Competing tablet makers are reevaluating their pricing strategy in the wake of Apple's iPad announcement, according to a
rumor in the Digitimes. The article cites the usual unnamed sources in claiming that companies like ASUS and MSI had expected Apple's iPad to debut at $1,000, and were planning to undercut that price by 20 to 30 percent with their own, presumably Android-based offerings. But with the iPad base model coming in at $499—the price of a decent netbook—the companies are now going to have to compete on something besides price.
Assuming this rumor is true, and it seems completely plausible, then it confirms what a major shift in strategy the iPad is for Apple's business. Apple jealously guards its fat margins, but those margins are almost certainly taking a major hit to get the base model iPad out the door at this price point. This sacrifice is an acknowledgment by Apple that it has to go out and create a market for a device that people don't yet know they need.
The iPad's price is also another sign of just how massive an impact that the netbook has had on the business of computing. If Apple is sacrificing profits to make the iPad an alternative to the netbook as a second or third computer for mass-market use, then Apple can join Intel, Dell, HP, and other PC vendors in the list of companies that have seen their margins suffer due to the netbook's popularity.
How did they get the price so cheap?The inevitable teardowns haven't been done yet, but even now it's hard to see how Apple will make much, if any, money on the $499 model. This being the case, it's worth considering how the company can afford to launch at this price point.
The first trick that Apple used to keep the cost down is that, as many have pointed out, the iPad left out some key hardware features and will instead charge users a nice markup on accessories designed to give those features back. Specifically, the lack of built-in USB ports and SD card support saved a few dollars per unit, and for a unit that will eventually sell in the tens and possibly of millions, that's real money. And Apple makes even more money if it can sell tens of millions of plastic USB and SD card adapters at a hefty profit.
Apple's second technique for mitigating the impact of that low price is the classic up-sell. The company is charging considerably more for the 3G and/or more storage, with the result that buyers of the higher-end models are pitching in extra money to pay for the low-end model's discount.
Finally, it's likely that Apple sees itself taking a page from the console makers' playbook by making up lost hardware revenues with content sales. Right now, prior to the advent of the HTML5 spec, which will make it much harder for Apple to take a cut of software and content distribution on the platform, Apple can afford to give away the hardware because it's taking a cut of iTunes, App Store, and iBook sales.
As Apple's iPhone OS inevitably begins to lose control of software and content distribution on the iPad to the browser, it's hard to see how it will continue to reduce the price of the device. What seems more likely is that the company will leave its pricing structure largely intact while widening its margins as unit prices decline.
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