Apple's iPad 2: The price is right

The next iteration of the iPad is expected to come with a camera and twice the RAM, but the most important new feature may be a lower price tag.

By TheStreet Staff Feb 28, 2011 12:34PM

Credit: (© Justin Sullivan/Getty Images)
Caption: Apple iPadBy Anton Wahlman, TheStreet

 

Apple (AAPL) has invited the press to an event on Wednesday that will include the introduction of the iPad 2. What will be the most talked-about feature of this new device?

 

First, let's stipulate that most of the hardware specifications of the iPad 2 are known, more or less, thanks to endless blogger speculation: one or two cameras, a faster processor, twice the RAM, some tinkering with battery, screen, thickness and bezel. In other words, in the big scheme of things, nothing too exciting. Do you know many people who have held off buying the iPad because it lacks a camera, dual-core CPU or 512 megs of RAM? No, me neither.

 

If this was all Apple had in mind for the iPad 2, it would be a snoozer event. One would think that Apple isn't knowingly going to leave it like that.

 

Post continues after video:

 

When Apple planned for the iPad 1, it had no idea how much success the device would find in the quarters that followed. It focused on creating a rock-solid product, which could at least skim the high end of the market. After all, the iPad 1 came at prices ranging from $500 to $830 -- as high or higher than the average non-Apple laptop.

By March 2010, Apple probably planned for fewer than 10 million iPads to be sold over the next 12 months, a goal which it exceeded handily. This time around, Apple is probably looking to sell 60 million units worldwide starting this March.

 

When you go from planning under 10 million units to 60 million, you can negotiate much better manufacturing prices. Components can also be optimized for cost, to a different degree. Apple is pre-paying for critical parts, such as memory and displays, taking risk out of the contract manufacturers, which pressures the price down. This probably means that despite some minor hardware bumps (camera, RAM), Apple could remove close to $100 in cost from each iPad.

 

Here is the bottom line: This logic points to Apple making the key feature of the iPad 2 its price, specifically a $100 price cut. The iPad 2 could start at $399 and range up to $699 for versions with more storage or 3G or 4G modems.

 

What about the remaining inventory stock of the iPad 1? That's easy: Drop the remaining units on hand by $200 to $299 or so as the shelves clear out.

 

Apple's ability to take cost out of the iPad 2 and the superior volume discounts achievable at 60 million annual units pose a nasty dilemma for its competitors: Motorola (MOT), Research in Motion (RIMM), Samsung, Dell (DELL), Hewlett-Packard (HPQ) and all the others. The various Android licensees will eventually catch up to Apple's head-start in the market, but it is looking increasingly unlikely that Google's (GOOG) Android will match Apple's iPad volumes in 2011. Especially with an Apple $100 price cut, the competitors will have to reload for 2012 or take a gross margin hit.

Apple's competitors are unlikely to get off the ground competing with the iPad unless their tablets start at $199, unsubsidized. The two main reasons Apple commands a price premium are 1) the superior shopping experience of the Apple stores, and 2) iTunes. Right now, Android -- and soon RIM and HP -- are unable to match these two key Apple advantages.

 

Naturally, Apple has several things up its sleeve other than a $100 price cut for its new iPad 2 series. This is likely to include new software and services, such as a revamp of iTunes, enhancements to MobileMe and NFC (near field communications) payments, to be announced at points throughout 2011. That said, as far as the iPad 2 is concerned, what will dominate the conversation won't be some new hardware specifications -- but rather the $100 price cut.

 

These theories of mine are not based on any form of "sources familiar with the matter" or anything equivalent. My statements are purely based on combining various classes of leaks published by the major blogging sites, together with my own logic as to how the market works and what is therefore likely to happen. That said, you can read here what I predicted about the iPad 1 more than a year ago.

 

At the time of publication, Wahlman was long AAPL, GOOG and RIMM.

 

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4Comments
Feb 28, 2011 3:03PM
avatar

Yet another example of Apple's great marketing.  Lets get people to make a lot of noise and buzz about nothing, then sell them something that's only slightly better than what they paid us $500 for six months ago.  And lets make it not fit in the ipad 1 accessories properly so that we can earn residual income on the new accessories the sheep... I mean customers... will be willing to buy.

 

Hey, in six months they can do it all again, just in time for Christmas!

 

Seriously, why do people report on Apple like it's actually something we should care about.  I'd be more inclined to purchase Apple products if they'd start making them in America and stop giving their innovation secrets to the Chinese government so they can pay workers 40 cents a day.

Feb 28, 2011 2:49PM
avatar
Yawn, let's go to iPad 4 and forget all the betweeniesSmile
Feb 28, 2011 1:36PM
avatar
I-Pad III will be out right in time for Christmas delivery!
Feb 28, 2011 4:50PM
avatar

Sorry, this is a yawn.

 

Unlike Iphone where they had lots of places to go and "wow" users with upgrades in subsequent additions, they don't have much of that on the Ipad.

 

The Ipad costs the same as comparable devices. Only the comparable devices have way more options. More carriers, more brands, more specs.

 

The Ipad2 will not even match the specs of other tablets coming out right now on googles Android platform. So, they aren't exactly leaping ahead with a camera, more ram. Ipad market share is eroding very quickly, this is just too similar to PC hardware, and Apple has never managed to do anything there.

 

That being said, they'll make good margins, but not enough to justify their stock price. Expect a pull back.

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