3 Reasons Apple’s iPad Won’t See a Price Drop
With Apple’s iPad slated for pre-orders next week and availability on April 3, we’re entering a new phase of iPad poker –are you in or are you folding? This round is different from the time immediately after the iPad’s introduction. Back then, folks were making snap decision commentary — betting blind without knowing what the hole cards were. But now it’s later in the game. People have spent more time thinking about what the iPad can or can’t do for them. And come Thursday Friday, when pre-orders start, they’re either all-in or walking away. Actually, there’s a third option and that’s to wait this hand out. I’m hearing more and more comments from people planning to wait for an iPad price decrease, but there are three reasons I think those folks will be waiting for nothing.
We’ve been here before
Much of this “wait for the price drop” sentiment stems from the original iPhone 4 GB and 8GB models, which debuted in late June of 2007 for $499 and $599, respectively. By September of that same year, the 4 GB model was scrapped and the 8 GB unit dropped $200 to $399. The situation generated an early adapter uproar by many — myself included — and Apple tried to make good with $100 Apple Store credits for those who paid the higher prices.
The entire event tarnished Apple’s luster in the eyes of consumers and this isn’t a company that repeats mistakes often. Apple learned a hard lesson in 2007 — you can correctly justify that technology pricing changes fast, but consumers don’t care. A 33% price drop on a hotly anticipated phone within two to three months of availability doesn’t sit well with people. We can argue supply and demand or say that people paid $599 because they felt it was worth it, but that has little to do with the public’s perception of the situation. Apple won’t tread this path again with the iPad.
Apple’s going it alone
Going back to 2007 again — there was another player involved with the iPhone. AT&T was, and still is, the exclusive U.S. carrier partner. For all intents and purposes, you can’t officially buy a new iPhone without AT&T involvement sans jailbreaking. The vast majority of iPhones use AT&T’s voice and data network, and AT&T earns much more from iPhone users than its other customers. Last year, Om noted AT&T’s iPhone addiction and the revenues it produces from each customer: “[t]he average iPhone user gave AT&T about $94.74 a month vs. an average postpaid AT&T customer, who spends about $59.21 a month with the company.”
The iPad is a different beast though. Yes, the iPad 3G model will work only on AT&T’s data network, but there’s no voice component, nor any 2-year AT&T contract like that of the iPhone. So there’s likely no subsidy paid to Apple from AT&T. You won’t be able to grab an iPad in AT&T’s retail locations, either. Simply put: this is an all Apple product so there’s no price or subsidy negotiation with a carrier about the device. I’m sure Apple and AT&T talked about the 3G service features since it’s a new approach — instead of a long-term commitment like the iPhone has, iPad users can simply enable 3G for a month at a time. Without subsidies or heavy carrier involvement, there are fewer pricing factors involved.
Product lines and pricing tiers
Apple going it alone doesn’t really prove that the iPad pricing might change. But since the company has control over the price, it’s worth looking at where that price fits in with other products across the Apple line. After the iPad introduction, the Boy Genius Report put this chart together showing Apple’s product line and base prices.
See the problem? There’s really not much room — if any — for the iPad prices to drop. Any price cuts and the iPad starts to contend with iPhone 3GS. On the surface, it’s easy to make the argument that the two devices are different because the iPhone offers cellular voice capability while the iPad doesn’t. However, if they’re priced the same, consumers will look deeper and see more similarities than differences — and that could influence purchase decisions on one or the other. And while I’m not the best representative of a mainstream customer, I did just drop my iPhone 3GS – why pay a monthly contract when I can have a similar or even better experience with a less expensive phone plan and an iPad, or an iPod Touch, for that matter? In either case, I”ll just use my MiFi device for a 3G signal over Wi-Fi — I’m already paying for MiFi 3G data plan, so why pay for a second one when I can share my mobile broadband connection with Wi-Fi devices?
The river card is new features
So maybe you’re still in this hand and not sure what to do. You’re on the fence and waiting to see that last card. I anticipate that it won’t reveal price cuts but will instead offer new features. The second generation of nearly any technology is better than the first. iPad prices are likely to stay put, but in as little as six months, a new model could hit with more features. An integrated camera is highly likely. More internal memory or a higher resolution display wouldn’t surprise me either. A price cut within a few months would, so I’m not betting on it. Are you?
Related research on GigaOM Pro (sub req’d):
4th reason, for anyone that follows pricing structure knows Apple usually has a bare minimum of 100% profit margin (double the manufacturing costs). reports are this device is costing anywhere from $220 – $270 to build. if thats true, Apple is already selling the iPad at the bottom level price. what that establishes is that Apple is somewhat leery of the market potential for this type of device so they started out aggressive on prices to ensure its success. Apple guessed this 1 right, it would have been a disaster to start out at a higher price point.
most companies dont have 100% profit margins, not even close. but most companies dont have Apples rabid fanbase or high quarterly profits (considering Apples rather low worldwide market sales). most companies make up for it in volume, which Apple is not much of a contender in.
@ TRBELLOW. Retail markup over BOM does not equate to profit margin. Most business have SG&A expense about 10% -12% of revenue and R&D 3%-5% of revenue. Uncle Sam also wants his part which in Apple’s case is about 30% of Operating Income. I agree that the price point is consistent with the BOM estimates and will not change in the short term. Apple is much more likely to add features in future releases rather then change pricing in the short-term.
i was dumbing it down, of course expenses have to be covered but i assume most people already know that. i was just trying to show a margin comparative Apple has to other companies.
for example, do you think most people know that average netbook is made for less than $150? so even these $300 netbooks are pulling in Apple level “profits”, technically more since its a saturated lower expense market. thats why the public & bloggers should ignore Dell/HP execs about “small margins” on netbooks, percentage wise it just isnt true. it does hurt Intel though, that much is true.
Ah, but that profit netbooks are “pulling in” are spread across the netbook brand, distributors, and retailers.
Apple’s margins, on the other hand, are in large part split between Apple and the Apple Store (aka Apple).
Huge difference…plainly visible in Apple’s cash hoard from their quarterly reports.
Most ipods go down in price after the first generation, so maybe it won’t go down in price right away but next year it will when they release the next gen ipad and they are clearing out old stock.
I’m still in and plan to order the Wi-Fi model. Partly that’s because I’m a tech consultant and need to understand the implications of new stuff to help advise my clients. But my trip to New York last week reconfirmed that this form factor would be a great addition to my travel bag. On two separate occasions a group of us were standing around a bar after working all day and I really wanted to pull out a computer to make a point, but opening a notebook was inappropriate – the iPad would have been perfect. Also, four hours each way on a plane (with Wi-Fi) squeezed into a small seat would have been more fun with an iPad.
Of course I would prefer to pay less, but I think the price is reasonable for a new type device. When the price drops and new features are added in version 2 I’ll buy that and hand the original down to someone else. I don’t make technology decisions lightly – never owned an iPhone, but bought the Pre as soon as it came out – and the iPad seems like a very useful device for my needs.
Actually, the biggest price pressure on the iPad may be the iPad itself. The key is that it’s contract-less. There will be early adopters that for what ever reason will decide that the device is not for them or that there are better alternatives available.
For cost-conscious consumers, the best strategy may be to wait and let the after market channel fill or flood when an upgraded iPad model is announced.
“For all intents and purposes, you can’t officially buy a new iPhone without AT&T involvement sans jailbreaking”
Not quite true Kevin:
http://www.addictedtophones.com/product_info.php?cPath=67&products_id=402
I guess everything has it’s price. ;)
There have long been third-party methods to buy an iPhone, but that’s why I said “officially,” i.e.: through standard channels. ;)
Brand new phone purchased retail with warranty. Are you saying that if it’s not obtained through the manufacturer or service provider it doesn’t count? Expansys also sells the same phone shown in the link, along with many others not even available from either the manufacturer directly or carriers.
I know Apple and AT&T both have their stores, but if the manufacturer is providing unlocked units to wholesalers for a price premium, it does give the consumer an alternative choice, and in many cases, a better phone.
You’re absolutely correct — if you don’t want to buy an iPhone from Apple or AT&T, there are other ways. But most people do buy them through those two entities. And for the purpose of this article, that point was made to show that Apple isn’t partnering with anyone on this and what that means for pricing. ;)
I can’t see the $499 base price coming down soon, although I can see an increase in Flash memory provided (32GB) and webcam for that same price on the next iteration…
I think the mighty iPad will drop in price only if Apple doesn’t see the demand they expect. But hearing all this talk of part supply shortages make me think initial demand (first six months) will exceed supply, therefore NO PRICE DECREASE until maybe Thanksgiving just in time for the Holidaze. I hope a Super iPad will make its way to shoppers in time for Xmas (that’s what dreams are for right).
Don’t forget, you’re all invited to my April 3rd iPad Unboxing Party on YT. See y’all there !
Or…
Get a decent tablet PC (gasp) w/ a cellular data plan for the same price and 4x the functionality! gasp
Wait… it wouldn’t be Apple. Right…
+1
Microsoft Courier looks promising, as I’m sure do a myriad of soon-to-be-released non-Apple tablet/pads.
THERE IS NO COURIER!!
Its a FUD animation, folks. Stop comparing vaporware to a real product.
Where is this mythical $500 tablet PC? And you realize a 3G data card for a PC usually costs $60/mo, right?
I don’t see any price savings at all in your scenario.
Correction: I mean to say I don’t see any way to get a tablet PC + data card that isn’t a lot more expensive up front, in monthly fees, AND requires a contract period.
But…all the apps I use on a day-to-day basis don’t work on a MS Windows PC.
If all the apps you use on a day to day basis work on an iPad, then you’re good to go.
Since you need not sign a contract for iPad they can sell these puppies to the masses in places you would never believe. It is only a matter of time before you start hearing the following:
Would you like some fries with your iPad order sir ?
And don’t forget the famous Apple Kiosk (already at some airports). Move over redbox (currently at 20,000 locations) !