iPad likely cannibalizes Mac sales, but that's OK

Analysts and pundits have fiercely debated whether or not iPad would cannibalize Mac sales. Or netbooks, or Windows PCs or iPods. Or nothing at all. Cannibalization will happen now, if at all, which is what I predicted in April. Based on NPD July US retail sales data, Morgan Stanley analyst Katy Huberty asserted in a report yesterday: "iPad momentum is likely contributing to the moderation of both broader PC and Mac unit growth."

Oh yeah? I'm skeptical about iPad sapping PC growth, except for perhaps netbooks, but Macs make sense. It's about time a Wall Street analyst finally acknowledged the inevitable. In April I asked "Will iPad cannibalize Mac sales?" and answered: "The question isn't if iPad will cannibalize Mac sales but when. If the cannibals are coming, they'll first strike during back-to-school buying season."

Well, bust my butt. We're in the thick of back-to-school buying season. Surely any cannibalization is going on now. For example, back-to-school buying season would be right time for mom and dad to choose a lower-cost iPad rather than MacBook for their middle or high schoolers. It's easy arithmetic: $499 vs $999. For the teen set -- iPad is an iPod touch plus. All the music and video benefits are there, and it's more respectable to carry around school. What teacher is going to tell a student to put away an iPad, who might otherwise scoff at iPod touch?

Not that cannibalization is so bad a circumstance. Apple is no longer a Mac company, and executives have the right attitude about cannibalization. Attitude first: During last month's earnings conference call, Apple COO Tim Cook surprised analysts by saying, "Everybody views cannibalization as a negative, but at Apple we focus on synergy between devices." The statement is so sensible, I nearly fell off my chair. It also resonates with what I blogged in January:

From a marketing perspective -- looking at Apple computing products as a range of features and prices -- iPad fills a gaping hole in the Mac product line between the aforementioned $399 and $999. Suddenly, the cheapest, functional Mac portable is $499, or half what it was on Monday. Consumers who wanted a Mac but couldn't afford one can get one for under 500 bucks...

Apple now offers portable computers -- and that's how I classify iPhone, iPod touch and iPad along with Macs -- ranging from $99 to $2,499. From a pricing strategy perspective, iPad is a brilliant product, because it fills the gap between iPhone/iPod touch and Macbook without price cuts or risk to the Mac's premium brand status.

Cook's July comments fit with this perspective. Apple doesn't see so much cannibalization as halo effect, where buyers of the company's other products add an iPad rather than skip buying something else. That's sensible marketing strategy. But what about profit and revenues? Macs generate lots more revenue than do iPads. Or do they?

During second calendar quarter, which would be Apple's fiscal third, iOS products accounted for at least 50 percent of Apple revenue -- that's an estimate, because the company didn't release exact iPod touch shipment data. For certain, iPad and iPhone accounted for 48 percent of revenue. By comparison, the Mac accounted for a mere 28 percent of revenue during calendar Q2. Apple's stake in iOS is much bigger than Mac OS X products -- the computers.

More numbers: iPad generated $2.17 billion revenue during its launch quarter or about half of what Macintosh generated but much more than desktops ($1.3 billion). Average selling price of iPad is about $600, according to Apple. Based on various iPad device breakdowns, gross profit is $400 or more per tablet. I don't have data on Macs other than ASP of about $1,200, but presumably profits -- and therefore margins -- are substantially higher than iPad. Where iPad cannibalizes iPod touch, Apple gets an overall margin boost, since iPad generates more revenue and margins. Where iPad cannibalizes Mac sales, Apple margins go down. But that's OK from Cook's "synergy" perspective.

Based on the imbalance of PCs and Macs, iPad is more likely to cannibalize Windows PCs than Macs. "If it turns out that the iPad cannibalizes PCs, then I think it is fantastic for us because there are a lot of PCs to cannibalize," Cook said last month. He is so right.

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