I
remember early 2010 before the iPad turned into something more than a
longstanding rumor. A lot of people were interested to see what Apple
could do to jumpstart a tablet PC industry that to date had only drawn
interest from a handful of tech enthusiasts. Sleek design, intuitive
features and mass market appeal went a long way, but what blew away a
lot of people was the $499 price point.
Of
course, there are more expensive iPads. The top end model with 64GB of
storage and a 3G antenna costs $829, on par with the projected sale
price of the new Motorola Xoom, but if you ask someone how much an iPad
costs, most would say “$500”.
What about the New Guys?
With
that in mind, can new devices compete with Apple when their starting
price points are so much higher? A lot of the excitement surrounding the
Xoom was tempered when we found out it would ship at $799 with a WiFi
only model available for $600. The Galaxy Tab only gets under that magic
$500 price point with a contract through a mobile carrier.
And
it’s not as if Apple takes a hit on profits. I believe Apple likely
makes the same amount of profit on their devices, regardless of a $500
price point, as Motorola, Samsung, RIM, HP and LG are likely to make
with their new tablets. The difference is in the economics of scale.
Apple produces significantly more devices when they launch a new product
– they have a worldwide brand they can mobilize to sell those products.
And now that Apple has taken such a commanding lead in the early tablet
market, they can afford to keep their price points low going forward.
The
cost of components are such that, unless a manufacturer plans well in
advance, shoring up stockpiles of key components (especially those
screen materials), they cannot afford to compete on certain levels. Apple’s moves in January
to invest $3.9 billion in long term contracts for certain components
show what a company with so much cash and an existing market so large
can afford to do in shoring up its competitive advantage.
Remaining Profitable
The
cost of components is always shifting and so too will profit margins
for these companies. I’m hopeful that pricing will not harm companies
that aim for innovation in the tablet market. Companies like Motorola
and Samsung need to make a profit to stay in business. They cannot
afford to cut their margins too thin just to compete with lower priced
devices.
And
as consumers, we need to remain supportive of higher priced devices
with advanced technologies, especially if we ever want their prices to
drop. Because unless they develop a stronger following, these other
companies will never have the leverage needed to make the same
investments as Apple.
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