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Apple’s iCloud Enables A Post-PC World That Will Boost iPad & iPhone Sales

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With the launch of the 2011 iPhone models, Apple will also launch iCloud, a new online services play that replaces MobileMe. This is a part of the iOS5 software that will be available for free to existing iOS devices and will ship as standard on new iPhones, iPads and iPod Touch’s.

This is a core part of Apple’s near term strategy to drive greater device sales — iPhone, iPad, iPod Touch and Mac — as Apple builds a post-PC world. Over the long haul iCloud will also help Apple’s content and services revenues but that won’t be its most important initial impact.

Apple still makes the vast bulk of its revenues from hardware sales despite having by far the most successful app store, music download store and various other services initiatives. Example: In the first three years after the launch of the Apple App Store Apple generated $1.1bn in revenue from iOS apps (1). But this figure is dwarfed by their iOS device revenues of over $100bn in the same period (2). Apple has great margins on those hardware revenues too.

Because of that hardware model, Apple has enormous incentives to create new product features to drive device sales, even if that means offering those new features or services for free. Apple can be disruptive with “free” offerings too. The “contagion of free” business models are not just the preserve of Google and Valley-based VC-funded startups.

This is the cloud the way it should be: automatic and effortless. iCloud is seamlessly integrated into your apps, so you can access your content on all your devices. And it’s free with iOS 5. — Apple marketing, October, 2011

Those devices sales give Apple a massive incentive to package its cloud services for free. In so doing, Apple undermines those that have cloud-based services as their core business. This includes Google. Although Google charges for few cloud services — the main exception being Google Apps for businesses — it still generates direct advertising revenues across all of its cloud services such as Gmail. So, if people choose to use Apple’s services instead of Google it still hurts Google’s bottom line.

iCloud supports Apple’s desire to sell more devices by helping two overlapping groups of consumers:

  1. Current Apple device owners. iCloud helps those that own one or more Apple devices to enjoy using them more easily in tandem by enabling easy sync of media, contacts, calendar, reading position to multiple devices automatically. As it’s cheaper and easier to sell to an existing customer than to acquire a new customer this is especially important. Across Apple’s portfolio the device that will benefit most from this is the iPad which currently complements both a PC and a smartphone but does not, yet, have a feature set good enough to completely replace either. However, I don’t believe iCloud’s proposition is sufficiently simple and compelling to motivate very large numbers of non-Apple customers to ‘go Apple’.
  2. PC haters and frustrated PC users (3). iCloud and iOS5 for the first time enable a buyer of an iOS device to set it up and use it without ever needing to connect it to a PC. Finally, Apple’s post-PC devices will not require their owners to also use a PC. As smartphones go beyond the early adopter  this will dramatically help Apple to appeal to the mass market. This matches the existing ability of Android smartphones to “just work”. While this will help sell iOS devices to those that don’t own a PC, I believe the greater opportunity for Apple is among those that own a PC but find it frustrating and time consuming to use. Breaking the physical tie to a PC also breaks the link between owning an Apple iPhone and using a frustrating and unreliable PC helping Apple to position for the post-PC world.

How do iCloud’s features drive those device sales? Lets take break down iCloud and analyze its benefits:

  • Enables iOS device set up without a PC or Mac. This means those uncomfortable with downloading and installing new software on a PC, like iTunes, will be able to buy iPhones, iPads and iPod Touch’s without needing to ask a more technical friend to help. It also means those that do not use PCs or do not like using a PC — even if if their household owns a PC — no longer have a barrier to buying Apple’s iOS devices.
  • Boosts customer satisfaction, especially for those that lose or break iPhones. iCloud will back up recent photos, bookmarks, calendar, contacts, apps and other settings wirelessly and automatically. Also, it will sync some data continuously while a more complete backup will happen automatically when an iPhone is connected to power and WiFi, for example on a bedside tablet overnight. Result: more people will have an up to date backup when they lose or break their phone. Those people are more likely to replace that device with another iPhone to regain their backed up data rather than defecting so boosting Apple’s customer retention. Plus they are more likely to be satisfied with the experience of Apple ownership as they will have access to much of their data through Apple’s web apps while they replace or repair their device. Apple’s customer satisfaction — already high — will be maintained or improved helping retain customers and boost cross-sell of other Apple products.
  • Makes photo editing more convenient on the iPad. Already, the iPad has great photo and video editing software from both Apple and third party app developers. But transferring photos to the iPad has been painful as it has required a cable. iCloud’s Photostream will automatically transfer new photos to all of a person’s devices, e.g. from an iPhone to the iPad. This means iPad owners are more likely to have the photos they wish to edit, manipulate or just look at, available to them.
  • Makes it easier to use different devices at once. With the tools to enable third party — i.e. non-Apple — app developers to sync documents between devices, just in the way photos work, Apple is dramatically improving the customer experience. This is akin to Amazon’s reading position Whispersync for apps. Just as Whispersync ensures that whatever device an Amazon buyer uses to read a book they are always prompted with the latest reading position, iCloud enables app developers to sync information between devices. Games will benefit tremendously, now saved games will be sync’able so consumers will be able to start playing a game on their iPod Touch and pick up at the same spot on their iPad later, assuming the game’s creator has added in iCloud support.

iCloud is far from perfect, but it’s a critical foundation for Apple’s future. There’s still much Apple needs to do to improve the proposition further, Apple needs:

  • iOS third party developers to update their apps with iCloud support. Otherwise, the already popular Dropbox will continue to gain traction and Apple is exposed if one of its main competitors — Google, Facebook or Microsoft — chooses to acquire Dropbox.
  • To iterate the iCloud music proposition as it’s remarkably kludgy compared with using a cloud music streaming service such as Spotify or rdio. Those services just work. For consumers to benefit from iCloud music they need to either have bought their music from the iTunes store or to take the time and trouble to upload their music into the iCloud music locker. Unlike the rest of iCloud, this is significantly more hassle than the alternatives. I can’t see it being a success as it stands. The annual charge of $25 for using the non-iTunes bought music is a further barrier to mainstream adoption for the iCloud music service.

Despite these initial omissions, iCloud is the most important new feature in iOS5 for the long term health of Apple. Crucially, iCloud enables Apple to create a true post-PC world that isn’t dependent on PC ownership.

Related post: “Let’s Talk iPhone” – Where to follow the Apple iPhone event live online

(1) Derived from Apple’s statement of having paid a total of $2.5bn to app developers and assuming Apple’s 30% cut applies to all developers.
(2) Based on cumulative iPhone and iPad sales in the period since the App Store launched and assuming an $600 average selling price (ASP) per device. Shipments are provided in Apple’s quarterly results and the ASP figures have been mentioned sporadically in earnings calls and various Apple presentations. For the iPod Touch, I’ve used the total number of iOS device figure that Apple has quoted and backtracked out iPod Touch volumes — Apple only reports total iPod sales in each quarterly results — and then assumed an ASP of $300.
(3) Does “frustrated PC users” include pretty much every PC, Mac or other computer user? Has anyone ever created a device as irritating as a computer?  

Written by Ian Fogg

October 3, 2011 at 10:51 am

4 Responses

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