Apple iPad – a Win or Loss for Consumers?

Posted on: January 30, 2010
Posted in Mobile, Strategy

One thing about Apple’s iPad which caught every single “expert” off guard is its price point. No one expected the base model of the iPad to debut at $499, particularly since Apple has a history of overcharging early adopters. This low price will have an important impact on tablet market evolution. As DigiTimes reports, Asustek, which was the disruptive force in PC Netbooks, is being forced to totally reevaluate its tablet PC strategy, since consumers will typically pay a 20-30% premium for Apple products.

Chris Dixon recently posited why Apple’s “closed” mentality in mobile will likely lead to continued success – new tech products tend to initially underperform relative to user needs. This results in a higher willingness to pay because consumers will pay a premium for a product that has additional features and performance. Over time, as a product segment matures, the competitive focus shifts to price. It took the PC market over a decade to reach this point.

Given this dynamic, Apple likely could have initially charged much more for the iPad ($799?).  It’s clear that Steve Jobs views the nascent market of tablet PCs as a land grab. They want to build up an ecosystem as fast as possible and leverage the installed base of 140,000 iPhone apps to win in the tablet market at all costs.

To maintain margin, Apple unveiled their PA-Semi heritage A4 CPU, which brings in-house a component that is typically the 2nd most expensive on the BOM (display is 1st). This allows Apple to reduce the retail price point by a factor of 2x over component savings and maintain the same margin – e.g. a $20 savings allows Apple to charge $40 less.

Apple’s real reason for debuting the iPad with such an aggressive price is that it knows that for a closed approach to win, a user base and ecosystem must form as quickly as possible. App developer Marco Arment points out “that app development for iPad is less enticing than iPhone app development for most developers since the installed base is starting from zero and is likely to grow more slowly”. Though iPad will draft off the iPhone, native iPhone apps will simply not have as good of a user experience as apps written specifically for iPad. Apple understands this chicken and egg game, and doesn’t want to risk slow iPad adoption.

Instead, solid sales numbers will result in more focused app development, creating a powerful network effect that will serve as a halo around Apple’s micropayment model in iTunes, the iPhone, and now the iPad. And in the process, Apple keeps forcing developers to use its own proprietary tool (Cocoa), which is not trivially ported to other languages (Java ME, Flash, .NET, etc) for use on other platforms.

Ultimately it’s ironic that – although consumers will initially benefit from the $499 price point – Apple may ultimately squeeze out nearly all serious competition in the tablet PC space. If this happens, and if tablet PCs become a ‘must-have’ device, Apple will dominate the vertical (like they do with the iPod at 70%+ share).  This would inevitably lead to fewer choices for consumers, and afford Apple the luxury of maintaining a higher long-run margin while fending off commoditization that would otherwise occur more quickly in the tablet space.

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