Otherwise Apple is going to continue to eat into your business.

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