Get Ready for an iPad Price Cut

The unthinkable is happening at Apple (AAPL).

The class act of Cupertino may have priced its iPad out of the market this holiday season.

Goldman Sachs analyst Bill Shope is advising clients to keep an eye on iPad sales this quarter, fearing that the company is facing some near-term demand challenges for its iconic tablet. He argues, and rightfully so, that Apple is long overdue for a price cut.

It doesn't take a rocket scientist to figure out that Apple -- until now the runaway market share champ in this nascent niche -- is finally facing legitimate competition at ridiculously attractive price points.

  • Amazon.com's (AMZN) Kindle Fire hits the market today at a head-turning $199 price point. As a seven-inch tablet, it's certainly smaller than the iPad, but that may not necessarily be a bad thing.
  • Barnes & Noble's (BKS) Nook Tablet hits stores in two days. The superstore chain's new gadget costs $50 more than the Kindle Fire, but it does have beefier specs in some areas.
  • There's a glut of cheap non-Android tablets out there, as Hewlett-Packard (HPQ) and Research In Motion (RIMM) mark down their first-generation devices while pondering what do to next. Android manufacturers that naively entered the market at high price points with impressive spec sheets are taking a more realistic pricing approach this time around.

They've got you surrounded, Apple. The days of selling roughly three out of every four tablets sold are over.

Seriously.

Limbo Rock in Limbo

It wouldn't surprise anyone to see Apple come up short on iPad shipments this quarter. It was all too convenient to have Amazon introduce the Kindle Fire in September, leading consumers to hop on the fence to see what the $199 tablet is all about before paying $499 and up for an iPad.

Some will argue that the Fire and Nook tabs don't come in 3G flavors, but is that really a deal breaker? If so, we're comparing the Kindle Fire to a $629 iPad that is more than three times as expensive (and that's before we delve into the 3G connectivity plans).

One way or another, Apple's next step here will be down.

How low can Apple go? The original iPhone hit the market at $599, and the markdowns have been aggressive. However, Apple was aided by wireless carriers subsidizing the popular smartphone. No one is going to subsidize an iPad, especially the cheaper Wi-Fi model.

Apple's iPod touch has stuck to more moderate pricing moves, but there hasn't been a whole lot of pressure for the company to cut prices there. It owns that space. It was never vulnerable the way that the iPad is right now.

Back to Apple's Future

There was a time when Apple had to settle for a thin slice of the PC market. Macs were generally well liked by everyone, but they just weren't worth a healthy market premium for most consumers. Mac and PowerBook owners are still in the minority, but it's a much larger minority now.

Apple doesn't want to go back there. Just as Android phones are now outselling Apple's iOS handsets, there isn't really a reason for the same scenario to play itself out with tablets. Many of the popular Apple App Store downloads are available on Android. Streaming video, browsing the Web, and checking email isn't materially different, at least not to the point of justifying paying 150% more for an iPad over a Kindle Fire.

"But the screen is smaller ..."

"But the Apple ecosystem rocks ..."

"But there's no camera ..."

Keep believing that these knocks are somehow worth 250% of the price of a new Kindle Fire, but then watch Amazon and Barnes & Noble combine to outsell Apple in this country during the holiday season.

Profit Prophets

The silver lining as Apple hands the smartphone pole position to Google's (GOOG) Android is that it doesn't matter because Apple's the one commanding the lion's share of the profits. It won't have to budge on the tablet end, sacrificing margins the way that Amazon and Barnes & Noble are right now.

Don't go there. When a fight boils down to the greedy vs. the hungry, bet on the ones with the grumbling stomachs.

The funny thing is that the carrier-subsidized iPhone is reasonably competitive to Android handsets, and it's still losing ground to Android. Why can't this play out with tablets? In other words, even a price cut may not be enough -- but it at least gives the current market share leader a chance.

Apple had no problem selling $500 to $830 iPads when all of the major manufacturers were in that ballpark, but there's a new line in the pricing sand. If Apple's response is to simply roll out a seven-inch iPad early next year at $299 -- and perhaps shave its flagship design by $100 each -- that may be enough to at least keep it in contention.

Either way, it's time to kiss Apple's healthy iPad profit margins goodbye.

If you want to follow this saga, track the latest news by adding Apple and Amazon.com to My Watchlist.

At the time this article was published The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, and Google; and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz owns a first-generation Kindle, an iPad, and will soon own a Kindle Fire. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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15 Comments

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Rick Ludwig

You can always tell when someone writing about Apple has no idea what they're talking about.

1) Market share means very little to Apple. If they have it, super (and they will boast, no doubt), but that doesn't mean they're basing their business around it. All of the money they have today they've made by not basing their business around market share and basing it on profits. They can make more money on a smaller amount of people then they can on a much larger amount with smaller prices.

2) "Competition" is a funny thing. Android tablets don't offer any real competition - even manufactures (and Adobe!) have noticed it. Super eReaders (Fire and Nook) generally won't cut too deeply into iPad's sales. While there will be some who choose one over the other, the majority of fire owners will either own both an iPad and a Fire, or won't have considered the iPad at all (same goes with Nook).

I actually feel embarrassed for financial people who write about Apple and don't realize this. It's one thing for a tech writer (who should know better as well) to write about "specs and price", but financial people?

November 16 2011 at 8:14 AM Report abuse rate up rate down Reply
Get back to work

"Price point" one of the most overused, least useful phrases in a bloated English language. How is "$199 price point" more helpful that "$199"?

November 15 2011 at 5:15 PM Report abuse rate up rate down Reply
Colleen

How can you compare a Kindle to an I-Pad? I have both...Kindle cant come close. I-pad is worth every penny.

November 15 2011 at 4:03 PM Report abuse rate up rate down Reply
smartin193

I visited the Apple store in a local shopping center yesterday and evidently the customers don't agree with your verbage.
The place was packed and everybody was buying. In response to your journalistic attempt to provide news, Apple has no competition from any of the tablets mentioned. Why don't you go buy one, then buy an IPhone, then buy an Apple computer. You simply pay more for excellence. Have been in the retail industry all of my life and sevice plus excellent products will always win out.

November 15 2011 at 2:53 PM Report abuse rate up rate down Reply
steph9985

Really? Comparing a Fire or Nook to an IPad. Like comparing a standard cell phone to a smart phone, from anybody. A Fire is a fancy reader. The Nook is a little more adavanced. But neither is able to perform the tasks an IPad, or even most other tablets can perform. When the 1st IPad came out I remember the uproar that there was no camera. Obviously that was a big deal, as most other competing tablets have one. Other tablets cant do things as easily or as well as the IPad, much less a Fire or Nook. I think they are fine for the intended market, which is a place that Apple obviously does not intend to compete, at this time. They have stated many times over, pcik your spot and do it well. If they built a device to compete at this price point, I am sure the public would lambast them for what it cant do, compared to the more expensive models. There have been rumors Apples will build a 7" model, I am sure to copmete at a lower price point if this is true, but dont expect it to compete heads ups with the bigger model, nor should you expect them to compete at the same price point as the Fire. I would think somewhere in the middle, on both performance and price. I dont believe Apple wil ever go back to building a product just for a price point, if they feel the performnce is not equitable for the consumer. Just look back to the early and mid 90s when Jobs was not there to see where that takes you. Their philosphy appears to work very well. They will just build a new model with new must haves to stay ahead of the competition as usual. At least as long as they stick to the values and ideas of Steve Jobs, and so far it appears that is exactly what they intend to do.

November 15 2011 at 2:44 PM Report abuse rate up rate down Reply
jimmrimm

This article ignores the best feature of the Pad, and that is the infrastructure behind it in the form of apps and iTunes. Amazon has a few things, but nothing compared to Apple for content and synching between devices. Nobody is going to catch Apple for a long time because it isn't just about what the device itself will do, it's what's behind it to make it so useful and entertaining as well. Yes, they may drop the price after skimming the cream, but that's just good pricing strategy on their part to nail down the early adopters and then go after the masses.

November 15 2011 at 2:04 PM Report abuse rate up rate down Reply
jr15dds

an obvious apple hater. so what if apple sells less of any product. It's not the volume its the profit. last I checked apple does pretty well.

November 15 2011 at 1:57 PM Report abuse rate up rate down Reply
fballou757

Interesting. I think Apple has scale advantage. Having lower costs due to higher quantities than any other competitor, Apple could: introduce a 7" tablet, reducing component costs for that model. The entry-level item (perhaps with a single camera without Face Time and with WiFi only) could be priced competitively at $249, offering better graphics and ability to take photos and a wider array of apps. Other 7" models could include two lenses, and other options such as 3G/4G connectivity [subsidized plan available?] at successively higher price points. The iPad 2 price could be reduced, while maintaining GM. The iPad3 could be offered at present price for superior product. My point is that the idea that "it's time to kiss Apple's healthy iPad profit margins goodbye": hence, lower gross margin, hence, lower profits per share is not a slam dunk conclusion. So long as Apple can offer a lower price entry point, I believe it is likely that many who will be attracted by that lower price will opt to trade upward in order to have greater function. Margins may decline, but it is not time to kiss profits goodbye.

November 15 2011 at 1:49 PM Report abuse rate up rate down Reply
Emily

I have a Macbook Pro and would never buy an overpriced Ipad. I have my Macbook for content creation, and I like it that way. I'm buying a Fire for content consumption, and its 7" screen will be fine for reading, emails, movies, etc. Anything that need real processing power will use my 13" MBpro, which is barely larger than the Ipad and just as portable. I use my Iphone for most things that I'll use the Fire for, and the Fire will do them admirably and without DRM protection, all on a bigger screen. I don't need the Ipad's computing power as much as I desire the price and portability of the Fire. Now if Apple makes an Ipad "Air" that is smaller and cheaper then I'm in, but for now...let me stand next to the Fire.

November 15 2011 at 12:22 PM Report abuse rate up rate down Reply
John D.

a very myopic view of the tablet market. B & N's marketshare and mindshare outside of the US close to 0%. Amazon's a bit more. Apple's market and mindshare outside he US versus these two 'competitors' huge and growing exponentially.
Just look at recent Q3 PC shipments in Europe: PC's down 11.4%, Apple up 20%. An opinion by a Mostly Fool indeed!!

November 15 2011 at 11:30 AM Report abuse rate up rate down Reply