As competitors pop up, iPad keeps price advantage
Thursday, March 10, 2011; 1:08 PM
NEW YORK -- The new iPad model hitting stores Friday comes with several improvements over the original version but the same price tag, hobbling efforts by rivals at breaking Apple Inc.'s hold on the emerging market for tablet computers.
Competitors such as Motorola Mobility Holdings Inc. can't seem to match the iPad's starting price of $499. Tablets that are comparable to the iPad in features cost hundreds of dollars more, while cheaper tablets are inferior to the iPad in quality.
This is highly unusual in the gadget business, where early products, such as the first Blu-ray players or digital cameras, are expensive. Competition then gradually brings prices down. With the iPad, the reverse is happening.
It looks as if this is a result of Apple's strategy. The company appears to have chosen, right from the start, to make less of a profit from its iPads than it does from iPods and iPhones. The move is particularly odd for a company that isn't known for cheap products.
Apple's profit margin on the $499 entry-level iPad model is about 25 percent, according to an estimate by Toni Sacconaghi at Bernstein Research.
By contrast, the company's profit margin for all products, before corporate overhead, was 38.5 percent in the most recent quarter. He and other analysts estimate the margin for the iPhone 4 is 50 percent to 60 percent. (Apple charges about $600 for it, though it's cheaper in stores because wireless carriers subsidize it.)
Apple is telling investors to expect overall margins to keep declining, meaning competitors can't expect much of a reprieve.
There are cheaper tablet computers available, but they don't perform as well. They have poor screens, poor touch sensitivity and poor software, and they are slow. For example, Archos sells a tablet that's roughly iPad-sized for $370. Reviewers at CNET and Laptop Magazine say its screen washes out unless you're right in front of it, and it has problems sensing touch.
A tablet that can match the iPad 2 in quality and features costs much more. For example, Motorola's Xoom sells for $800, or $600 if the buyer agrees to a two-year data service contract with Verizon Wireless. The iPad 2 with the same amount of memory - 32 gigabytes - and cellular data capability on AT&T's or Verizon's network costs $729, no contract required.
The Galaxy Tab from Samsung Electronics Co. is half the size of the iPad, yet costs $500. And that price is only available if the buyer pays an activation fee and signs up for at least one month of data service from Verizon, at a minimum total cost of $55. The tablet can be had for as little as $300, but that requires two years of data service, or hundreds of dollars in fees.
Some 100 different models of tablet computers have already gone on sale or are on the way. Gartner Inc. project that 65 million tablets will be sold worldwide this year, and analysts expect the bulk of them will be iPads. Apple sold 15 million of the original iPad in its first nine months on sale. Research firm IDC says three-quarters of all tablets sold in the last three months of 2010 were iPads.
J.P. Morgan analyst Mark Moskowitz believes there's a "bubble" building in tablets, with supply potentially outstripping demand by 36 percent this year. That could put additional pressure on tablet prices, though Moskowitz believes manufacturers will be hurt less than suppliers of components, which are able to command higher prices now because tablet makers are eager to secure displays and other parts.