iPad, Apple: Why the company's products aren't just for rich people anymore.

Innovation, the Internet, gadgets, and more.
Feb. 22 2011 5:02 PM

Better. Faster. Cheaper?

The iPad proves Apple products aren't just for rich people anymore.

A man looks at Apple's iPad.
How does the iPad compare in price with the Glaxy Tab, Xoom, and Playbook tablets?

Are you obscenely wealthy? Do you have more money than you'll ever know what to do with—more money than Montgomery Burns, more money than brains? I bet you bathe in Cristal, start your morning with truffle butter on brioche toast, and at least consider filling up your Bentley Azure T with premium unleaded (you're rich, but not completely stupid). Then, when you get around to doing what most of us consider "real work," you reach for the one computer that was designed and marketed to rope in rich suckers like you. Yes, you've got a Mac. Sure, you paid a few hundred dollars extra to get a shiny logo emblazoned on your computer, but what do you care? You like the logo.

This, anyway, is the stereotype of people who buy Apple products. Even though Apple long ago left the ranks of a niche brand—the company has sold hundreds of million iPods, and the iPhone now accounts for a quarter of the smartphone market—there's a lingering perception that it makes expensive baubles for people who don't know any better (for proof, scroll to the comments under every Apple-related story I've ever written in Slate, including this one).

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The perception is partly Apple's fault. The company purposefully cultivates an aura of luxury; it puts those Apple stores in fancy malls, after all, not next to your local dollar store. Apple also long refused to compete at the lower end of the PC market, a decision that helped to keep its profit margins high—its gross margin is around 40 percent, compared with less than 20 percent for Dell. I've argued that Apple's computers aren't as expensive as they seem when you consider all you get with them—free walk-in tech support, a range of well-designed built-in programs, and substantially higher resale value. But when you can buy a cheap PC laptop for $400, less than half the price of the lowest-priced MacBook, that's a tough argument to sustain.

Over the next few months, though, Apple's customer-gouging reputation might start to change. Lots of companies are lining up to release competitors to the iPad—and so far, the major contenders are more expensive than Apple's tablet. This doesn't look like a short-term trend, either. As Apple ramps up iPad production this year, it will reap enormous benefits from its massive scale; the company will be able to buy tablet components for much less than its competitors pay, thereby undercutting its rivals. This will lead to a remarkable shift in the computer business. Whereas Apple has always set the premium standard, leaving the rest of the market open to low-end devices, Apple's going for everyone this time around. When it comes to tablets, Apple might make both the best and one of the cheapest devices on the market, and competitors are going to find that hard to beat.

The iPad starts at $499 for a model with Wi-Fi only, and $629 for a model with a 3G cellular modem. That's cheaper than the Motorola Xoom, the first device to use Honeycomb, a version of Google's Android operating system designed for tablet computers. The Xoom—which includes a cellular modem—goes on sale this week for $799 (you can get it for $599 if you sign a two-year Verizon data contract). Samsung's Android-based Galaxy Tab comes closer to the iPad's prices—a 3G version sells for $599 without a contract, and a Wi-Fi version sells for $499. But those prices look less attractive when you consider the Galaxy has a seven-inch screen, compared with the iPad's nearly 10 inches. (After lackluster reviews and sales, the Galaxy Tab's price has fallen recently; T-Mobile now sells it for $250, but only with a two-year contract.) This is also true of the BlackBerry Playbook—that seven-inch tablet, which was announced last year but hasn't gone on sale yet, will reportedly cost the same as the iPad.

Finally, there's Hewlett-Packard's TouchPad, a slick-looking tablet based on Palm's WebOS operating system that's due to go on sale this summer. At its launch event earlier this month, HP showed off everything that its tablet can do, but it was deliberately cagey about the price. This doesn't bode well; if HP believes it can sell the TouchPad for $499, it would surely have said so. Though I'd love to be pleasantly surprised, I'd wager that the TouchPad will cost more than the iPad.

There are several reasons why Apple's tablet prices are so hard to beat. It can cut out the middle-man by selling directly to customers through its retail stores, it has mastered the logistics of global manufacturing and shipping, and it controls all aspects of its device's design (including the OS and processor), a feat no other manufacturer can claim. But perhaps the most important reason is the unparalleled size of its operation. During a conference call with investors in January, Apple's chief operating officer Tim Cook reported that the company had spent nearly $4 billion on several "strategic" long-term contracts for specific electronic parts. He didn't say which components those were, but last week DigiTimes, a Taiwanese publication that covers Asian manufacturing companies, reported that Apple had purchased 60 percent of the world's supply of touchscreen glass panels—the major component for iPads, iPhones, and iPod Touches.

This is the sort of move that only Apple—which has nearly $60 billion in cash reserves and can guarantee massive sales of its devices—can pull off. It's a brilliant play. By buying up a huge percentage of the touch panel supply, Apple has created scarcity in the market that will raise prices for all of its competitors. Meanwhile, it can enjoy several years of stable component prices—and several years of undercutting everyone else.

Critics might argue that this is a short-term phenomenon. Prices in the computer business, after all, always fall. Over time more manufacturing companies will begin to make touch panels and all of the other components that go into tablets, and eventually Apple's price dominance will decline. Then Apple will show its true colors—rivals will be able to sell tablets for $400, $300, or maybe even less, while the iPad will be stuck at $500.

But I'm skeptical that the future will play out that way. Analysts say Apple aims to sell more than 40 million iPads this year, and it will need to keep up that staggering volume over several years to satisfy shareholders. The only way to do that is to keep improving its products while keeping its prices very competitive. As it happens, that's exactly what Apple did with the iPod earlier this decade. Sure, you could get MP3 players for less money, but Apple added new features and matched competitors' prices with each release. It followed the same path with the iPhone, and now it's doing it with the iPad—and each time, the company has realized blockbuster profits.

There's no looking back at this point. Apple's future depends on selling lots and lots of relatively low-priced computers at enormous volume. In other words, it's not just for rich people anymore.

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