Most Overlooked Element of iPad Launch To Date- Updated

As expected the iPad has been dissected by just about every technology site out there. Opinions are varied with some writers focusing on what the iPad is missing (Flash, multi-tasking), some writers focusing on what the iPad represents for the future of computing.

Getting lost a little in this discussion, is perhaps the most surprising element of the whole presentation. Not that the iPad is missing a USB port, or that it does not have a user replaceable battery, it’s the very simple element of the price, starting at $499.

Why is this so important?

Well usually you compete with Apple by beating them on price and overloading the feature set. If an Apple laptop has a DVD-RW, then the competitor adds a Blu-Ray player. If the Apple laptop is 1199, the HP laptop using almost the same guts is 899. Generally hardware manufacturers have gotten used to a 25% price cushion on products from Apple. Notice MS’ biggest Windows marketing message has been “We’re cheaper!!”

Now, one of the primary reasons for the huge success of the iPhone and the iPod have been that the competitors were not able to beat Apple on price.

Sure the initial iPod was a very expensive gadget, and it wasn’t until the iPod Mini, iPod Nano that the prices really dropped below the $200 mark consistently. But the last 4 years, the iPod has been priced so aggressively. Also, a $50 difference on a $200 iPod is still 25% discout, but it’s only 50 bucks. The price difference is no resistance at all to purchasing the Apple product with a powerful marketing message/brand prestige/and iTunes. Look at the total lack of impact of the new Zune HD (a solid product with a good feature set). The Zune HD is only 30 bucks cheaper than a 16 GB iPod Touch. That level of price difference is completely offset by iTunes/App Store. The Zune HD to really attack Apple would have to be priced at a margin crippling $99 dollars to attack Apple’s market share.

Initially, Apple appeared to be making a big mistake with iPhone pricing. But Apple quickly changed their pricing model and now has an entry level iPhone at $99, and their newest model is only $199. For comparison, let’s review the prices of the most popular “iPhone killers”.

The Droid is $199.

Palm Pre is $149 (and the Pre only have 8 Gigs of internal memory)

Nexus One is $180

Blackberry Storm2 $179

MyTouch 3G $149 (only 4 Gigs of Memory)

So, none of the competitors really have Apple at a price disadvantage. Apple is able by combining their massive iPod flash memory orders with iPhone memory orders to get as good or better memory pricing than anyone else. Shared components between the iPhone and iPod Touch allows Apple to get better discounts on chip sets/multi touch displays. The economies of scale are on Apple’s side just like with the iPod when Apple started to dominate the MP3 player market.

Now Maximum PC, seems to have realized this issue  about pricing with their new article Rival Tablet PC Makers Worry About the iPad’s $499 Price Point.

The Tablet designers were hoping to attack the new market Apple was going to create with cheap Windows 7 Tablets with touchscreen displays. However, the iPad’s $499 price point is $200 to $300 under the $699/799 price point the PC companies were targeting (believeing Apple would be at $999). So they are stuck with two bad options. One,  reducing their prices and already slim margins, presuming of course that they can get to a price below $499, which may not be possible. Apple probably has negotiated low pricing on a number of the key components. In addition, they cannot get access to the processor brains of the iPad, so they will have to use silicon from Intel which will cut into their devices’ battery life significantly, giving the iPad a major feature advantage (If Intel had superior silicon to the Apple A4, Apple would be using it). Two, release their Tablets with Win 7 at the original prices they were projecting (higher than Apple) and hope that their products are superior to Apple’s at the higher price point.

Either way it’s a very big gamble for the Tablet hardware manufacturers. Slash margins on a product that hasn’t proven that volume sales are possible. Or, hope that the Win 7 tablet experience will be superior to the iPad OS. It’s not a very attractive set of options. Especially when in 6 months the iPad could be loaded with specialty software written for a multitouch environment while Win 7 Tablets will likely still be running desktop versions of software wedged into a Tablet form factor. It wouldn’t surprise me at all to see the legion of Win 7 Tablets that were present at CES  be put on hold until the Wintel PC Clone guys can get a feel for the real market size for these devices.


Appleinsider today has an article talking about Acer not planning on producing a competitor product to the iPad instead planning to focus on their existing offers. The iTunes Store is cited as the main reason why Acer does not feel that they can be competitive against the iPad. In addition, at the end of the article, another computer manufacturer MSI appears to be putting their iPad competitor on hold until there is sufficient market demand for the device. Now neither designer mentions price as a consideration but I have to wonder how much Apple’s entry price of $499 is impacting their decision making.

In addition, ComputerWorld is projecting that even at the $499 price point, that Apple has a margin of nearly $208. Now, this seems awfully speculative based on not being able to even tear down the iPad like iSuppli will do the moment that they purchase one. Even iSuppli’s estimates don’t really factor in the R&D costs/Software development costs for a device like this, and I don’t think iSuppli’s cost estimates truly reflect the bulk discounts that Apple receives on flash memory and certain components (Apple certainly never provides those cost details). Still, rather than being a margin poor product for Apple, the iPad may potentially have a margin north of the 35% range on the entry level iPad device. The higher cost iPads  should have an even higher gross margins due to the profit margin Apple has on Flash Memory prices.

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