“Tablet devices are simply credit cards. The real battle is for profitable ecosystems” – Magister Advisors report
Debating features of the latest tablet offerings misses the entire point that there is a fundamental shift in business models of leading consumer technology companies, according to analysis by Magister Advisors, M&A advisors to the global technology industry.
Commenting on the swathe of autumn tablet announcements, Victor Basta, managing director of Magister Advisors, said: “Tablet wars are in fact no longer about hardware. The big prize is control of an entire, hugely profitable ecosystem. Devices are fast becoming irrelevant and are trending towards zero profit and beyond.”
“Apple and Amazon have created incredibly profitable eco-systems using proprietary file formats that keep control over users, and they are able to amass and exploit valuable data on hundreds of millions of people. Even more, Apple and Amazon have credit card data for hundreds of millions of consumers and will own the hugely lucrative micropayments market in future.“
Hardware, Victor Basta argues, is now simply a tool for enabling consumers to buy content and will become as prosaic an element of the commercial relationship as a credit card: “Significantly, Apple’s revenues from sales of content are growing faster than total revenues. We expect this trend to accelerate.”
Apple’s management changes emphasise the importance of ecosystem to its strategy, he added: “Executive changes at Apple, including Jony Ives’ new responsibilities for user experience, underline the importance of the whole ecosystem over simply great design.”
Reconfiguration of devices also points to Apple’s content intentions: “Apple removing DVD drives from MacBooks forever encourages users to get content from iTunes, fuelling the value of the Apple ecosystem even more.”
Leveraging their trust with consumers
The ramifications for technology giants, such as Facebook, Google and Microsoft, which lack a global credit-card user community, could be significant, Victor Basta argues: “Apple or Amazon can now go further, leveraging their trust with consumers, and depth of data about loyal users to create versions of a social media alternative to Facebook – through acquisition or innovation within their ecosystems. The implications for Facebook would be enormous, and negative. Against ‘specialist’ social platforms from major players, Facebook could suddenly look like a legacy system.”
Pricing for devices adds further weight to the argument that profit will increasingly stem from incremental content purchases. Victor Basta said: “The iPad mini is an attempt to bring a wider customer base into the Apple ecosystem. Jeff Bezos, Amazon’s CEO, announced in the last few weeks that the company makes no profit on the Kindle. As competition intensifies between Apple and Amazon, we predict that devices will be sold at a loss or potentially given away to capture value in content.”
About Magister Advisors
Magister Advisors is a leading M&A advisory firm to the technology industry. With offices in London and Silicon Valley, Magister advises companies seeking to achieve an optimum exit. Last year Magister advised on 15% of all European technology exits valued above $50m.
Recent Magister deals include the sale of C3 Technologies for $250m (40x revenue), LoveFILM’s $320m exit to Amazon, Mobile Interactive Group’s $59m exit to Velti and Clearswift’s sale to Lyceum Capital.