Tomorrow, Apple will host an event to announce the forthcoming release of the new and improved iPad. If prognosticators are correct, the new iPad will see modest improvements throughout in addition to either one or two cameras. It will be billed as, all the things people love about the original iPad, but better. It comes at a time when tablets are the new battleground. CES 2011 saw a bevy of manufacturers launching or announcing tablets for release this year. The most significant is probably the Motorola Xoom, which went on sale last week. The Xoom is the first tablet to feature Android’s Honeycomb OS, which was developed specifically for tablets. Honeycomb feels fresh and modern, if not a little rough around the edges. BlackBerry and HP will enter the fray later this year with the Playbook and Touchpad, both of which run their own proprietary OS. By sitting out the first half of 2011, they’ll have a long road ahead. LG, Samsung among others will join Motorola with tablets that run Honeycomb. Apple currently owns tablet market share, but as we have seen with smartphone market share, things can change quickly. Apple has a unique opportunity tomorrow to end the wars before they even begin.
With upgrades throughout the device, Apple will virtually guarantee continued strong sales of the iPad in 2011. This will be the first year they encounter any sort of real competition, but these manufacturers will have a tough time initially doing battle with Apple’s iOS ecosystem that boasts thousands upon thousands of iPad apps. Google’s Honeycomb has 15 or so apps that are tablet friendly. Other apps scale to size, similar to how one would view iPhone apps on an iPad in 2X mode. With a multitude of Android tablets, these numbers will improve over time. Apple’s advantage of the App Store is not only about the quantity of apps, but their cut of the profits. For each app sold, Apple receives 30 percent of the take. Motorola, Samsung, LG and others receive zero from sales in the Android Market. When Apple sells an iPad, they are selling the razor, with utmost certainty they’ll earn money from the razor blades (apps, movies, music). When Motorola builds an Android tablet, they aren’t worrying about the iPad alone. They have to build in components, memory and graphics that surpass Samsung, LG and others. If you are in the market for a tablet running Honeycomb, which one are you going to buy? There are no differences in the OS, so it comes down to specifications. Apple has been immune in some ways to competing along the lines of specs. They trade in experience, one that is largely driven by the vast amount of excellent apps. Most people buy an iPad for the ease of use and large selection of apps. Does the average consumer even know that iPad has 256MB of RAM? It just works and that’s the lure of Apple products in general.
I’d assume that Apple has accountants who look at the revenue generated by the average iPad user. How much does Apple earn after the initial iPad sale? How much revenue comes from music, movies and apps? Using this number, Apple could theoretically lower the entry cost of the iPad, knowing that they will make it up on the backend. This a competitive edge not shared by the Android tablet manufacturers. They need to make money on hardware. That hardware gets expensive when you are forced to compete on processors; RAM and other spec line items. A contract free Motorola Xoom is priced at $799. Given the specifications, it’s actually more than competitive with the 32GB iPad 3G that carries a $729 price tag. Tomorrow, one would assume the model will see upgrades that meet or exceed those of the Xoom. It might not have 1GB of RAM, but that’s not going to matter to the average tablet consumer. For some reason, Motorola chose to compete at the higher end of the tablet spectrum. Apple already had a distinct advantage by offering an iPad under $500. Apple makes money once an iPad is sold. Motorola and others do not. What if Apple were to either cut the price of the existing iPad to $399? Better yet, what if tomorrow we saw an improved iPad released at a lower price. There will always be a market for those who won’t buy an Apple product or would be willing to pay a premium for tablet that allows them to run their existing phone apps. If tomorrow brings a lower cost iPad, Apple could effectively end the tablet wars of 2011 before they start.
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I’m wondering if “ending the tablet wars before they begin” isn’t something that would necessitate more than simply modest upgrades. Hands-down, Apple is eclipsing the competition right now, but the so-called tablet wars are just beginning to heat up. If all they do is dump in a front-facing camera and a faster processor, is that really enough to head off the looming competition? Maybe it is, I’m just asking. Despite being a die-hard iP4 user, I have to say if the Android OS was smoother I’d probably opt for the Xoom (or something like it) over the iPad. Flash 10.1, a USB hub and a memory card slot are too important on a device like that–at least for me they are.
I think you misunderstood the point. The author was saying that a price drop could end the tablet wars even before they start even with a modest hardware bump.
Also of the 3 points you use as reason you would prefer a Xoom – fash, usb, card reader – only one is actually on the Xoom today. Flash and the card reader are both promised for the future.
It’s definitely a model that’s been used in electronics before. Both printers and game consoles have heavily subsidized hardware, and then they get you once you’re locked in their system — be it buying games or ink. Apple’s new rules about getting a cut of any and all transactions on iOS could definitely be interpreted as a precursor to a less expensive iPad — they’re trying to recoup that money elsewhere.
That’s never been the Apple way. They make the big bucks on the hardware. Take a look at any of their quarterly financials. The apps, music, movies, etc. simply give the hardware value for the consumer.
But that doesn’t mean they won’t change their business model slightly to make more affordable products. As mentioned above those new in app purchase rules seem to point in that direction for sure. Not to mention Tim cook was just saying a few days ago that they don’t want their products to be “just for the rich” that leads me to believe they really are going to try and get lower priced iOS products to market.
Oh, I definitely believe that Apple is going to find creative ways to provide lower priced, entry level devices into the iUniverse. Just look at the $49 iPhoneGS at AT&T or the $229 iPod touch, and the shuffle and nano. They could sell a version of the iPad 1 for just $399 after they intro the iPad 2, for example, kneecapping the el cheapo slate market. In fact, I believe they will introduce a no-contract, iPhone-GS-level iPhone for $200 – $300 within the next six months which will take the pre-paid market by storm.
BUT they won’t change their business model where they consistently earn 30 – 40% margins on hardware. Profit margins on music in the iTunes store, for example, are generally believed to be less than 10%. That’s not what Apple is interested in. And, with their current economies of scale, they can match hardware with anyone in the mobile space. The iPad wannabes still can’t come up with a 10 inch iPad clone for $499.
Have you actually studied Apple financials? Out of $25 billion revenue in Q4/2010, how much would you guess is from hardware as compared to apps/music/iBooks/media? Around $22 billion in revenue came from sales of iPhones, iPads, iPods and Macs. That means that software, apps, music, movies, etc. only accounted for around $3 – 4 billion.
Yes, Apple will continue to find ways to stay very, very price competitive in the mobile space. No they will not change their business model.
Yes, Apple will continue to
They could offset profit margins associated with lower hardware prices if it meant more volume. I agree it’s not the typical Apple way, but they would continue to own the tablet space.