If we were to agree with the fundamental philosophy that a company must make money (not just revenue, but positive profits), I wonder what Notion Ink's Adam 2 strategy is - Is it to sell a premium hardware at a high price with high margins or is it to sell huge volumes at low price but at a low margin?
Think about it closely - would you think either of those would work for this company?
This is the ultimate question, not just for NI but for all tablet makers except for Apple. What Apple haters don't understand (or wish to discount) is that with both the iPad and now the MacBook Air, the most premium of premium companies is able to undercut everyone else not just on margins, but on price.
ReplyDeleteThe genius of Apple's business strategy is that they have refined the supply chain to the point that no one else -- not even the biggest firms -- can compete on price. Apple sells an iPad 2 for $499 - $839 US and makes a gross margin of at least 33%. Now, that's actually low for Apple, which hovers at closer to 40% for most of its products (and in fact, leads the PC industry on that front by several multiplea. The average PC has a GM of 8%. So you have to sell 5 to get the same profit of Apple sellIng one Mac. Puts fighting over marketshare into perspective.), but it's exponentially higher than any other tablet company.
By selling at $499, the other tablet competitors are selling at margins of maybe 10-12%. Why the difference? Apple has finessed the supply chain in such a way that the others can't grt volume orders in, even if they wanted to pay more. Apple started making big bets on investing in flash storage and memory in large quantities going back at least to 2007. By doing that, Applle has built up fantastic relationships with suppliers. For flash storage and memory, for instance, there are two major companies that supply to everyone else. For screens there are two or three (LG is the biggest source for IPS panels and Apple is their largest customer by far). As a result, competitors have to fight to even get an order in, let alone at a reasonable rate.
So what happens is that Motorola finds it can only sell a Xoom for $799 without a wireless subsidy and that is more than Apple charges for the same specced device. The problem is, Motorola can't claim to be premium because Apple is premium of premiums. No company has a better high-end reputation. So as q customer, why should I pay more for a device when the illustrious Apple product is less?
Ok, so you make up on volume. The problem here is that if you are going to sell at a loss or near loss, you need additional revenue to generate profits. Apple makes a billion a year on iOS apps, but that's a drop in the bucket. Rather than selling cheap hardware to push apps, music or media, they sell media to sell profitable hardware. Amazon has taken the reverse approach, and they can because the margins on booms are high enough, for them, to do that. They also benefit because if a person has a Kindle, they are more likely to do all their shopping via Amazon. So they can sell Kindle Touch and Kindle Fire at a loss to build up their greater store ecosystem. No one else can. HP will likely lose half a billion selling the TouchPad at such a huge loss. They take that loss because otherwise they'd owe the suppliers more for unused components. Considering that the most profitable and largest app marketplace only generates a billion or so in prodors for Apple. HP would have to sell that many apps just to break even on hardware. That is before R&D and marketing costs. Not to mention building out q support and developer chain. So if the largest PC company cant make a business severely undercutting Apple, how can a small shop like Notion Ink?
They can't. Their best bet is to price at 30% margin and offer something different. Be it PiQi or multi-boot ROMs or a dream catcher for morons. Focus on a selective market and audience, dont try to be international and go niche. From there, you can try to build up. But NI will never be a major player, at least, not as the ecosystem currently exists.