Or Hit the Throttle
When I was working with Gateway Computers I was friends with the Western Director of Government Sales. He was the point man for increasing sales volume in California to schools and local governments. From a margin standpoint, it was a brutal business.
The education market was especially difficult. For whatever reason, school computers had a higher warranty expense rate than other markets. This compounded what may have already been a loss on the initial sale. Gateway was pretty big in education and we beat back Dell or HP by undercutting them on price. Gateway simply had a higher tolerance for shipping products out the door at less than cost. It’s one of the reasons that led to Gateway’s downfall in the end.
So why did Gateway put up with this lousy market as long as they did? It all comes back to some mumbo-jumbo theory that if kids see your hardware in school that a certain percentage of them will be customers for life. Gateway, like Google and Apple today, believed it was OK to lose some money up front in education, because you’ll probably make it up in the future as those kids graduate and buy their own hardware. But I’ve never seen any hard-core analysis that proves this popularly believed myth to be true.
Apple’s position isn’t dire like Gateway’s. For one thing, Apple’s other products are wildly profitable so they can afford to subsidize a money-losing category like education as long as they want. But also, Apple isn’t as big in education as Google or even as Gateway was back in the day. So that limits their exposure.
However, Apple has gone beyond Gateway in a big way. They are actively dedicating resources to working on software for education. They are customizing iOS for a relatively small sub-set of users. No matter how small the market, that can’t be cheap. I’d wager that it costs Apple more to fine tune their education software than it is to maintain 3D Touch. If Apple is properly allocating the cost of this software work to the education market, I guarantee their education business is wildly unprofitable. IOS programming work for regular iPads probably costs very little when allocated out over the 45 million units that they ship in a year. But how big is Apple’s education volume? Is it even over a 100 thousand units in a year?
Oh, and did I mention that the education iPads offer a price cut? When in reality, those iPads should probably cost $50 to $100 more to maintain comparable margins.
This has got to be one of those situations where Apple’s financial analysts are telling Tim Cook or Phil Schiller that they need to kill the education program because it doesn’t make any financial sense. Normally, I like to say that you can predict what Apple will do by quantifying the profit on their various options. This, however, is not one of those times. Apple is doing the opposite and doubling-down on education.
So…why? Why does Apple insist on flushing good money down the toilet on a crappy business only to be criticized for not doing more. The only logical answer I can think of is that they believe it is the right thing to do. They truly believe that their iPads are a better long-term option for kids. After all, these kids are headed into a touch-centric future where having to use laptops is regarded as a nuisance.
Apple believes that schools deserve an alternative option to the low-quality Google hardware that sucks everyone in. Schools willing to invest more for their kids and jump through the extra hoops, buy iPads. Yeah, I’ve heard a bunch of reasons why schools like Google hardware. And it all boils down to it’s easier for the IT administrators and teachers. Not necessarily the kids.
But Apple has hedged their bets. If Apple is already losing money on these iPads, they could go even further and match or even under cut Google’s prices. They didn’t, and they probably never will. Probably because Apple wants to send the message that even their lower priced iPads are still high quality hardware. They may not have the latest features as the iPad Pro but they are manufactured to exacting standards and are supported by a worldwide network of bricks-and-mortar stores. You pay more but you get more.
I disagree with Apple. They should kill their education efforts and bail out of that business. I don’t believe there’s any correlation between what kids use in school and what they buy as adults. I do believe, however, that there’s a very strong correlation to what people use at work and what they buy for their home later. Further, the more Google sells to schools the more it weakens them. It’s a cash drain and a distraction. Google owning the education market is an advantage to Apple.
But if Apple is hell-bent on offering an alternative to Google in education because it is the morally right thing to do I’d suggest that they take a different tact. Instead of lowering their price and expending a modicum of effort on the software side that they do the opposite. I’d suggest that they do a full-court press on the software side and price their iPads accordingly. Either that or kill their education division.
Schools are already aware that you get what you pay for. When a school principle is taking quotes to repair the parking lot he knows that it will cost much more to pay for concrete than blacktop. But he also knows it will last longer and be much more durable. He’s willing to pay that price. If, and when, Apple makes a superior product both on the hardware and software side, price will not be an issue.
Now available in iBooks —> The Tesla Bubble
So why did Gateway put up with this lousy market as long as they did? It all comes back to some mumbo-jumbo theory that if kids see your hardware in school that a certain percentage of them will be customers for life. Gateway, like Google and Apple today, believed it was OK to lose some money up front in education, because you’ll probably make it up in the future as those kids graduate and buy their own hardware. But I’ve never seen any hard-core analysis that proves this popularly believed myth to be true.
Apple’s position isn’t dire like Gateway’s. For one thing, Apple’s other products are wildly profitable so they can afford to subsidize a money-losing category like education as long as they want. But also, Apple isn’t as big in education as Google or even as Gateway was back in the day. So that limits their exposure.
However, Apple has gone beyond Gateway in a big way. They are actively dedicating resources to working on software for education. They are customizing iOS for a relatively small sub-set of users. No matter how small the market, that can’t be cheap. I’d wager that it costs Apple more to fine tune their education software than it is to maintain 3D Touch. If Apple is properly allocating the cost of this software work to the education market, I guarantee their education business is wildly unprofitable. IOS programming work for regular iPads probably costs very little when allocated out over the 45 million units that they ship in a year. But how big is Apple’s education volume? Is it even over a 100 thousand units in a year?
Oh, and did I mention that the education iPads offer a price cut? When in reality, those iPads should probably cost $50 to $100 more to maintain comparable margins.
This has got to be one of those situations where Apple’s financial analysts are telling Tim Cook or Phil Schiller that they need to kill the education program because it doesn’t make any financial sense. Normally, I like to say that you can predict what Apple will do by quantifying the profit on their various options. This, however, is not one of those times. Apple is doing the opposite and doubling-down on education.
So…why? Why does Apple insist on flushing good money down the toilet on a crappy business only to be criticized for not doing more. The only logical answer I can think of is that they believe it is the right thing to do. They truly believe that their iPads are a better long-term option for kids. After all, these kids are headed into a touch-centric future where having to use laptops is regarded as a nuisance.
Apple believes that schools deserve an alternative option to the low-quality Google hardware that sucks everyone in. Schools willing to invest more for their kids and jump through the extra hoops, buy iPads. Yeah, I’ve heard a bunch of reasons why schools like Google hardware. And it all boils down to it’s easier for the IT administrators and teachers. Not necessarily the kids.
But Apple has hedged their bets. If Apple is already losing money on these iPads, they could go even further and match or even under cut Google’s prices. They didn’t, and they probably never will. Probably because Apple wants to send the message that even their lower priced iPads are still high quality hardware. They may not have the latest features as the iPad Pro but they are manufactured to exacting standards and are supported by a worldwide network of bricks-and-mortar stores. You pay more but you get more.
I disagree with Apple. They should kill their education efforts and bail out of that business. I don’t believe there’s any correlation between what kids use in school and what they buy as adults. I do believe, however, that there’s a very strong correlation to what people use at work and what they buy for their home later. Further, the more Google sells to schools the more it weakens them. It’s a cash drain and a distraction. Google owning the education market is an advantage to Apple.
But if Apple is hell-bent on offering an alternative to Google in education because it is the morally right thing to do I’d suggest that they take a different tact. Instead of lowering their price and expending a modicum of effort on the software side that they do the opposite. I’d suggest that they do a full-court press on the software side and price their iPads accordingly. Either that or kill their education division.
Schools are already aware that you get what you pay for. When a school principle is taking quotes to repair the parking lot he knows that it will cost much more to pay for concrete than blacktop. But he also knows it will last longer and be much more durable. He’s willing to pay that price. If, and when, Apple makes a superior product both on the hardware and software side, price will not be an issue.
Now available in iBooks —> The Tesla Bubble
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