Blog Post

Fear & Loathing Over iPad Pricing

The Wall Street Journal in a blog post today points to a research note by Credit Suisse analyst Bill Shope that he wrote in the wake of meeting with Apple executives. It reads:

Apple wants the iPad to be the best device for a few key use cases. For instance, the company believes it could eventually be seen as superior to both handheld and notebook devices for browsing the Internet, using the App Store, and consuming mobile media (video, photos, and e-books). Nevertheless, in other areas, notebooks, the iPhone, or an iPod may be more appropriate. This clear segmentation of capabilities suggests that cannibalization may be less of a concern than most currently believe.

As The Wall Street Journal then goes on to explain:

Shope also wrote that despite the seemingly aggressive pricing of the iPad — the lower-than-expected price points range from $499 to $829 — Apple seemed to indicate it would respond with price cuts if demand for the device wasn’t revving up the way it liked. ‘While it remains to be seen how much traction the iPad gets initially, management noted that it will remain nimble (pricing could change if the company is not attracting as many customers as anticipated),’ Shope wrote.

Initially everyone was expecting Apple (s aapl) to launch a device that would cost as much as $1,000, but instead the company came in at half that price — and it’s still getting criticized. Given that the iPad hasn’t even made it to the market yet, this conversation about price cuts is kinda moot.

Let’s assume that Apple does have to cut the device’s price — it still has lots of room to make a profit with it. According to Broadpoint AmTech analyst Brian Marshall, the base model $499 iPad will cost about $290 to manufacture and has a gross margin of 42.9 percent. Have you checked the gross margin on a netbook, Nokia (s nok) smartphone or even a Motorola (s mot) device lately? I rest my case.

Regardless, I’m amazed at the play being given to this iPad price cuts story. People seem to be overlooking the fact that Apple’s business model is in transition. In addition to being a hardware and software company, it’s becoming a “transactions” company.

Apple, thanks to its exclusive deals with phone companies such as AT&T (s T), has learned the art of making money over a period of time. Selling digital media — video games, books, music, videos and periodicals — is just an extension of that very basic idea: an ongoing relationship with customers. Thanks to iTunes and the App Store, Apple has one-click access to customers. If Apple can sell a lot of video games, songs and videos (via iTunes) and books (via iBooks) and gets to keep 30 percent of the total sales, then it behooves the company to sell more and more iPads. Even if it means cutting iPad prices — which it won’t have to.

I am of the opinion — admittedly a minority opinion for now — that the iPad, despite all the early skepticism, is going to find its place in this world. In fact, over a period of time (admittedly longer), I believe its success will replicate that of both the iPhone and the iPod touch.

And I bet Steve Jobs believes the very same thing. As he told Rolling Stone back in 1994:

“I’ve always been attracted to the more revolutionary changes. I don’t know why. Because they’re harder. They’re much more stressful emotionally. And you usually go through a period where everybody tells you that you’ve completely failed.”

28 Responses to “Fear & Loathing Over iPad Pricing”

  1. I am not sure I like the idea of an over-sized iPhone/iPod product from Apple at such a price. The iPad is anything but innovative. They have not built on their existing technology to bring us anything new. I guess the economy is tough on everyone; including Apple.

    • Then I guess you didn’t read all those comments about why people were buying Kindle – because they didn’t want to read on such a small screen as on the iPhone/iPod. Perhaps Apple listened.

  2. Or perhaps the price cuts will be offered as incentives to buy the 3g model.

    Quite a few people were unhappy with the cuts in the price of the iPhone, but those came after the newer/upgraded model came out so perhaps someone is attempting to stir that same pot before it is introduced. Maybe Ballman at M$ or maybe X2 (or srikar) whose keyboardless netbook was “launched recently.”

    • Irving Que

      Hmmm, looks like a poorly fact-checked link-bait article.

      Numbers 3, 4, and 5 are wrong: 3 partially because there is multi-tasking among Apple’s apps.; 4 because there is video-out through the dock connector ( just like the iPhone and some iPods ); and 5 because there is an HP app. that will send copy to a wireless/networked HP printer ( and other printer mfgs. could do the same ).

      However, #7 is partially right as there is no hard drive in the device at all. But 16gB is plenty of “drive” space for what the “starting” user may want to do w/ the device.

  3. Rob Enderle was on Bloomberg TV, yesterday – addressing the iPad. He noted the WSJ story and dismissed it as something any business would consider if they had the room to maneuver. I’ve worked for firms in exactly the same market position and we did it as a matter of course over the sales life of products.

    It’s nice to have wiggle room at some point in the curve.

    He also went back and reviewed all the babble from bloggers, pundits and commenters – about the iPhone – between the time of announcement and delivery to the public. Same old, same old.

    And that’s what I find most frustrating – except here at GigaOm. Very few of those afforded a place for public commentary do much more than roll-out their prejudices, their often ill-informed ideas about engineering, industrial design and usefulness.

    If anyone in the buying public actually followed the suggestions from the blog-babble and pundits, the iPhone and iPod would hardly be a hiccup stuck into the cul-de-sac of American commerce.

    You don’t need a grain of salt. You need enough to de-ice the roads of Maine.

  4. Constable Odo

    I can’t believe Apple is discussing price cuts before even one iPad is sold. Sounds like some anti-Apple bloggers rumor. If it is the case, then Apple may be talking about $25 price cuts or something. I don’t think there are going to be many consumers hearing about this price cut business, so I doubt if Apple is in any danger of people holding out for the iPad waiting for a price drop.

    I’d hardly think the average consumers is going to choose an Asus T91MT in place of an iPad for reading books and watching videos. That Asus is just some two-point touch-screen convertible netbook with a mediocre processor and maybe five hour battery life. It’s as thick as a brick and heavier than an iPad. The Asus is OK as a netbook but that’s all. Those convertibles computers are like trans-genders. They don’t know where they belong and nobody else does either.

    In a few months we’ll see what the verdict is for consumers. Convertible netbooks or iPads.

  5. I am quite sceptical about apple iPad, I see little advatadge over one of the latest Netbooks, all they have in their favour is the big MAChead fanbase who buy anything that says “Apple”.

    • I have to chuckle over head-in-the-sand hangups that ignore success in the marketplace, bringing tens of millions of new users to a product – as being some sociological phenomenon confined to fanboys.

      I hope you don’t try to earn a living with such crippled logic.

    • The latest netbooks really only compete well against notebooks. Low-end notebook PCs cost about the same as netbooks, are larger and more powerful, and have a shorter battery life. The iPad is superior to netbooks in battery life and connectivity (that is, the 3G data plan without contract). It will also have more specifically designed apps. The problem with Windows tablet PCs and netbooks is that even when they sell in large numbers, they represent only a small fraction of Windows PCs generally. So, 3rd party developers don’t have much incentive to write applications specific for those form factors. That issue is even more pronounced with Linux based netbooks.

    • I want an iPad, but I’m not a MAChead fanbase (whatever it means). In our informal poll among teammates half of them said yes to iPad. Some of them wanted to buy 3 each!!! None of them are true Apple geeks.

  6. Apple cuts prices on successful products to send sales soaring. That is what they mean by flexible pricing. They are not going to cut the price on something that doesn’t sell well to try to make it sell well. Not their style and never has been.
    Amusing to see people saying it won’t sell well. It will. Quite well and it will be a whole new category that Apple has spawned like iPod and iPhone before it.
    Big iPod Touch? You aren’t paying attention.
    Windows will do it better? You are delusional. They have had their chance over and over again and have blown it every time.

  7. Thiago Bocato dos Santos

    Om, very good points, but a bit superficial analysis. I feel skeptical because Steve wants a revolution in such a space where the consumer subconscious is still sticky to a PC mindset. And it’s a illusion assume that every tech-fearer will find in it a must-have tool, despite all potential that a slate, be Apple or any other maker, can offer. Even harder to users more familiar with tech, like college students, that find on the netbook a mighty sidekick . For them, some lighter OS X variation (some revamp, it’s a reliable, but aging OS) is a must for flexibility reason. I was talking in a interesting debate with some friends and they find the iPad offering based on iPhone OS offensive to their intelligence. Think about things that reverberate loud like keyboard shortcuts to copy and paste, listening music while do typing, usb file exchange, traditional file system. To replicate iPhone success, it will be necessary more iterations and to gain a good product position between the plethora of slates coming. Apple will need initially to compete on price (a temporary concession aiming long lasting results) to gain mindshare and expand it’s profits margin. I don’t think consumer will always lean toward design superiority, even because aesthetics produces a kind of infatuation that isn’t long lasting.

  8. Thanks for the savvy sanity, Om.
    I saw an article on potential iPad price cuts in Business Insider and got neg-bombed for noting that price alone is a key feature of the iPad. That Apple can deliver such a device for $300 in 2010 — meaning it can be offered by Google in 2013 for $99 — is a game changer. A relatively high-end ereader, videoscreen, web browser, media device with WiFi and intimately integrated within the iTunes ecosystem. Hell, Apple could offer these at cost! Most of us think a $250 Kindle is a steal. A $400 iPad is a (potential) revolution.

  9. Jeff Lewis

    A couple of points.

    First, most people who were expecting the $1000 price point were also expecting this to be a full MacOSX device, not an oversized iPod touch. That’s part of the disappointment. It’s also why comparing the iPad to netbooks is a wee bit misleading. An iPad is a tightly controlled and relatively restrictive device – by intention – while netbooks tend to be full on systems running full OSes and are compatible with most desktop apps.

    From that perspective, the iPad is actually rather pricey for what you get. The best counterargument is the Asus T91MT which delivers most of the iPad 32GB model at almost $150 less and gets you a full OS in the deal as well.

    The other flaw is that an iPhone is first and foremost a phone and these days everyone carries a cellphone. The iPhone wins by being good at something everyone already expects to lug around. Those who don’t have an iPhone will typically carry around a music player – which opens the door for the iPod touch (and the iPod).

    The problem with the iPad is that most people AREN’T already predisposed to carrying a pad-like ebook reader/browser/big screen iPod touch. Some people are predisposed to carrying a laptop – but now the iPad runs square into the netbooks. If a person is going to lug around a pound and a half of electronics – they want it to do everything – they absolutely do not want to be carrying around two such devices.

    So, sorry – there are actually good, rational reasons to question the iPad’s potential success. Expect to see a lot of netbook makers flip their screens, remove keyboards and trackpads, stick on touchscreens and write nice, friendly front ends. The Windows camp will use Atoms – the Android camp will ARMs.

    And they’ll all be less expensive than the iPad.