Apple fans will love the new product, but what about new customers eyeing less expensive Android tablets?
Apple intended this week’s announcement for the faithful Apple customer base, and as a test of the Apple premium price. Announced were a new Macbook with Retina display, a new 10-inch iPad with Retina display and faster processor, a new iMac, notable for its industrial design, and the long awaited iPad mini. Mac-iPhone-iPad businesses and households will simply pick from this shopping list and pay the Apple premium. Businesses and households using heterogeneous computers, phones and tablets will choose differently.
The one-on-one comparison of the iPad mini and the Nexus 7 by Apple’s Senior VP Phil Schiller is insightful. The base model iPad mini has a few advantages, such as a larger display, smaller bezel and aluminum housing, at a price of $329. This is a 32% premium compared to the Nexus 7. The Apple household or Apple business accustomed to the Apple premium price won’t make this comparison. In heterogeneous environments, price could be a major factor in a tablet purchase decision.
Interpolating IDC’s recent yearly unit tablet forecast through 2016, approximately 850 million new tablets will ship during the period ending in 2016, many to first time tablet users who will look carefully at the price. A 32% premium will be difficult to accept for those consumers and businesses that have mixed iOS, Android, PC and Mac environments.
When one compares the iPad mini to the Kindle Fire HD 7” at $199 the price difference is more pronounced. Intuitively the larger 8.9” premium version of the Kindle Fire HD with 4G/LTE and 64 GB should cost a little more than a similarly configured 7.9” iPad mini and a little less than the 10” iPad Retina, but it in fact the Kindle costs less. The Kindle HD costs $599 while the similarly configured iPad mini and iPad Retina cost $659 and $829.
Although the use case of the Kindle is less general purpose than the iPad, pricing should be approximately comparable. But Amazon sheds some light on Apple’s pricing intentions and business strategy. Amazon sells the Kindle as an enabler for its media business of books and movies where Amazon’s greatest innovation and value resides. It entered the business in 2007 with the Kindel Dx to change the way people consumed books. Amazon continues to produce the Kindle to represent its use case in the evolution of the tablet market. It sells for less not because it is proportionately less capable, but because Amazon seeks to profit from media revenues and does not want to make the acquisition price of a tablet an obstacle to this new method of media consumption.
Apple on the other hand produces 83% of its revenue from hardware sales. Media revenues from iTunes, the App Store and iBookstore account for only 6% of revenues. If Apple is to continue its impressive financial performance maintaining its hardware margins is critical. The challenge for Apple is not to sell to its base of Apple fans in established markets, but to sell premium priced tablets to new customers and create new Apple fans. With the iPad mini, Apple is testing how much of a premium it can charge in the tablet market.
One should respect Apple for selling 100 million iPads and holding about 60% marketshare. At the same time one wonders, will there be enough new Apple fans to pay a premium over Android tablets to maintain Apple’s impressive growth and profitability?
