A lot has changed about Apple in the last few years, and one of the most important shifts has been the company’s price competitiveness. In particular, while Apple’s devices still compete on the high end of both price and features, when it comes to tablets and MacBook Airs, Apple is the price leader. It’s even possible that the company could use price to punish its would-be competitors when it releases a 7.x inch iPad later this year.
A 7.x inch iPad with a price tag at or below US$399 (I think it will be below) will allow Apple to squash the competition even more than it already has, and prevent those competitors from being able to gain a real foothold in this market.
Apple, Price Leader
To understand that, though, we have to start with the current form factor. With the iPad, the iPad 2, and the new iPad, Apple has performed two remarkable feats. The first is to be able to offer a high margin device that consumers will buy. The second is that it has done so while simultaneously being the price leader in the segment!
This is similar to what it did with the MacBook Air. With its total command over its supply chain and a simplified product lineup that allows the company to make enough of each device to benefit from economy-of-scale factors, Apple’s MacBook Air has been priced below what its competitors could match, though this is starting to change.
Intel was so freaked out by this, and by the fear that Apple could eventually use its own processors in this class of device, it put up $300 million for its so-called Ultrabook initiative to help its Wintel customers develop their own abilities to produce an ultrabook that was modeled on Apple’s MacBook Air. Let’s ignore the lie that is Intel’s tagline for the project, “Inspired by Intel,” because we all know that it was inspired by Apple’s MacBook air.
Be that as it may, Apple was able to gain significant share with the MacBook Air, and the company took the same approach when it released the iPad.
Apple Execs Spell It Out
“We’re all about making the best products at aggressive prices,” Apple CEO Tim Cook said during Apple’s fiscal Q4 earning call for 2010. In the same call, CFO Peter Oppenheimer noted that aggressive pricing on both iPhone 4 and iPad would affect margins.
Going back to April of 2010, right after the iPad was released, Peter Oppenheimer said, “As we said in January when we an announced the iPad, we [are being] very aggressive with pricing and are delivering tremendous value to customers.”
He iterated this concept when asked for clarification, saying, “We’ve been very aggressive, and [we plan to] take advantage of our first mover opportunity here.”
This was a point the company consistently made over the next year or so, always noting that the iPad is priced aggressively. Apple was keen on preventing the competition from being able to do what Apple’s competition has historically done (until the MacBook Air), swooping in with cheaper products after Apple had shown the way.
Tada!
So far, it’s worked. Competitors have been able to come in near the end of each iPad’s product life with tablets that are cheaper than the iPad, and in some cases delivering some specs that exceed Apple’s. For instance, the Asus Transformer Prime was a very competitive device compared to the iPad 2 when it was released, but it didn’t compare well to the new iPad. The Asus Transformer Infinity comes closer, but the new iPad still has the edge, especially in display quality.
At the small and cheap end, there are plenty of inexpensive Android tablets. This is especially true with the 7.x inch form factor. Amazon’s Kindle Fire is the only one that has found (limited) success, so let’s look at it for a moment.
Kindle Fire
Amazon shipped the device six weeks before Christmas, and people snapped it up in droves. At $199, they hit the sweet spot for a significant gift, and Amazon’s consumer reach is outstanding. Now, it turns out that once people got their Kindle Fire, they appear to have put it on a shelf to gather dust, possibly because it doesn’t do anything really well.
Cheap screen, cheap plastic, little memory, and an interface tailor made for one thing, buying Amazon stuff. The company had to make those kind of compromises to hit that price point, and the result appears to have been that few people found the devices to be a pleasing experience.
Whatever the reason, sales of the device fell off a cliff in the March quarter. I should also note thatStephen Baker of NPD has argued that sales to end users declining by 50 percent quarter-over-quarter doesn’t represent a steep decline in demand (never mind that his math requires that Amazon was satisfied ending the quarter with zero inventory).
At the same time, when Apple introduced the new iPad, it kept the iPad 2 in its product lineup priced at $399. Turns out that price point opened some doors in education, according to Tim Cook, and more than one analyst has said that when faced with a $399 choice in getting a full-featured iPad or $199 to get a cheap Kindle Fire, many users have chosen the higher priced option.
Meet the New Boss, Dramatically Different from the Old Boss
And this is where Apple could use pricing to bludgeon the competition when it throws its 7.x inch hat into the ring. Using its command of the supply chain and its economy-of-scale advantage, Apple could raise the bar high enough to severely limit anyone’s ability to compete on price.
If it achieves that, iPad’s ascendancy will remain unchecked for years.
So, let’s look at what I think are likely price points for this device and weigh the pros, cons, and feasibility.
$399 - If Apple were to release a Retina Display 7.x inch iPad, the iPad 2 will be discontinued. Actually the iPad 2 will be discontinued no matter what, but the point is that at this price Apple is just phoning it in and looking for a long-term, slightly cheaper device for education. I don’t think this qualifies as the sort of “very aggressive” strategy that the company is used so far, and I think it will be cheaper.
$379 - This price point is very attractive in that it is enough to differentiate the smaller iPad from the new iPad, while simultaneously allowing the company increase its overall iPad margins. At this price point, expect a device that is identical to the new iPad in terms of specs and storage, but I think Apple will be more aggressive still.
$329 - This is where I expect Apple to come in with a 7 inch iPad form factor. For one thing, it is enough to very clearly differentiate the company’s two models, and that’s not only important, it’s something Apple has consistently achieved. At the same time, I think the competition will find it all but impossible to make a competing device with anything close to Retina Display resolution, especially with a metal body and good battery performance.
At this price point, though, Apple could face margin pressure, and the company could offer a slower processor, a dual core graphics processing unit, or less storage to maintain margins.
$299 - This is the price point that would put the serious hurt on everyone else. At $299 with a Retina Display, few people would choose a $199 Kindle Fire, forcing Amazon to cut even more corners to compete. A full featured device small enough to hold with one hand that can display text almost (but not quite) as well as an E Ink display, that has access to Apple’s App Store and the kind of physical presence that only Apple seems to be able to produce becomes a no-brainer choice compared to anything like the Kindle Fire.
At this price point, Apple will almost certainly have to offer a slower processor, less capable GPU, and/or less storage than the new iPad (I think it will be an 8GB/16GB/32GB kind of device), but I don’t see that being problematic. Customers wanting more will still be able to choose a new iPad, after all.
The question is whether or not economic reality makes this feasible. You’ve got a smaller battery, a smaller case, and a smaller display, and you need less backlighting for this size device, but there are plenty of other components that will cost roughly the same as they do for the new iPad. Of course, that, in and of itself, invokes yet more economy-of-scale benefits, so maybe the company can do it.
If it can, if Apple can release a 7.x” iPad starting at $299, all bets are off for anyone wanting to dethrone the iPad as the dominant tablet for at least two to three years.
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