Apple released a new iPad this week, actually they released two.
A small one, and a refreshed big one.
The standard iPad, now referred to as the iPad Fourth Generation, is not much to talk about. A faster processor than the third generation, and a lightning connector. No big deal.
The iPad Mini is the important product, but not for the reason Apple would like. It is important because it is showing Apple’s philosophy for competing with Android and other hardware manufactures.
The debacle of Apple Maps made it painfully clear that Apple was more interested in their feud with Google than supplying their consumers with quality software. Although, I would argue their insistence on stunting the growth of iOS proved that years ago. Nevertheless, it became incredibly clear their “war on Android” was priority number one, and they began to take advantage of the fact that if they placed an Apple logo on something, it would sell millions.
But the iPad Mini tipped the hat to priority number two; margins.
It is becoming clear that Apple’s strategy to fight Android is to simply be Apple. Release a product made of aluminum, price it with a nice profit-margin, and win. That is their plan.
Unfortunately for Apple, that is a recipe for losing.
The iPad Mini is a device with last year’s technology. Literally, it has the same screen and processor as the March 2011 released iPad 2. Yes, it is light and thin, but that’s where the innovation ends. And the price is $130 more than a 16GB Nexus 7 (if the rumors are true and the 16GB falls to $199 this week).
With this price, it is clear that Apple does not want to compete on price. Again, because they don’t have to. They are taking advantage of the fact that people will buy anything with an Apple logo, regardless of price.
I cannot blame them for that. If I were selling products that consumers bought simply because I was selling them, I’d do the same. But that only works for so long.
Let’s take a look at the smartphone market. Apple essentially created the market in 2007 when they released the iPhone. And it dominated for years. It was held back by the exclusivity to AT&T, and that allowed Android to grow quickly and swiftly. Verizon, Sprint, and T-Mobile customers wanted iPhones, but couldn’t have them because Apple released it only on AT&T.
The closed nature of Apple created an opportunity for Android to grow. And now, Android commands more market share than iOS, and Samsung is selling twice as many smartphones as Apple.
There’s no question that plenty of consumers still purchase iPhones because of the Apple logo embossed on the back. But there is also no question that had Apple released the iPhone on more carriers at the beginning, it would be the Windows PCs of smartphones, commanding ridiculous market share. Instead, Apple signed a deal with AT&T that made them the exclusive carrier of the iPhone for five years.
That decision was motivated by money. AT&T gave Apple $10 a month from every iPhone user’s monthly bill. Apple was paid handsomely for the exclusive deal with AT&T.
However, that same deal cost Apple lots of market share and millions in lost sales. Apple focused on short term instead of long term gains. It might make Wall Street happy, but it usually ends in long term destruction.
A similar event is unfolding with the iPad line.
Again, Apple essentially invented the market. The iPad was laughed at originally, but they sold millions upon millions. And without carriers to work through, anyone could purchase an iPad. Meaning, there was no natural entry for a competitor. They would have to go head-to-head with Apple.
Apple controls the tablet market. Android tablets have been released, but Google failed to provide a good tablet operating system until they released Ice Cream Sandwich in late 2011. Without a solid OS, Android tablets, regardless of price and build quality, fell flat with consumers.
Until Amazon popularized a new tablet market. The 7-inch market was an open space. Small enough to carry around, yet powerful enough to accomplish the same tasks as an iPad. The original Kindle Fire was flawed in more ways than one, but it was cheap, and that worked.
Google continued to expand the market when they released the Nexus 7. A fantastic small tablet that was only $199, just on the verge of an impulse buy. That was the way to compete with the iPad, beat it on price and form factor.
You can hold a Nexus 7 in one hand comfortably, that is not easy with a 10-inch iPad. The Nexus 7 is a full $300 cheaper than an iPad, in this economy that gained people’s attention.
Price was, and continues to be, the secret sauce for Android. And Apple is refusing to acknowledge that.
I am not suggesting Apple needs to match the price of the Nexus 7. Apple makes money on hardware, it does them no good to shrink their margin to zero. But let’s assume that the iPad Mini costs roughly the same to build as a Nexus 7 – around $180. That would mean Apple is banking about $150 per iPad Mini – which is their standard margin. They make roughly $150 on the full sized iPads.
It almost seems as if Apple designed an iPad Mini to fit into a standard margin, instead of designing a device that could fit into consumer’s hands.
Again, this will deliver short term success, but long term headaches. Android phones beat Apple by taking advantage of carriers that did not sell the iPhone – and Apple has paid dearly in market share.
Android tablets are starting to beat Apple by taking advantage of lower prices and lower margins – choosing to make money on content consumed on the device. Apple could wipe this competition out by adopting a similar model for the iPad Mini.
We all claim that “Apple makes money on hardware” and that is true, but they don’t make money exclusively on hardware. Apple sells more digital content than Amazon and Google – and for Apple those margins are just gravy.
Apple could have wiped the Android competition off the map by releasing this same iPad Mini for $199. They would make zero dollars on the hardware, but they would easily make the money back in content purchased on the device. Apps, music, movies, and TV shows are all cash cows for Apple. They make roughly 30% on every iTunes purchase on an iOS device. Each iPad Mini user would surely spend at least $100 in content (those $.99 and $1.99 apps add up).
Market share is important in the long term. If Android tablets can continue to be sold at $199 without competition from Apple, they will continue to creep up in market share. Each consumer that purchases a Kindle Fire HD or a Nexus 7, is a consumer that will likely not purchase an iPad for at least two years. That is lost opportunity, and lost revenue for Apple.
And if they are happy with their Nexus 7 or Kindle Fire HD, they will happily purchase the new version in a year or two. Which means they will continue to be a consumer that will not purchase an iPad.
Instead, Apple should have seized an opportunity to sell the iPad Mini at cost and leverage their brand recognition and respect for long term gains. A $199 iPad Mini would have been a no brainer for 90% of potential tablet buyers. That would have been their easiest buying decision of the year. And it would have likely locked them in as Apple consumers for years to come. Sure, Apple takes a short term loss, relative to a $150 margin, but they make that up in longevity of the consumer and content purchases.
Apple is content with making billions in the short term instead of preserving their consumers and business in the long term. I understand that decision, it is not easy to say “let’s not make $150 on every device sold and sell this thing at cost. Don’t worry, we’ll make it up on iTunes.” That is not an easy sell when their business model is based on make money now, not later.
But given the market they entered, it would have been a smart long term move. It would have immediately killed the Android competition, and given them millions of new customers that would have otherwise purchased a cheap Android tablet. Game. Set. Match.
It might amount to nothing in the next two years, but Apple’s short sighted approach will eventually catch up to them.
–jb
