What is the Magic Factor to Apple's Pricing?

[Jeff Campbell]

<div class='os_post_top_link'><a href='http://www.zdnet.com/blog/perlow/apples-secret-ipad-advantage-the-supply-chain/15813' target='_blank'>http://www.zdnet.com/blog/perlow/ap...ply-chain/15813</a><br /><br /></div><p><em>"The word is out. That cool Android-based iPad killer coming out from Motorola? The XOOM? It's going to set you back eight Franklins if you want to buy one. That's $800.00, 9,566 pesos, 881,000 won or 5,275 yuan, for those of you keeping track."</em></p><p><img src="http://images.thoughtsmedia.com/resizer/thumbs/size/600/at/auto/1297172109.usr105634.jpg" style="margin-left: 150px; margin-right: 150px;" /></p><p>And at roughly $800.00 USD, that isn't a price point to compete with the iPad. This is especially true when you factor in the absence of WiFi on the device, and this article isn't the only one pointing this <a href="http://www.eweek.com/c/a/Mobile-and-Wireless/Motorola-Xoom-Pricing-May-Push-Consumers-to-iPad-483596/?kc=rss&amp;utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed:+RSS/tech+(eWEEK+Technology+News)" target="_blank">pricing problem</a> out. But what went wrong here with Xoom and why aren't they able to get their pricing point to a level to compete with the iPad? One reason is the control of the Apple supply chain. Apple has been doing this for years, investing heavily in technology such as their own A4 chipset, and leveraging price points by buying in bulk.&nbsp;In fact, the prediction is that by 2012 they are expected to be the largest purchaser of semiconductor technology.&nbsp;Their strategic planning is such that they are able to buy in high enough quantities to bring down their cost per unit to a level that they still make a profit at the low end of the product line. Granted, as you move up the line of products they increase in price, some say too much, but you can't argue that there is still value there. Bottom line however, is that when you control the supply chain, you certainly control the price. The bigger question I have about this isn't about Apple, it's about the competition. Why aren't they doing the same thing? Is the bigger issue lack of foresight rather than supply chain control? What are your thoughts?</p>

[Brad Adrian]

Pontificate all you want about attempts to buy parts in high enough quantities to drive down the purchase price. Purchase price will only be a consideration during the early phase of the tablet wars, because the producers know they cannot make a thin DIME from the hardware sale. The only way any of these devices will be affordable to the masses will be through bundling and packing with wireless and related services.

It's the same old "razors and razor blades" story. NONE of the the PC retailers makes any money from hardware sales; they make their money from adjunct sales of software, services, accessories and support.

[Sven Johannsen]

What absence of WiFi? Only thing close to that I have read is that they want you to pay for a month of cell to setup the WiFi, Specs certainly indicate WiFi.
http://mediacenter.motorola.com/Fact-Sheets/Motorola-XOOM-Fact-Sheet-3537.aspx Find this hard to believe. I would suppose I could buy a XOOM outright, not involving a carrier. If you can't, this is going to be quite the fail.

Part of the pricing magic is comparing the wrong stuff. The XOOM is a 32G, Wi-Fi 2.4GHz & 5GHz 802.11b/g/n, 3G, 4G LTE upgradeable, w/Personal Hotspot device. The nearest iPad, 32G iPad with Wi-Fi + 3G is $729. Not that far from $800. Up to the user if the Xoom has sufficient additional features to make up the difference, such as HDMI out, microSD slot, USB, etc.

[Jason Dunn]

It's the same old "razors and razor blades" story. NONE of the the PC retailers makes any money from hardware sales; they make their money from adjunct sales of software, services, accessories and support.

But I thought Apple was known for their 50%+ profits on hardware sales - they make a FAT profit on the hardware. Did that change?

[Jeff Campbell]

But I thought Apple was known for their 50%+ profits on hardware sales - they make a FAT profit on the hardware. Did that change?

According to this Cult of Mac article (http://www.cultofmac.com/apples-ipad-only-costs-270-to-make-says-analyst/28746), an analyst says they make about $270.00 profit from the low end $499 ipad, which drops at each level above that, so yea, they make money from their hardware.

[Sven Johannsen]

According to this Cult of Mac article (http://www.cultofmac.com/apples-ipad-only-costs-270-to-make-says-analyst/28746), an analyst says they make about $270.00 profit from the low end $499 ipad, which drops at each level above that, so yea, they make money from their hardware.
I read it to say it costs $270 in parts, and then indicates a $10 manufacturing fee and a $20 set aside for warranty, making the cost $300 for the $499 basic model...profit $199. Then the 32G and 64K models cost $25.50 and $76.50 more to produce, but cost $100 and $200 more, leaving a greater profit at each level.

One comment pointed out, 'You have to account for company overhead, R&D, advertising, customer service, support, warranties - and of course the store needs to cover its costs, and make a profit too."

So while Apple is making what would appear to be stellar profits, there's a lot that isn't covered by just estimating basic hardware costs. It would be like valueing a book by the weight of paper in it.

[Jason Dunn]

One comment pointed out, 'You have to account for company overhead, R&D, advertising, customer service, support, warranties - and of course the store needs to cover its costs, and make a profit too."

Yeah, but the competition from the likes of HP and Dell have those same factors PLUS they're dealing with less profit on a per-device basis...so I think Apple is ahead more than anyone else in this regard.

[Dyvim]

Part of the pricing magic is comparing the wrong stuff. The XOOM is a 32G, Wi-Fi 2.4GHz & 5GHz 802.11b/g/n, 3G, 4G LTE upgradeable, w/Personal Hotspot device. The nearest iPad, 32G iPad with Wi-Fi + 3G is $729. Not that far from $800. Up to the user if the Xoom has sufficient additional features to make up the difference, such as HDMI out, microSD slot, USB, etc.
The comparable iPad model is $729, but the cheapest iPad is still $499, which is $300 less than the cheapest XOOM. Plus there are 5 iPad models that come in cheaper than the XOOM with a mixture of storage capacities and wireless capabilities.

The average consumer isn't going to think: "Oh, the XOOM is only $70 more than the comparable iPad model but does so much more!". They're going to think, "I can get an iPad for $300 less. Plus, it's an iPad!"

People love to rail about Apple being expensive, but so far in the tablet market, they're cheaper than the competition or at worst equivalent. It was similar when the 1st generation iPod nano debuted- no one was able to sell a 4 GB flash-based player with a color screen for $249 except Apple. Of course, over time component costs will come down a lot, while Apple mostly holds to its price points, and the iPad will probably eventually be more expensive than some of its competitors, but by then they may well have established their market position and tablet brand cachet.

[Jason Dunn]

The comparable iPad model is $729, but the cheapest iPad is still $499, which is $300 less than the cheapest XOOM. Plus there are 5 iPad models that come in cheaper than the XOOM with a mixture of storage capacities and wireless capabilities.

Indeed. I think that, amazingly, Apple is going to be the "bargain" tablet for now, at least in terms of a high-quality product (you can buy Android tablets for $300, but they're crap). I'm kind of amazed that there's no WiFi only version of the Xoom. I simply don't want 3G in my first tablet...