Will iPad bomb or be the bomb?

I'm now convinced that iPad can't fail, if for no other reason than the momentum of hype. Too many people believe in iPad. It's like a religion. But there are measures of success, and I don't expect iPad will be a fast starter -- nor does it need to be. Forrester Research conservatively forecasts Apple selling 3 million iPads this year.

Apple's history of new product categories is evidence enough that iPad sales will slowly proceed -- after a modest early surge -- before really taking off. For example, Macintosh (in 1984), iPod (in 2001) and iPhone (in 2007) all started off modestly. Some overly enthusiastic Mac fans will question any assertion that iPhone sales started off modestly. Hey, but they did compared to what came later. Apple reached 1 million iPhone v1 shipments in 74 days, a number later paled by iPhone 3G and 3GS launches.

Each of these three products had a surge point, where modestly growing sales dramatically pivoted upward. In 26 years, Macintosh sales surged many times during Apple cofounder Steve Jobs' two tenures as CEO; they're too many for this post. For iPod, release of iPod mini (first half 2004) and iPod nano (second half 2005) hugely impacted sales.

These weren't singular events, but surrounded by other important Apple business activity. 

According to Apple 2004 SEC filings:

Strong iPod sales were experienced in all of the Company's operating segments during the second quarter of 2004 with unit sales of 807,000, surpassing record units sales in the prior holiday quarter by 10 percent. In addition, iPod sales during the current year were favorably affected by several factors including shipment of the iPod mini which began in the second quarter of 2004; the introduction of Macintosh and Windows compatible models; the Company's introduction of a new version of the iTunes Music Store in the U.S. for both Macintosh and Windows users in October 2003; and expansion of the Company's iPod distribution network.

A 10-percent sales surge over the holiday quarter is quite remarkable. The iPod nano also surged sales ahead. During holiday quarter 2005, the first following launch of iPod nano, Apple shipped 14 millon music players, up 207 percent from 4.6 million units a year earlier.

These are two of many examples of iPod sales surges, all related to incremental changes made by Apple over the years. For iPhone, the initial surge came following price cuts introduced not long after the smartphone shipped in June 2007. But the biggie came with the introduction of the App Store concurrent with release of iPhone 3G and broadening of international distribution in July 2008.

I expect iPad to follow a similar pattern. Early sales will be reasonably but not exceptionally good, regardless of how Apple PR might present sales data. As Apple makes incremental changes, including price cuts, increases storage capacity and eventually adds a WebCam, sales surge spurts will follow. But for iPad to succeed on the scale of App Store, iPhone, iPod or iTunes Store, there must come a concurrence -- marketing, distribution, pricing, services, etc. -- around a single marketable product or service. Apple's tablet shipments will then either dramatically surge or level off.

Apple's Incremental Formula

Apple's 21st-Century sales successes follow a clear formula, which surely the company will apply to iPad. Part of that formula I've already lightly touched on -- feature and distribution expansion -- and will let be at that. The rest is nearly all about marketing and maximizing margins.

Like a graceful dancer, figure skater or gymnast, Apple makes sales success look easy. But for each product category, Apple makes huge investments, particularly in marketing. The company sets a baseline of initial features and customer benefits then improves them incrementally over several product releases.

Apple's business is all about incremental improvements based on longstanding and successful retail principles. One of these is the "pay more" principle. There is always someone willing to pay more. Clothing stores use this approach when bringing in cool new wears. Somebody will pay full price to look good -- to look cool. Stores maximize early sales from full-price buyers, then generate several new waves of sales through ongoing discounts. Apple's approach is somewhat similar.

Apple's newest, trendiest products -- like iPod, iPhone and iPad at their respective launches -- tend to be higher priced. The products are perceived to be cool. Early buyers are willing to pay more for cool, and Apple certainly doesn't discourage them from doing so. The approach allows Apple to maximize margins at the front end. The company then iterates -- incrementally improves -- the products over time. The process is essential to Apple maximizing margins.

Some incremental improvements, like release of iPod mini or iPod nano, are larger than others. These products restart the sales process -- people paying to be cool.

There has been fierce debate among technophiles about what iPad is missing, as there was with iPhone. Apple often sets different design and feature priorities than competitors and, as aforementioned, seeks to maximize margins at the front end. From one perspective, early buyers get less than later ones -- and often paying more money. That follows the "buy again" principle, that people who bought, say, a first generation iPod will buy again and even again as new features or models release.

One question to ask: How many people buying iPads this month will buy another when Apple releases a new model?

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