Competitiveness and Innovation

iPad math: a consumer looks at value

2 Sep 2010  

In a recent post Surfing the value waves I mentioned having purchased an iPad. Here’s the value calculation that drove me to buy it.  Of course it’s cool and fun—but does it make economic sense?

It first occurred to me in discussions with my wife—who wants a big, flat, thin TV like all our friends have—that we could EACH get an iPad, skip the TV, and pocket the change.  The iPad is not quite “there” in terms of programming, but for what I mainly watch (movies and sports), it’s halfway there (the movies half.)  TVs have gotten so cheap, this was actually about break-even—so there wasn’t a lot of change to pocket.

In this sense the iPad (and the Internet in general) is a textbook example of a disruptive rival to the TV—not as good in many respects, definitely cheaper—but with the future potential to knock the whole competitive game into a different orbit.

But then I started adding up the other gadgets that an iPad could replace.  I should mention that while I do not own all of these, as a “weekend warrior” musician and photographer, I own more than most people.  Your mileage will probably vary.

  • Digital wallet for photos – $400iPad 2
  • Voice recorder – $200
  • Point-and-shoot camera – $200
  • My PDF library – printing costs maybe $50/year
  • iPod – $250
  • Guitar tuner – $30
  • Electribe drum machine – $400
  • Hand-held navigator – $150
  • E-book reader – $170
  • Netbook – $400
  • Laptop – $800

TOTAL $3100

Books and movies regrettably continue to hang in at roughly equivalent prices to their hard-copy counterparts, so again this is around break even.  (Were this value balance to shift in favor of virtual formats, there would be a massive shift toward those formats.)

Even leaving out the TV, and even based on the most expensive iPad model (which is not the one I own), that would be a 374% return on my investment.  Hmm, let me check whether my 401(k) did that well recently.

Every student of strategy textbooks will recognize the iPad as a substitute for these other gadgets—though it’s a new product category, it serves the same needs or wants with a somewhat different technology.

Though I’ve focused here on economic benefits, “Value” is not just about saving money. My earlier post on The Value Wheel mentions other ways to create value. Here, for example, there’s the convenience of not having to lug around of all these gadgets, my printed PDF library, electronic books I may have purchased, and so on.

My point is not that you too should buy an iPad.  My point is that if you work in a business, your customers are evaluating your products just the way I did—including which alternatives they might choose.  Your product or service should “surf the value waves” like the iPad does.  How does your product create value for its consumers—and how much? What other products can YOUR product displace?  Who can displace YOUR product?

And if you’re an investor, think about how these value waves will affect a company’s products and its overall value—its stock price, for example. I’d recommend, for example, that if you’re invested in any companies that rely heavily on any of the “endangered economic species” categories I mention above, you re-evaluate those soon.  The value waves are slowly but surely moving away from them.

DISCLOSURE:  I hold a small position in Apple stock.

2 Responses

  1. Carla says:

    I like your train of thought on this, but I don’t think iPad can substitute a digital camera, since it doesn’t come with one (as far as I know).

  2. Tim Powell says:

    Oops, you’re absolutely right! As many uses as I find for my iPad, it still doesn’t have a camera. I wouldn’t use it for that anyway, since I carry an iPhone 3GS for that. It should be “only” a $2900 return, which on my WiFi iPad 64 is actually 414%.

    And now that I look at it, adding a netbook AND a laptop is double-counting. The iPad doesn’t do everything my laptop does –yet — so I should take that out too, leaving an even $2100, or 300%, return.

    But the math is not really the point — and, to be honest, not consciously how I justified my iPad. In fact, these other items were “sunk costs” — I couldn’t go back and un-buy them, and I didn’t sell them. By the way, that’s the biggest fallacy of this kind of logic.

    My point was to encourage companies to look at their own products through their customers’ eyes (and wallets.) We need more no-brainer products like this!

    Thanks for your thought, Carla.

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