Wednesday, March 2, 2011

iPad: price is no object

Steve Jobs returned to work briefly on Wednesday to introduce the iPad 2. Clearly launching new platforms and changing the industry is his passion.

The introduction was and was not what everyone expected. It’s still a 10" tablet, but adds two cameras, a new operating system and much faster processor into a smaller and lighter box.

What didn’t change (despite various predictions) was the price. For example in March 2010 ZDNet flatly predicted “You know Apple will drop prices with the second generation iPad.” The price cut predictions continued up until Steve Jobs walked on stage — but the only price cuts were the clearance prices on last year’s model.

Instead, Apple is counting on superior execution to hold continued loyalty of the press and the customers. It’s also available next week in the US and two weeks later in major overseas markets, closing the window rivals had hoped to exploit: Apple will ship its second tablet before HP (and especially RIM) can ship their first.

The analysts who underestimated the iPad in 2010 are outdoing themselves to be bullish in 2011. Forbes quoted one prediction of 26 million units in 2011 — nearly double the 14.8 million sold in 2010. Again this year, Apple will remain the leader of the tablet market, with the #1 product, the #1 company market share and the #1 platform market share. Keeping 2/3 of the market in 2011 might be an underestimate.

In contrast, this year’s round of iPhones are rumored to include a lower cost model. Of course, this is year 5 for the iPhone and year 2 for its iOS cousin. Apple has both more serious competition and a more saturated high-end market in phones than in tablets.

However, indications are also that by setting the bar so high, Apple is making it difficult for competitors to undercut it on price. Its $500 iPad 2 competes with a $800 Motorola Xoom, which despite Motorola’s decades of high-volume mobile device experience, has a bill of materials cost higher than the original iPad. Steve Jobs showed a slide Wednesday noting the higher prices of its Motorola rival.

Apple also spent $3.9b of its excess cash to invest in its display suppliers, both enabling capacity expansion and locking up scarce inputs that are now unavailable to rivals. For now, most of its rivals (vertically integrated Samsung excepted) will have difficulty matching its volumes and prices of screens.

As Matt Asay noted last month, Apple’s rivals have no hope in the near term of taking away customers from Apple at the high end, among discerning early adopters:

No one beats Apple at being Apple. The best bet for the iPad also-rans, then, is to run a different race, aiming for mass market appeal….with much lower price tags.
For now, the only opening for its rivals is in the 7" tablet, which for now Apple has lambasted as a losing form factor. I disagree, and if I were a company like HP/Palm, I’d put all my resources in 2011 into becoming the #1 vendor of 7" tablets, and hope Barnes & Noble doesn’t get their act together quickly enough to own that market.

Now above $350, Apple shares were trading at $150 a year ago and $85 two years ago. Boy I wish I’d bought some: my 401(k) might actually be something I could use for retiring.

Update 3:30pm: Goldman Sachs reiterated a “buy” rating and set an AAPL target price of $450 — reiterating the pre-announcement prediction.

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