iPad mini pricing invalidates 'price umbrella' theory

Apple's long-awaited iPad refresh is finally a reality. Apple's new full-size iPad, rebranded as the "iPad Air", starts at the usual $499 price. Apple also unveiled an iPad mini with retina display, with a higher starting price of $399 and retained the original iPad mini at $299. Finally, the aging iPad 2 was also retained with the price unchanged at $399. This essentially proves my theory that Apple's pricing strategy has nothing to do with a "price umbrella" and everything to do with margins.

Apple's primary business model is selling high-margin hardware, so this should come as no surprise. While many like to draw comparisons to the iPod, the limited set of "jobs to be done" allowed Apple to aggressively slash BOM costs, thereby allowing lower prices at higher margins. This approach is no longer viable for the iPhone/iPad because of broader use cases and competition from modular vendors. Based on this, let's take a look at the iPad product portfolio and gauge its impact on Apple's holiday quarter.

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9.7" iPads: iPad Air ($499) and iPad 2 ($399)

When the iPhone 5s was launched, I was critical about the need for a 64-bit processor as the product had no more room to move upmarket. However, a 64-bit processor for the iPad opens up the possibility of creating desktop class applications for enterprise users. This could help the iPad move upmarket and displace PCs for lightweight productivity. I still feel like Apple missed an opportunity here as a keyboard cover could have driven home the point. While the 64-bit architecture should open up the possibility for an upmarket move to enterprises, it is unlikely to have an immediate impact in the holiday quarter as application support needs to be expanded beyond iWork/iLife.

Apple also retained the 30-month old iPad 2 at the 18-month old $399 price. While a full-size iPad at that price price point may appeal to some niches like the education sector, the product/price trade-off looks like a clear attempt to shore up margins. If margins weren't a concern, Apple could have retained the 4th generation iPad at $399.

iPad mini: iPad mini Retina ($399) and iPad mini ($299)

This is the strategy that effectively disproves the "price umbrella" theory. If Apple's motive was to eliminate the price umbrella for competitors, it could have lowered the price of the original iPad mini to $249 or lower. Instead, Apple chose to reduce price by $30 which could be lower than the BOM reduction from last year's launch. It is clear that Apple was spooked by the cannibalization and margin erosion caused by last year's iPad mini launch and sought to correct that "mistake".

Apple also launched the highly anticipated retina iPad mini for $399. The retina display would have added to the BOM costs, so Apple chose to increase price to safeguard its margins.

Holiday Quarter Sales & Competitive Impact

After the iPad mini launch last year, consumer interest rapidly shifted from the 9.7" model to the 7.9" model. Since use cases were similar, a lower priced product seemed like the natural choice for iPad buyers. While Apple hoped to attract new buyers at the lower price, cannibalization and the lack of a mid-year iPad refresh led to a YoY decline in fiscal Q3 (and possibly another YoY decline in fiscal Q4).

Investors have pinned their hopes on this iPad refresh to revitalize demand and reignite growth. However, this refresh may not have a major impact on holiday quarter sales. The most awaited product from this refresh, the retina iPad mini, is rumored to be in short supply until early next year and seems overpriced compared to market expectations. This leaves the $499 iPad Air, the $399 iPad 2 and $299 iPad mini. Based on this and the intensity of competition from cheaper, "good enough" Android products, I wouldn't be surprised if holiday quarter iPad sales remained roughly flat. Given the growth seen by the rest of the tablet industry, this should be concerning.

22 Responses to iPad mini pricing invalidates 'price umbrella' theory

  1. toph36 says:

    Creating a keyboard cover would make Cook a hypocrite. Although, it is obvious that the iPad is moving in the direction of the Surface with the 64-bit phone processor and the inclusion of the inferior iWorks. The Surface will pick up the pace in the enterprise especially and Apple is trying to protect their tablet lead there.

    • Terry Gregory says:

      There are hundreds of third party keyboards for the iPad today and many are cheaper than what Microsoft charges for their "click-pad". Microsofts Pro Surface eats up 24GB of its 64GB of memory. That's great innovation!

      Talking about bloatware, nobody needs Office anymore. There are so many iOS apps that perform spreadsheet and WP functions that the Office Tax is no longer needed.

      Welcome to the Post PC Era. A world without Microsoft.

      Priceless..

      • toph36 says:

        Sorry buddy, but Office and Microsoft are here to stay. Individuals may not buy Office as much with access to free alternatives, but if you have a corporate job, iWorks or Google Apps will never make a significant impact there. That is where Microsoft makes most of their money on Office. So Microsoft is not going away. I think their earnings annoucement today proves that.

      • melci says:

        On the desktop sure, but on mobile (smartphones and tablets) where all the growth is, Microsoft has been decimated.

      • toph36 says:

        2 Million subscribers for Office 365. Double since May.

      • melci says:

        That's a pretty small number in the scheme of things.

        Apple has sold 700 million iOS devices and has 600 million active credit card enabled iTunes/App Store accounts.

        Apple's revenue per account leads the industry at $329 per year compared to Amazon at $305, ebay at $125, FaceBook at $5 and Google's G+ isn't even a blip on the radar.

        2 million Office 365 subs at $99 each is nothing.

      • toph36 says:

        You know what, I don't really care. I prefer Windows and Windows Phone to iOS. I had the iPhone 4, so I know what it is all about. The OS is not better, it just has more apps. That's about it. That might be important to you and a lot of people. I know Microsoft is not going away, so I know the platform will only get better and more apps will come. Keep enjoying iOS, that is your thing, it's just not mine.

      • Allen Bennett says:

        MS not going away… What happened to Zune?

      • melci says:

        And Kin
        And Windows Mobile 6.5 (backward compatibility?)
        And Windows Phone 7 (backward compatibility?)
        And PlaysForSure
        And Silverlight (dead man walking)
        And the SPOT Watch
        And Surface RT ($1 billion wrote-off)
        And even the xbox ($8 billion in the red and only recently starting being slightly profitable)
        And Bing (another $1 billion loss in the last 12 months)
        etc

      • CharlesPonzi says:

        And Apple III
        And Macintosh TV
        And Apple Lisa
        And eMate 300
        And Appleworks
        And Mac Portable
        And Pippin
        And TAM
        And Hockey Puck Mouse
        And Newton
        And Cyberdog
        And Slideshow
        And Taligent
        And QuickTake
        And Eworld
        And G4 Cube
        And ROKR
        And etc, etc, etc.

        Two can play this game.

      • melci says:

        Interesting how just about all your Apple examples are from 30-40 years ago. The 3 or 4 examples that are from the last decade are all very minor items that cost Apple and users virtually nothing (iPod socks, iPod hifi, Ping).

        Now Microsoft's failures in contrast are mostly multi-billion dollar boondoggles or devastating failures in new categories that have sealed Microsoft's fate in this brave new post-PC world resulting in Microsoft being obliterated in the smartphone and tablet markets, the music market, the music player market, online etc,

      • Chaka10 says:

        I'm actually bullish, and long, on. Microsoft. They are entrenched in enterprise IT and have 20 years of sunk costs for a moat. I think their results for this quarter show some of that. Enterprise is a huge market in itself, and I think Apple has an opportunity there too, in mobile. I think Apple's biggest threat, is Google, which is inherently consumer focused (for now, I don't see them getting into enterprise, given what they do), and Samsung.

      • melci says:

        Hi Chaka, it's true that MS is very entrenched in Business and Enterprise, but it is interesting how much less important the Business market is overall in the PC market.

        The Business PC market is actually only 15% of total worldwide PC sales now, far smaller a percentage than back in 2000 when it represented 60% of all PC sales according to Goldman Sachs.

        The iPad and iPhone are making major strides eating into many business PC use cases - sales staff, retail POS, email, light word processing, web, messaging, reference, presentation, front ends to back-end databases etc. This means that the traditional MS strength on the business desktop and laptop has been severely compromised and the importance of Office considerably constrained.

        I wouldn't be surprised if it was mainly the back-end server component that MS retreats to with a lot of front-facing use cases ceded to the far more user friendly, portable and reliable iPad and iPhone.

        Time will tell.

      • Chaka10 says:

        Yeah. I'm not very bullish or very long. I just think the Microsoft is doomed view is overblown, and I like the stock at current prices. I like the growing dividend (in a low return environment, with the existing 20% dividend tax rate, vs upwards of 50% on interest income). I see some early encouraging trends -- stability and even growth in Business and Enterprise, even some growth (from low base) in Windows Phone.

      • toph36 says:

        I am talking about the company (I want to us derogatory term here, but I won't). The Zune was a good product that was introduced into an already declining product category. Tech Bloggers and other trolls keep talking like Microsoft is going out of business, when they continue to report record revenue and profits. Windows Phone is a distant third in smartphone market. However, it does continue to grow and is not going the way of the Zune because the market itself continues to grow, it is a key piece of the overall offerings from Microsoft with Samsung and other OEMs are supporting it directly through WP licensing and indirectly through Android royalties paid to Microsoft. So Windows is not going anywhere, in whatever form it takes, so please move on and focus on the things you like instead of the things you don't.

    • melci says:

      93.2% of the business tablet market for the iPad according to Good Technology versus less than 1% for Microsoft and 78% marketshare for iOS overall in Business up from 69% last year while Android declined from 30% to 22% (Egnyte) says Apple's tablet lead is only getting bigger in the enterprise.

      • toph36 says:

        With a Windows tablet, there is not much use for Good. I use Citrix Receiver on my Surface. There are other Remote Desktop apps that can be used as well.

      • melci says:

        Citrix themselves report that iOS as a whole represents 58% of all smartphone and tablet enterprise mobility management deployments (62% in the USA) with Android on 35% and Windows on 7%.

        Citrix mentions the iPad represents 53% of the iOS total, but don't indicate how this compares to competing tablets. However, considering the iPhone-iPad ratio is far lower in the overall market, it follows that the iPad's Citrix tablet marketshare would be similar to what Good and Egnyte report as well.

  2. obelus says:

    The name iPad Air gives room for an upcoming iPad Pro with whatever features more. Same naming convention like the MAc.

  3. Whayne says:

    Apple iPad is not Surfaces only problem, as already excellent alternative tablets are coming out with much better value than Surface 2/Pro. I'd take the new Dell XPS Ultrabook in a heartbeat over the Surface 2 Pro and their Venue 11 Pro looks like a great alternative too. That's just the beginning. Within 6 months Surface will be just another tablet lost in a sea of choices. I expected a much bigger change from Surface 2 but it doesn't look different, is no lighter, or thinner and costs Ultrabook prices, some of which can convert from laptop to tablet and already have keyboard, wifi ac, getter gpus and just as good battery life.

  4. dorkus_maximus says:

    A tablet with a keyboard cover is just a laptop with a floppy lid. The iPad is all about a new way of interacting with a computing device. If anything it should move more toward voice activation/interaction than typing. Why are some so intent on keeping the future at bay?

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