Apple Could Use 7” iPad Pricing to Punish Competitors

| The Back Page

A lot has changed about Apple in the last few years, and one of the most important shifts has been the company’s price competitiveness. In particular, while Apple’s devices still compete on the high end of both price and features, when it comes to tablets and MacBook Airs, Apple is the price leader. It’s even possible that the company could use price to punish its would-be competitors when it releases a 7.x inch iPad later this year.

$299!

From my introductory statement, you might have concluded that I feel strongly that Apple will release such a device, and that’s because I do. I think there is enormous opportunity for Apple with a device that size, especially in education and for people looking for an ereader that can do a lot more, rather than a tablet that is also an ereader like the current 9.7 inch iPad.

A 7.x inch iPad with a price tag at or below US$399 (I think it will be below) will allow Apple to squash the competition even more than it already has, and prevent those competitors from being able to gain a real foothold in this market.

Apple, Price Leader

To understand that, though, we have to start with the current form factor. With the iPad, the iPad 2, and the new iPad, Apple has performed two remarkable feats. The first is to be able to offer a high margin device that consumers will buy. The second is that it has done so while simultaneously being the price leader in the segment!

This is similar to what it did with the MacBook Air. With its total command over its supply chain and a simplified product lineup that allows the company to make enough of each device to benefit from economy-of-scale factors, Apple’s MacBook Air has been priced below what its competitors could match, though this is starting to change.

Intel was so freaked out by this, and by the fear that Apple could eventually use its own processors in this class of device, it put up $300 million for its so-called Ultrabook initiative to help its Wintel customers develop their own abilities to produce an ultrabook that was modeled on Apple’s MacBook Air. Let’s ignore the lie that is Intel’s tagline for the project, “Inspired by Intel,” because we all know that it was inspired by Apple’s MacBook air.

Be that as it may, Apple was able to gain significant share with the MacBook Air, and the company took the same approach when it released the iPad.

Apple Execs Spell It Out

“We’re all about making the best products at aggressive prices,” Apple CEO Tim Cook said during Apple’s fiscal Q4 earning call for 2010. In the same call, CFO Peter Oppenheimer noted that aggressive pricing on both iPhone 4 and iPad would affect margins.

Going back to April of 2010, right after the iPad was released, Peter Oppenheimer said, “As we said in January when we an announced the iPad, we [are being] very aggressive with pricing and are delivering tremendous value to customers.”

He iterated this concept when asked for clarification, saying, “We’ve been very aggressive, and [we plan to] take advantage of our first mover opportunity here.”

This was a point the company consistently made over the next year or so, always noting that the iPad is priced aggressively. Apple was keen on preventing the competition from being able to do what Apple’s competition has historically done (until the MacBook Air), swooping in with cheaper products after Apple had shown the way.

Kapow!Tada!

So far, it’s worked. Competitors have been able to come in near the end of each iPad’s product life with tablets that are cheaper than the iPad, and in some cases delivering some specs that exceed Apple’s. For instance, the Asus Transformer Prime was a very competitive device compared to the iPad 2 when it was released, but it didn’t compare well to the new iPad. The Asus Transformer Infinity comes closer, but the new iPad still has the edge, especially in display quality.

At the small and cheap end, there are plenty of inexpensive Android tablets. This is especially true with the 7.x inch form factor. Amazon’s Kindle Fire is the only one that has found (limited) success, so let’s look at it for a moment.

Kindle Fire

Amazon shipped the device six weeks before Christmas, and people snapped it up in droves. At $199, they hit the sweet spot for a significant gift, and Amazon’s consumer reach is outstanding. Now, it turns out that once people got their Kindle Fire, they appear to have put it on a shelf to gather dust, possibly because it doesn’t do anything really well.

Cheap screen, cheap plastic, little memory, and an interface tailor made for one thing, buying Amazon stuff. The company had to make those kind of compromises to hit that price point, and the result appears to have been that few people found the devices to be a pleasing experience.

Whatever the reason, sales of the device fell off a cliff in the March quarter. I should also note that Stephen Baker of NPD has argued that sales to end users declining by 50 percent quarter-over-quarter doesn’t represent a steep decline in demand (never mind that his math requires that Amazon was satisfied ending the quarter with zero inventory).

At the same time, when Apple introduced the new iPad, it kept the iPad 2 in its product lineup priced at $399. Turns out that price point opened some doors in education, according to Tim Cook, and more than one analyst has said that when faced with a $399 choice in getting a full-featured iPad or $199 to get a cheap Kindle Fire, many users have chosen the higher priced option.

Meet the New Boss, Dramatically Different from the Old Boss

And this is where Apple could use pricing to bludgeon the competition when it throws its 7.x inch hat into the ring. Using its command of the supply chain and its economy-of-scale advantage, Apple could raise the bar high enough to severely limit anyone’s ability to compete on price.

If it achieves that, iPad’s ascendancy will remain unchecked for years.

So, let’s look at what I think are likely price points for this device and weigh the pros, cons, and feasibility.

$399 - If Apple were to release a Retina Display 7.x inch iPad, the iPad 2 will be discontinued. Actually the iPad 2 will be discontinued no matter what, but the point is that at this price Apple is just phoning it in and looking for a long-term, slightly cheaper device for education. I don’t think this qualifies as the sort of “very aggressive” strategy that the company is used so far, and I think it will be cheaper.

$379 - This price point is very attractive in that it is enough to differentiate the smaller iPad from the new iPad, while simultaneously allowing the company increase its overall iPad margins. At this price point, expect a device that is identical to the new iPad in terms of specs and storage, but I think Apple will be more aggressive still.

$329 - This is where I expect Apple to come in with a 7 inch iPad form factor. For one thing, it is enough to very clearly differentiate the company’s two models, and that’s not only important, it’s something Apple has consistently achieved. At the same time, I think the competition will find it all but impossible to make a competing device with anything close to Retina Display resolution, especially with a metal body and good battery performance.

At this price point, though, Apple could face margin pressure, and the company could offer a slower processor, a dual core graphics processing unit, or less storage to maintain margins.

Bam!$299 - This is the price point that would put the serious hurt on everyone else. At $299 with a Retina Display, few people would choose a $199 Kindle Fire, forcing Amazon to cut even more corners to compete. A full featured device small enough to hold with one hand that can display text almost (but not quite) as well as an E Ink display, that has access to Apple’s App Store and the kind of physical presence that only Apple seems to be able to produce becomes a no-brainer choice compared to anything like the Kindle Fire.

At this price point, Apple will almost certainly have to offer a slower processor, less capable GPU, and/or less storage than the new iPad (I think it will be an 8GB/16GB/32GB kind of device), but I don’t see that being problematic. Customers wanting more will still be able to choose a new iPad, after all.

The question is whether or not economic reality makes this feasible. You’ve got a smaller battery, a smaller case, and a smaller display, and you need less backlighting for this size device, but there are plenty of other components that will cost roughly the same as they do for the new iPad. Of course, that, in and of itself, invokes yet more economy-of-scale benefits, so maybe the company can do it.

If it can, if Apple can release a 7.x” iPad starting at $299, all bets are off for anyone wanting to dethrone the iPad as the dominant tablet for at least two to three years.

Images made with help from Shutterstock.

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Comments

MelIal

Bryan,
You might want to factor in not just the iPad 2 at $399, but also the iPod touch at $199 considering that after all “the iPad is just a big iPod touch” isn’t it?
And at that price, it also fits in a retina screen, two video cameras, microphone and optional capacity increases right up to 64Gb all of which the Kindle Fire lacks.  It also fits in any pocket.

Also, there is the factory reconditioned iPad 2 with full factory warranty at $319.

Apple is already hitting a lot of the needed price points, so I think a 7” would be the coup de grace.

Peter

I’m not sure I’m buying your spec comparison with the Transformer Prime and the latest iPad.  About all I see the iPad having over the Transformer Prime is screen ppi and Bluetooth 4.0.

I also noticed that you didn’t mention that the Transformer Prime supports DLNA, which is available in over 9000 devices versus AirPlay which requires you to spend another $99 for an AirPlay device.

That said, I’m not buying the 7” iPad theory.  First problem is the “fragmentation” in screen sizes—you need to make yet another version of your app for the 7” screen or have a really ugly scaling of applications.  If you don’t use a Retina Display and use, say, 1024 x 768, you run into Steve’s “filing down your finger tips” problem.  Remember that Apple pushes the Retina Display as one of those great big advantages that makes the iPad “better” than everyone else.  Dropping that would tell people that Apple isn’t trying to make “great” products, they’re trying to make “cheap” products.

anonymous

it’s not only the price
it’s the quality, induced by the features set
the device is locked, you cannot even use microsd
you cannot see the directories
you cannot get back the files you put in
it’s like hotel california

i really don’t understand what makes apple think that we are all a crowd of idiots…

MelIal

I should mention that though everyone includes 4”, 5”, 7” tablets in Android tablet totals, everyone studiously avoids including the iPod touch in Apple’s.

They shove it into the dubious “media player” or worse “MP3 player” segment completely ignoring the fact that the iPod touch is used for many of the same tasks other small tablets are used for: playing games, reading ebooks, email, web browsing, app usage etc.

If the 6 - 9 million iPod touches sold each quarter were added to Apple’s 11-15 million iPad sales totals, their lead would be even more extraordinary.

John Molloy

“About all I see the iPad having over the Transformer Prime is screen ppi and Bluetooth 4.0.”

So the App library is for nothing? Access to a ton of apps written specifically for the iPad as opposed to a ton of apps that may or may not run on the Android device?

Yeah, right.

MelIal

@Peter, add a GPS and wifi that actually works to the iPad’s list of advantages over the Transformer Prime.  4G LTE connectivity is the other biggie.

In addition, the Tegra 3 GPU of the Transformer Prime only gave 64.4fps to even the iPad 2’s 88.8fps in the GL Benchmark, 78.4fps vs 148.2fps in the offscreen render and 28.6fps to the iPad 2’s 32.3fps according to Anandtech.

In terms of HTML 5 and JavaScript performance even the iPad 2 completely blows the Asus tablet out of the water with 300 moving objects at 30fps while the Asus gets far below 100 objects according to the Spaceport PerfMarks report.

skipaq

Doing this spec comparison between platforms doesn’t amount to much. Consumers have already decided that issue. This article isn’t getting the right consideration. Try looking forward as the article does.

I think the 7” iPad will be released this year at a price between $299-$319. I don’t believe it will be compromised much at all in features.

jameskatt

Apple will always price its products aggressively but with HIGH margins.

Apple will only lower the cost of the iPad if it can produce it at a price low enough to maintain its high margins.

Garion

I don’t understand the talk about a Retina screen 7” iPad. At all.

The only screen resolution that would make sense for a 7,85” iPad mini would be the same 768x1024 pixels as the iPad 2. What else?

The last thing Apple want to do is fragment the iPad platform further with a third screen resolution that developers have to consider.

Anyway, if they choose to go with the iPad 2 resolution and cram in the same number of pixels in half the screen size that would mean the mini gets a substantially higher DPI than its full-grown brother, right?

Can somebody do the math? What would the DPI be if a 7,85” iPad mini gets a 768x1024 resolution screen? It can only look sharper than the iPad 2. That in itself will make the $299 iPad mini stand out compared to the competing 7” tablets.

melgross

A 7.85” device is more properly described as an 8” device rather than a 7” device. This is true, as a 9.7” device is generally described as a 10” device rather than a 9” one.

I do think it’s important to distinguish this difference, rather than to have everyone write about it as a 7” tablet.  If this thing actually does come out, there will be competitive points in its favor. A 7.85” 4:3 tablet has a much larger view area than a 7” 16:9 (approximately) has. This is another reason why a higher price would not be a detriment.

As for fragmentation, it’s been shown that this size screen has the same Rez as the original iPhone, which would make touchable objects on the screen the same size as on the iPhone, which has been proven over five years to be perfectly fine.

I don’t think the screen would be a retina display because of cost, and it doesn’t need to be. 1024-768 as the first iPad models are, is perfectly fine. Some ti e in the future, when display prices come down, Apple could upgrade to retina Rez.

some internet dude

At 300 bucks Apple wont hurt anyone, Google is going for 199 for its new Nexus Tablets. Thanks for playing Apple.

Constable Odo

At 300 bucks Apple wont hurt anyone, Google is going for 199 for its new Nexus Tablets. Thanks for playing Apple.

Good for Google.  I’ll love to see them as the last straw that breaks the backs of all the other Android tablet vendors including the Kindle Fire.  There’s nothing worse than a company that plays traitor to all of its partners and Google is just that type of company.  It may just send a healthy number of those tablet makers over to Microsoft’s RT platform.  I really enjoy seeing all the back-biting for second place while Apple smoothly sails along eating the low-hanging fruit in the tablet space.

John Molloy

At 300 bucks Apple wont hurt anyone, Google is going for 199 for its new Nexus Tablets. Thanks for playing Apple.

Hmmm. Google-colored spectacles on I see.

gnasher729

At 300 bucks Apple wont hurt anyone, Google is going for 199 for its new Nexus Tablets. Thanks for playing Apple.

First, it’s called Lexus, not Nexus.
Second, it’s made by Toyota, not Google.
Third, it’s a car, not a tablet, so it doesn’t compete with Apple.
Fourth, you want be able to buy one for $199.

Garion

At 300 bucks Apple wont hurt anyone, Google is going for 199 for its new Nexus Tablets. Thanks for playing Apple.

If Google is going for $199 for their Nexus tablets they’ll end up with a stripped down product like the Kindle Fire, and so Brian’s point still stands. A $299 mini iPad would indeed hurt the Kindle Fire-type 7” tablets selling for $199. Also if it’s called Google Nexus.

Brian

“Peter” said:  “I?m not sure I?m buying your spec comparison with the Transformer Prime and the latest iPad.  About all I see the iPad having over the Transformer Prime is screen ppi and Bluetooth 4.0.”

Yeah, I guess software doesn’t matter, does it?  Software availability is just nothing, just like for DOS/Windows, right?    I mean, no one actually wants software, they just want to slobber over the specs (that they can’t use).  Riiiiiiiight.  Have fun trolling!

@anonymous   When coming up with your clever “room full of idiots” analogy, did you just get back from an Android developer conference, by any chance?

Brian

“Some internet dude” said:  “At 300 bucks Apple wont hurt anyone, Google is going for 199 for its new Nexus Tablets. Thanks for playing Apple.”

Oh, yeah, everyone wants a ‘Google’ ‘tablet’ that no one has heard of.  Right?

Android is DOA in tablets.  The only reasonably successful one was Kindle Fire, and the sales of that went off a CLIFF after Christmas.  iPad sold more in the spring quarter than it did at Christmas, by comparison!

It’s getting hard not to laugh at this sort of hubris.  Look at the Android phone market?  all talk about it being a big deal, but no one is SERIOUSLY using it.  A lot of haters are buying, but look at the internet stats, internet dude, compared to iOS, NO ONE IS USING ANDROID.  They are probably all still using Windows (haters), or not using it at all (normal people who are seriously confused about things like computers and tablets and think they can save $50 on a phone or tablet or ‘PeeCee’ and that that is a “good idea” over buying a device/ecosystem worth many many times their copy-cat device (and without which, their device wouldn’t even exist.)    Keep dreaming.

iJack

I do think it?s important to distinguish this difference, rather than to have everyone write about it as a 7? tablet.

I’ve been saying that on TMO for months.

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