One might assume that when the iPad 2 ships in, perhaps, early April, the original iPad 1 would be discontinued. One might be wrong.
Apple has a goal of making life difficult for the competition by geting ahead of the game in innovation, selling millions of products before they even wake up, driving costs down, then coming out with a next generation version that leaves the competition’s first efforts looking expensive and outdated.
That’s exactly what’s happening with the iPad. The tablet competitors that are any good are still not shipping in quantity and and Apple is on the eve of introducing its second generation iPad. Given that Apple shipped over 14 million iPads in 2010, it’s very likely that the cost of parts is now down considerably from the US$259.60 estimated in April of 2010. Let’s say for the sake of argument that the current cost to build a 16 GB model is $220.
It would be very smart of Apple to continue the original base model iPad and sell it for, say, $379. Here’s why.
Competitive Lag
As Steve Jobs said during the Q4 Earnings Report last year, tablet competitors will be hard pressed to produce a product with the iPad’s large screen, A4 performance, and price. They’ll have to settle for 7 inch screens — which is what many are, in fact, doing.
Just as the competition starts to sell imitation iPads, with immature app stores, and struggles to meet the iPad’s specs and price point, Apple could lower the entry model iPad’s price considerably, making the purchase decision for an iPad a no-brainer. The competition would be throwing chairs when they see their own sales numbers.
No Cannibalization
Wouldn’t that cannibalize sales from the iPad 2? I don’t think so, assuming the technical specs of the iPad 2 are desirable: 2048 x 1536 resolution, multiple cameras, and so on. Also, the effect on Gross Margins would be short term and small, weighted against all Apple’s other products.
Apple has never been afraid of cannibalization. They know that their customers are tech savvy enough to pick the right product and the right price for their needs. Some will buy an iPad 1 at an attractive low price for themselves or a son, daughter, spouse or parent. Meanwhile, others will want the latest and greatest at the original base model price of US$499. Lesser companies would cancel the iPad 1 for fear that sales of the second generation iPad would suffer. Apple need have no such fears.
Precedent
There is precedent for this. You can still buy the iPhone 3GS at a subsidized price of just US$49. That gives retailers a low price leader, but it hasn’t hurt iPhone 4 sales.
Customer Peer Pressure
Another factor that comes into play is buyer attitude thanks to Apple marketing that generates a certain kind of peer pressure. It goes like this: If you buy, just for example, a Samsung Galaxy Tab, you may lack the technical judgment required of modern customers. You look like the kind of person who backs himself into technical back alleys and dead ends. As Bill Thompson in the UK says, customers these days, want to show that they’re tech savvy and can make good purchase decisions for the long term. The Apple tablet ecosphere is a good place to be.
Summary
All in all, I think Apple would do well to continue a discounted iPad 1 well into 2011. It would give the company a way to completely deplete its inventory, cause competitive products to be stillborn, and maintain market share. If the iPad 1 popularity remains great enough, Apple might even have to enter new production orders.