$199 iPad is a bad idea
Over at eWeek, Don Reisinger presents "A $199 iPad: 10 Reasons Apple Should Discount its Tablet". My retitle: "10 lame-ass reasons why Apple should slash iPad's price to $199".
I don't often go for another reporter's jugular, but Reisinger is the king of top-10 lists and this is among his worst. We post top-10s sparingly at BetaNews, because of their limited news value. But they do generate traffic. Top-10s are the purview of pagevew whores. Well, hell, Google search might filter this post for the "W" word; so much for my pageviews. Frack it. I'm not a traffic slut; I just have a bad reputation.
Not Everyone Else is Doing It
Reisinger's first reason is by far the worst: "Everyone else is doing it". Oh yeah? Everyone else but Apple sells cheap PCs, too, and know-it-alls have called for price cuts for years. The Cupertino, Calif.-based company rightly resisted, drew a line at $999 and has fairly consistently stayed above it. That's MacBook Air's starting price. Higher pricing helped establish Mac as a premium brand and kept PC margins high.
Apple generated $46.33 billion revenue and $13.06 billion profit during calendar fourth quarter. Macs alone generated $6.6 billion revenue. Dell, which is best known for low-cost PCs, announced quarterly results two days ago: About $16 billion in revenue but only $764 million in profit. That's what happens when a company sells products cheap and reaps low margins as a result. Apple rightly resisted going there with Macs and should do so with iPad.
Apple's business model is very much not what everyone else is doing. So what if Amazon and Barnes & Noble sell $199 Android tablets? Why should Apple pee away margins? In the last quarter alone, Apple sold more than 15 million tablets, generating $9.1 billion in revenue. If my math is right -- and I am dog sick with the flu today, so it might not be -- that works out to about $591 per iPad. The tablet sells well, and according to every analyst tracking the market iPad is overwhelmingly the share leader.
It's insane to suggest slashing prices because "everyone else is doing it", when iPad is top of its game and Apple would give away lucrative margins for minimal gains.
Besides, everyone else isn't doing it. Most major brand tablets that compete head-to-head with iPad cost considerably more than $199. For example, Amazon's discounted price for Samsung Galaxy Tab 10.1 WiFi is $448 for the 16GB model and $480.53 for the 32GB. Heck, even the smaller Tab 7.0 Plus is $346.51 and $380.53 for the 16GB and 32GB models, respectively. Asus Eee Pad Transformer Prime ranges from $546.35 to $717.99. Yeah, everyone sure is doing it.
It Devalues the Brand
I won't rebut all Reisinger's reasons, mainly because I feel too sick but also it's professionally unbecoming. I've energy and inclination for two more, however. Next up: "It doesn’t devalue the brand". Doh, of course $199 iPad devalues the brand. Apple's successfully-proven pricing strategy is simple: Start high and go low only as needed to expand the market of available buyers.
iPod and iPhone are excellent examples. Apple started selling the original iPod, with 5GB storage, in November 2001 for $399. The following summer, Apple introduced new models with lower and higher selling prices: 5GB ($299), 10GB ($399) and 20GB ($499). From there, prices dropped slowly, as Apple introduced smaller, lower-capacity models like iPod mini in early 2004.
Today you can buy an iPod for as little as $49 or as much as $399. Apple carefully lowered prices, while spreading them out across a range, as it sought to reach more buyers and give existing iPod owners reasons to buy another.
iPhone pricing is similar but less so, since it's a product subsidized by wireless carriers. The original iPhone went on sale in June 2007 for $499 and $599, respectively, for 4GB and 8GB capacities (soon after, Apple lowered prices and issued $100 credits to early buyers). Prices dramatically dropped for iPhone 3G to $199 and $299, in July 2008, but subsidized by wireless carriers. Apple collected much more money, averaged exceeding $600 per handset. So the company could lower prices in partnership with carriers without peeing away margins.
iPad isn't iPhone
My continued explanation hits on another of the 10 reasons: "It’s working with the iPhone". Reisinger observes that Apple and carriers are "giving away the iPhone 3GS for free, and the iPhone 4 is being sold for just $99" He asks: "If it works with the iPhone, why wouldn’t it work with the iPad?"
For starters there's no need. Apple only lowered price on older iPhones outfitted with less storage capacity after maximizing sales and margins on higher-priced models. Discounts open the market to buyers wanting or needing to pay less. iPad still sells really well, starting at $499, as aforementioned.
iPhone is a subsidized product, and iPad is not. iPhone 3GS might be free to the customer, but it's not to carriers, which, last I checked, pay Apple $375. What works for iPhone won't for iPad, unsubsidized.
There is only one circumstance that justifies $199 iPad: Carrier subsidies. Because, like with iPhone, Apple would still get the big bucks for iPad from telcos like AT&T or Verizon. But, then, carriers would require monthly data plans, which are optional today. Definitely there are customers who would pay less now and commit to 24-month data contracts.
In this scenario, Apple could hit lower price points and snatch some sales from $199 Amazon Kindle Fire and Barnes & Noble Nook. Customers looking for carrier-free arrangements would pay full price. Apple keeps its higher margins either way.
There remains the question of reducing price on iPad 2, alongside iPad 3. Apple could possibly justify $399 but would sacrifice too much at $299. Considering how much demand there is for iPad 2 and interest in iPad 3, I don't see much reason for Apple to give up margins on older iPad selling for less. Yet.