A question of scale

Almost everyone in a decision-making position in the media seemingly has an iPhone or has at least tried one – but overall only around five percent of the UK population has an iPhone. This disparity will be even more marked for the iPad, a $500+ device (UK price TBC) which may not be subsidised by mobile operators as iPhone is and which is not as essential as a phone.

Apple (NSDQ: AAPL) has disclosed 300,000 first-day sales and 500,000 first-week sales in the U.S, but putting numbers to long-term demand can still only be speculative. From iPhone, iPod touch, netbook and e-reader sales, we have built three scenarios…

How many paying customers, paying how much?

Of those one million to 3.6 million iPad owners, how many will pay for content? Even assuming some people are willing to pay for news online, the iPad is not just a news device – it is a multipurpose device. We cannot expect all iPad owners to access news in any form, let alone newspapers.

The long-term sustainability of the app model as a way to shape people’s consumption of content is questionable. The iPad has a great web browser, so users may simply transfer their existing ‘grazing’ news consumption: certainly, the pull of the link economy will be strong. The main impact of the iPad might be to erode further the position of print publications and their websites, by giving all of the web the same portability as a physical newspaper or magazine.

Then there’s the question of price. In the UK, the Times will shortly move to a model of £2/week (or £1/day), while the FT is £4.99/week. The Daily Express is planning an iPad app with an upfront cost of £1.79, providing free online content and paid subscription to archives.

These prices are substantially cheaper than print subscriptions, but £8 a month for The Times online (£2 a week) is just about within the pricing envelope of iPad apps. App developers are trying hard to establish pricing in the $5-$10 range as the norm, in contrast to the rapid collapse of the iPhone app store to $0.99 or free, ad-supported. But, looking at the top 20 paid and free apps on the iPad store so far, news apps dominate the free list.

So, what iPad news revenues might be plausible? Assuming:
—our above iPad sales estimates
—that 50 percent of iPad users access some sort of paid news service

—and an monthly average revenue per user (ARPU) for active news users of £2.50, £5 or £10

... then annual UK news revenue on iPad could vary greatly, but could look like this…

But these numbers are contingent on a long string of “ifs” - if people like the iPad and do not see it as an inferior laptop, if they consume news in less dispersed ways, focusing more on established news sources, and if they are willing to pay.

If all these are true, the annual news revenue from UK iPad users might be £200-£250 million at most, before Apple deducts 30 percent commission…

This is not by itself of a scale to support an industry that generated £1.2 billion of revenue for quality newspapers and £1.9 billion for mass-market newspapers in 2008…

Floatation or displacement?

It is always enjoyable to play with shiny new devices, cool technology and intriguing new revenue models – more fun than contemplating big newsroom cuts.

But no matter how appealing the iPad, and no matter how appealing the news products that can be created for it, the real question is one of scale…

—It is extremely unlikely that Apple can sell enough iPads in the UK at current prices to create a news revenue opportunity on the same scale as 10 million newspaper buyers generating £8.5 million every day in retail and advertising revenue.

—Meanwhile, all of the costs of the print operation remain – the print costs are largely fixed and the individual newsrooms for quality titles will be supporting between 500 and 700 newsroom staff.

Some people will pay something for news on the iPad. But there will not be enough of them, and they will not be paying enough to cover the cost of a newspaper model that was predicated on the absence of the internet.

Benedict Evans is a consultant analyst at Enders Analysis.