NEW YORK - The new iPad model hitting stores today comes with several improvements over the original version but the same price tag, hobbling efforts by rivals at breaking Apple Inc.'s hold on the emerging market for tablet computers.
Competitors such as Motorola Mobility Holdings Inc. can't seem to match the iPad's starting price of $499. Tablets that are comparable to the iPad in features cost hundreds of dollars more, while cheaper tablets are inferior to the iPad in quality.
Usually, the early products in consumer electronics, such as the first Blu-ray players or digital cameras, are expensive. Competition then gradually brings prices down. With the iPad, the reverse is happening, spelling trouble for competitors.
It's rare for prices to start low and stay low, yet it looks as if that's exactly what Apple intended. Apple appears to have chosen, right from the start, to make less of a profit from its iPads than it does from iPods and iPhones. That's an odd move for a company that isn't known for cheap products.
Apple's profit margin on the $499 entry-level iPad model is about 25 percent, according to an estimate by Toni Sacconaghi at Bernstein Research.
By contrast, the company's profit margin for all products, before corporate overhead, was 38.5 percent in the most recent quarter. Sacconaghi and other analysts estimate the margin for the iPhone 4 is 50 percent to 60 percent. (Apple charges about $600 for it, although it's cheaper in stores because wireless carriers subsidize it.)
Apple is telling investors to expect overall margins to keep declining, meaning competitors can't expect much of a reprieve.
There are cheaper tablet computers available, but they don't perform as well - with poor screens, poor touch sensitivity and poor software, and overall slowness. Archos sells a tablet that's roughly iPad-sized for $370. Reviewers at CNET and Laptop Magazine say its screen washes out unless you're right in front of it, and it has problems sensing touch.
A tablet that can match the iPad 2 in quality and features costs much more.
About 100 different models of tablet computers have already gone on sale or are on the way. Gartner Inc. project that 65 million tablets will be sold worldwide this year, and analysts expect the bulk of them will be iPads. Apple sold 15 million of the original iPad in its first nine months on sale.
Apple sells about a third of iPads in its stores and from its website. By cutting out the middleman, Apple is able to keep more of the profit margin.
Also, the iPad uses many of the same chips as the iPhone and iPod. That means Apple is able to buy them in huge quantities, bringing down costs. Wayne Lam at research firm IHS iSuppli estimates that Apple alone buys 20 to 25 percent of the world's production of flash memory chips, which go into phones, iPods, memory cards and the iPad.
Lam also speculates that Apple is using its clout and its cash to ensure supplies of another crucial component: touch-screen displays, which make up a large share of the tablet's cost.
Apple said in January that it had spent $3.9 billion on long-term contracts to secure supplies for the next two years of a "very strategic" component it wouldn't identify. If Apple is indeed tying up a lot of the production capacity, competitors could have difficulties getting screens at a reasonable price. Apple did not immediately return a message to comment on that or its overall pricing strategy. Motorola also had no immediate comment.
Apple also designs its own processing chips to run iPad and the iPhone, based on blueprints it licenses from ARM Holdings Inc. For its Xoom, Motorola buys its main processing chip from Nvidia Corp., meaning there's one more vendor to pay.
One other factor is the software powering the tablet. The Xoom and other rivals generally use Google Inc.'s Android system, which Lam says demands more memory, raising the cost of the product.
In short, using Android forces iPad competitors to produce more expensive machines, Lam said. They might be able to bring component costs down by working closely with Google to optimize the software, but meeting the needs of a range of devices and companies is difficult. Because Apple controls its own software, it's in a better position to tailor it to its own devices.
That adds up to difficult math for competitors.
by Peter Svensson Associated Press Mar. 11, 2011 12:00 AM
Apple's advantage vs. its competitors