Apple's problem, in a word
The iPad maker is reeling under the Android threat after Samsung's Galaxy Note grabs the value end of the market. Pricing, it turns out, is more important than Apple realized.
By Dana Blankenhorn, TheStreet
Apple's (AAPL) problem is that it failed to perceive the threat that phablets -- small tablets that double as phones -- would create for it.
Samsung launched its Galaxy Note phablet in 2011, two years after the introduction of the first iPad. The phablet was designed to undercut both the iPhone and iPad by giving low-income consumers, especially in Asia, one inexpensive device that combined the functions of Apple's immensely popular gadgets.
This doesn't just appeal to Beijing hipsters. One of my dearest friends, a 68-year old Vietnam War veteran, recently chose a Note phablet over the iPhone. His eyes desired the bigger screen, and his wallet demanded he get one device, not two.
Apple, which maintained premium pricing on its iPod line for a decade, did nothing against the threat to its iPad dominance for more than a year. The response, when it came, was the iPad Mini. The problem with the Mini was that it did not address the real challenge of the Note, namely price.
Ignoring history's lessons
As any market matures, pricing theory holds that the wise supplier moves from "premium pricing" to "value pricing," sacrificing margin in order to maintain market share. Apple did not do this with the Mini. Samsung did this with the Note.
Amazon.com (AMZN) also did this with the Kindle, which is less a tablet and more an Amazon-only device -- the browser is deliberately terrible. But when you can get the price below $200, as Amazon has, you can move a lot of boxes.
The result of failing to address the low end of the market, combined with rivals' decisions to go after it aggressively, can be seen in the market share data.
The saturation of the phablet market and the high price of the iPad Mini pushed Apple's second-quarter share of the total tablet market down to 35.5%, against 21.5% for Samsung, with a host of other Android names taking up what remained.
This was a huge win for Google (GOOG) Android operating system, which powers nearly all the market's small fry, as well as Samsung. Google is now trying to consolidate its advantage with the LG-made Nexus 7, which reviewers at C|Net compare very favorably with the Mini, along with the Moto X phone, produced by its Motorola division and backed by a $500 million ad campaign dwarfing anything Apple has ever done.
Usually, at this time of the year, we in the media are all breathlessly awaiting the next Apple press conference, speculating about what great new stuff the company is about to offer us. Instead, we're now watching to see which Apple executives walk the plank, and speculating about Google.
The "cool" end of the market, the premium end, always responds in time to what is happening at the low or "value" end of the market. Just as Toyota made the Lexus possible, just as Chevrolet made Cadillac possible, so mass market success breeds class market profit.
This is Business 101. Tim Cook's Apple, in its arrogance, ignored the lesson of history and is paying the price, in the stores, on the streets, and especially on Wall Street.
At the time of publication the author owned shares of Apple and Google.
More from TheStreet.com
Apple has always been "eletist" about both it's products and customer base, it's what nearly caused the demise of the company the first time around.Apple may have better products initially, but in this day of touch screen idiot proof operation is "better" realy worth $200+ more? And it realy doesn't help when your better and more expensive product has a better and more expensive version every 6 - 9 months, upgrading is so much less painfull with an almost as good (some say possibly better) cheaper Apple alternative. I personally never went or will go the Apple route, never saw the point in spending that extra money ( or standing in line for a product, I have bladder issues)
Stupid wormy just cant seem to wake up ! I have been saying this for years
1. Removable Battery
2. Sim Card
3. Hard case included
4. External Antenna jack
I like the operating system , Bye Bye apples my next upgrade just not worth it !
History will repeat itself; in five years when people think about tablets they will think Microsoft...
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
Start investing in technology companies with help from financial writers and experts who know the industry best. Learn what to look for in a technology company to make the right investment decisions.
MyMagic+, a $1 billion experiment in crowd control, data collection and wearable technology, could change the way people play -- and spend -- at the Magic Kingdom. But not everyone is singing its praises.
VIDEO ON MSN MONEY
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'