Why Nobody Can Match The iPad’s Price

When Steve Jobs introduced the iPad last January, the biggest surprise wasn't the actual product. (Many shrugged and called the iPad a "bigger iPhone.") It was the price: Just $US500.

Nobody expected that number, perhaps because Apple has traditionally aimed at the high end of the mobile computer market with MacBooks marked $US1000 and up. And perhaps we were also thrown off because Apple execs repeatedly told investors they couldn't produce a $US500 computer that wasn't a piece of junk.

But Apple did meet that price, and the iPad isn't junk. The iPad is still the first and best-selling product of its kind. Competitors, meanwhile, are having trouble hitting that $US500 sweet spot.

Motorola's Xoom tablet is debuting in the United States with an $US800 price tag. (To be fair, the most comparable iPad is $US730 - but there's no $US500 Xoom planned, and the lack of a low-end entry point will hurt Motorola.) Samsung's Galaxy Tab, with a relatively puny 7-inch screen, costs $US600 without a contract.

Why is it so hard to get to a lower starting price? And how was Apple able to get there?

Jason Hiner of Tech Republic suggests it largely has to do with Apple's retail strategy. Apple now has 300 retail stores worldwide selling iPads directly to customers. That's advantageous, because if the iPad were primarily sold at third-party retail stores, a big chunk of profit would go to those retailers, Hiner reasons.

Apple has partnered with a few retail chains such as Best Buy and Walmart, but those stores always seem to get a small number of units in stock. Hiner rationalises that the true purpose of these partnerships is probably to help spread the marketing message, not so much to sell iPads.

"The company can swallow the bitter pill of hardly making any money from iPad sales through its retail partners because it can feast off the fat profits it makes when customers buy directly through its retail outlets and the Web store," Hiner says. "However, companies like Motorola, HP, and Samsung have to make all of their profit by selling their tablets wholesale to retailer partners."

The retail advantage is a reasonable theory, but Hiner neglects to mention the high overhead costs that Apple must pay handsomely for each of its 300 stores. To Hiner's credit, Apple running its own stores does present clear benefits: the customer outreach is enormous, and of course, in Apple stores, Apple products don't have to compete with gadgets sold by rivals on other shelves.

But when we try to decipher why the iPad costs $US500, we have to consider the sum of all parts, not just the retail strategy.

Apple is the most vertically integrated company in the world. In addition to operating its own retail chains, all Apple hardware and software are designed in-house, and Apple also runs its own digital content store, iTunes.

Designing in-house means Apple doesn't have to pay licensing fees to third parties to use their intellectual property. For instance, the A4 chip inside the iPad is based on technology developed and owned by Apple (not Intel, AMD or Nvidia). The operating system is Apple's own, not something licensed from Microsoft or Google.

Why do you think Hewlett-Packard bought Palm to make the TouchPad? HP wanted ownership of a mobile operating system in-house to take control of its own mobile destiny and stop being so reliant on Microsoft (who, till this day, still doesn't have a credible tablet strategy).

On the iTunes media platform, Apple takes a cut of each sale made through each of its digital storefronts: the App Store, iBooks and iTunes music and video. iBooks still has a long way to go before it's anywhere near as big as Amazon, but the App Store and iTunes are the most successful digital media stores of their kind.

At the end of the day, the iPad might be worth well above $US500 for all we know. (Part estimates made by component analysts such as iSuppli aren't very useful because they fail to measure costs of R&D and other factors.) It's most likely that Apple can afford to absorb the costs of producing and selling the iPad because of the tenacious ecosystem backing it, and also because it has such tight oversight over every aspect of the company to control price.

That's what it all boils down to: ecosystems and control. Competitors are struggling to match the $US500 price point because they aren't as fully integrated as Apple, in terms of retail strategy, a digital content market, hardware and software engineering - everything.

As Steve Jobs famously put it one day, "Apple is the last company in our industry that creates the whole widget." Competitors are having trouble beating the iPad widget.

Photo: Bryan Derballa/Wired.com

Wired.com has been expanding the hive mind with technology, science and geek culture news since 1995.


Comments

    That pretty well sums it up.

    If Apple has this whole "vertical integration" going on, why are the rest of Apple's products so ridiculously overpriced?

      I'd say because they can charge that price and get away with it.

      Apple has differentiated themselves from their competitors in the PC market by saying they are designed better and a more premium product. Both in their hardware and software.

      Because they have marketed themselves as a premium product they charge a premium price to reinforce that idea.

      And people buy into that idea. It sells. And while it continues to sell they will continue to charge the prices that they do.

      It’s hard to argue with that strategy especially since it seems to be working.

    This article could be summed up by

    http://en.wikipedia.org/wiki/Economies_of_scale

    What about the Notion Ink Adam? Its well under $500 for its basic model and its top model just reaches $600. It also provides a lot more usability.

    Wouldn't it be more accurate to say that nobody can match Apple's profit margins?

    Apple is not the most vertically integrated company in the world. My friend has a tshirt company and they also have a cotton farm, they spin and dye the cotton before making the tshirts. They then print them before selling them in their own stores. Apple doesn't mine the materials that go into the ipad.

    Lets not forget the fact that Apple have developed the most effective, viral, content delivery platform, ever. Why do they need to make money on the hardware when the hardware is locked to the App store - where for the entire life of the product the user (and subsequent users on the second hand market) can buy content from the Apple Store ONLY.

    I'm an apple fan - but lets not forget that Apple has one huge benefit over the open source market...

    Android does not benefit from apps developed for the android platform.

    Apple is a retailer for the apps developed on the IOS platform.

    Even if they sold the Ipad at a loss - 10,000,000,000 downloads at 99c each is worth it.

    Having custom silicon will harm Apple in the long run. It takes years of R&D and millions of dollars to design a CPU which someone already beats you to. They don't use their own chips in the laptops and desktops anymore, because they were losing the battle. The same will happen with the tablets and phones. The game is only just heating up now and there's no way they can keep up with Qualcomm Nvidia and Intel. Eventually they will be using someone elses CPUs.

    The tablet market is completely in its infancy so why don't we wait and see how it folds out over the next year or so? The Motorola Xoom is a superior tablet in many ways, so of course it won't be the same price. The ASUS and Acer's of the world will be the competitively priced options.

    Then why isn't Apple using it's vertical integration to produce cheaper MacBooks? I own a MacBook and although it's a great laptop, it's overpriced for what it is.

    the Galaxy Tab also manages to incorporate a phone though along with a camera and is only $100US more, in the states I'd rather have the Galaxy Tab but in Australia where everything is stupidly overpriced the Tab is just not affordable

    dont forget that ipad has no additional capabilities that the other competitors have such as micro sd slot, both front and back camera and other stuff.... Its like comparing a civic

    Sorry got cut off its like comparing honda civic vti with sport edition. Hence the difference in additional accesories and price. Also apple didnt produce their own a4 chip its a samsung hummingbird downclocked...

    Apple is the most vertically integrated company in the world. In addition to operating its own retail chains, all Apple hardware and software are designed in-house, and Apple also runs its own digital content store, iTunes

    Ikea?

    I think the author missed the point and assumed Apple make profit on the iPas hardware. I agree with Dave, Apple made over 6 billion over the last year from app sales, they are probably happy to forego profit on the hardware because selling hardware inevitably sells apps and at 30% of the sales for an app they didn't have to produce, that is sweet sweet pie.

    Apple aren't doing anything new here. Printer manufacturers have been using this business model for years: sell the hardware at a loss; make profits on the ink/toner. For every customer who buys a printer they will probably buy at least 20 units of ink/toner (usually priced between 10-20% of the initial printer purchase) over the life of the printer (which will probably only be used for a few years anyway before being replaced for one with more features - and probably a different type of ink/toner cartridge that's not compatible with older models). It's a devious scheme but it works for them because it works (kinda-sorta) for the consumer.

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