Apple’s iPad price hits a sweet spot between popularity and profits

Correction: An earlier version misstated the name of Eitan Muller. This version has been corrected.

If history is a guide, Apple this week will introduce some upgrades to the iPad that perhaps only a techie will fully grasp — but that will draw millions of new customers anyway.

That swooning interest may say just as much about an often overlooked innovation — price — as about the features of Apple’s products.

Starting at $499, the iPad has hit a sweet spot. It is drawing many users who would have opted for laptops and PCs. Yet it makes a lot of money for Apple.

The fat profit margins have been difficult for the company’s rivals to match. Competitors have either had to price their tablets higher, or sell their devices with razor-thin margins or at a loss.

Amazon, for instance, began selling a smaller, less sophisticated Kindle Fire tablet last fall at $199, even though it costs about $202 to manufacture, according to estimates by IHS iSuppli, a market research group. Meanwhile, Apple sees hundreds of dollars in profit from every iPad, the group said.

“The iPad is strategically priced between an entertainment device like an iPod and a professional device like a PC, and it’s disrupted both markets,” said Jagmohan Raju, the head of marketing studies at the University of Pennsylvania’s Wharton School of Business. Some analysts have estimated that tablets will overtake PC sales as soon as 2013.

Getting the price tag just right is partly a result of the efforts of chief executive Tim Cook, who has a reputation as a logistical whiz, analysts say. Apple has been able to buy parts and put its gadgets together cheaply while maintaining high quality control. But its practices have also led to questions about the company’s labor practices in its factories in China.

The pricing of the iPad is part of a meticulous, long-range strategy that stems from the introduction of the first digital music player in 2001, experts say. The idea, crafted by the late chief executive Steve Jobs, was to get users hooked on cheaper Apple products early — first the iPod, then the iPhone in 2007, these analysts said. From iTunes stores, consumers would buy music and apps, which would only be transferable to the more expensive iPad.

“With the iPad, Apple is relying on the fact that they have a package to offer with the iPhone, iPod and laptop at home and all the content under that umbrella,” said Eitan Muller, a professor of marketing at New York University’s Stern School of Business.

Next up is a television, the analysts say, which would be even pricier — and fully integrated with other Apple products.

“Their growth is going to come from breaking into new categories. Why wouldn’t that include something like a refrigerator with an Apple front end? Most of us take notes and post pictures on our refrigerators anyway,” Raju said.

This tight integration makes it hard for consumers who own one member of the family of products to leave Apple’s ecosystem and for all but the most well-funded rivals to break into the markets Apple creates.

A handful of tech giants, such as Amazon, Google and Microsoft, are trying and have had some success. Samsung has made some headway by selling a smaller tablet, also priced at $499. Last year, Apple saw its tablet sales soar, but its share of industry sales fell from 87.4 percent to 68 percent, according to IDC Research.

Rhoda Alexander of IHS iSuppli said she expects Apple to maintain its price of $499 for the next iPad, despite a few cheaper alternatives hitting the market. But consumers are expected to clamor for the new device anyway.

That happened last fall, when Apple maintained a $200 price for the iPhone 4S, even though it offered only a few upgrades from its previous version. Still, the company reported in January that it sold a record 37 million units, more than double the number from the previous year.

This ability to create amazing demand and profits is the reason Apple is the most valuable company in the world.

“People are willing to pay a lot for the brand,” said , the NYU professor. “They are able to succeed on their brand like no one else.”

Cecilia Kang is a national technology reporter, writing about tech and Internet policies at the Federal Communications Commission and Federal Trade Commission and how regulations affect businesses and consumers.
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