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 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 smartphone or even a Motorola 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, 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.”

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