Sandwiched Products

I am going to touch on a theme that I have always sensed since I started to do marketing. That is the fate of “sandwiched products”, or products that are positioned in the middle of the market.

When Steve Jobs introduced the iPad, he was very careful and deliberate in describing the problems of a product in the middle.

Steve Jobs says, “Is there room for a third category of device in the middle? The bar’s pretty high. In order to create a new category of devices, those devices are going to have to be far better at some key tasks.”

He clearly acknowledges that creating a category of device in the middle is hard. Steve should know. He introduced the very simple product matrix, had great success, but subsequently succumbed to the temptation to put something in the middle; the ill-fated G4 Cube. Steve knew more than anyone else that products in the middle are hard.

Steve Jobs introduces the G4 Cube Macworld NY 2000 YouTube

In retrospect, when we look at the declining sales of the iPad, we can clearly see that the problem it is having is that there is no longer room in the middle. The iPad is being sandwiched by the smartphone on the one side and by the PC on the other. In particular, the improvements on smartphones are squeezing it out.

The interesting thing is that the Apple Watch is in a very different situation. Although one can draw parallels with the iPad, for example, the lack of carriers and a subsidy structure, that isn’t the most important difference. What is most important is that the Apple Watch is not sandwiched. It is totally free to explore a new dimension of computing without bumping into any significant competing category. Since it is exploring a new frontier, convincing customers of the benefits will be harder than the iPad. However, once it does convince customers, it will have the market totally to itself.

Simply put, the upside of the Apple Watch is much higher than the iPad. The iPad is now struggling to find a new niche that is not in the middle of the smartphone and PC. The Apple Watch will not have to do that. If it takes off, and data suggests that it already has, it has a broad frontier all to itself.

Sandwich products eventually get squeezed. Products at the frontiers do not.

iPad sales growth in Japan, 2015 Q2

In Apple’s 2Q 2015 earnings report (3Q for Apple), they mentioned that despite a global decrease of iPad sales, Japan saw an increase.

Files shareholder com downloads AAPL 100143349x0x840568 7616A2CA 9254 40E4 92BC 3815B1155018 Q3 2015 Form 10 Q As filed PDF

This prompted a brief conversation on Twitter in which I Googled around to find any further information and hopefully an explanation.

Ben BajarinさんはTwitterを使っています kirkburgess benthompson naofumi any thoughts

Here, I would like to add a bit more detail to that Twitter conversation.

First the IDC Japan report:

  • 2015Q1 tablet shipments in Japan were +13.6% YoY (2.29M).
  • Shipments to the consumer segment were +1.9% YoY (1.41M).
  • Shipments to the business segments were +39.2% YoY (0.88M).
  • In the business segment, Android and Windows tablet demand drove the increase with an emphasis on the education sector.
  • Demand for Wi-Fi models in the consumer segment decreased. However shipments of iPad were good, mainly due to the 4G models.
  • The senior analyst at IDC Japan said that sales in the consumer segment is now mainly for replacements. On the other hand, in the business and education sector, solutions that incorporate tablets are expanding and they expect shipments to continue to increase. The collaboration between Apple/IBM and Japan Post is expected to expand the domestic tablet market.

I have a few additional comments.

First, we know that household tablet penetration in Japan is lower than many western countries. It was estimated to be 21.9% at the end of 2014 and maybe close to 30% at the end of 2015. This is in contrast to 51% in the US in February 2015.

Second, I’d like to outline what I’ve been noticing in the education sector. Unlike the US, I have heard very few reports of widespread deployments of tablets in schools where the aim is to have a tablet for every student. There may be a few private schools that are doing this, but it seems to still be in the experimental phases. What is more interesting is the prep-school market, which is huge in Japan. This market is estimated to be about 15 billion USD in size and interesting, it is apparently moving towards a blended learning style with on-demand video lessons. This is where tablets and PCs are being utilised on a one-to-one basis. I’m not absolutely sure if IDC would count devices purchased for this purpose as “household” or “business”, but I know that at least in some cases, the tablets are either included in the tuition or are provided as rentals, which would most likely classify them as “business”.

Third anecdotally, I’m seeing a lot of Microsoft Surface devices. Japan has always preferred small and portable PCs much more so than western countries (remember the Powerbook 2400c/240 which was a Japan exclusive?). This is probably due to the fact that we use public transport more often and we tend to have a lighter physique, hence increased baggage is a bigger issue.

Fourth, many Japanese businesses are still using feature phones and not smartphones. According to a report released in Jan 2015, only 22.4% of companies were deploying smartphones out of the 71.2% of companies which deploy a mobile phone (smartphone or feature phone). This suggests that if and when companies decide that their employees should have Internet access on the go, a combination of a feature phone and a tablet would be a more attractive solution rather than a large screen smartphone.