AAPL Reveals Risky iPad Strategy

Apple sticks to high-margin devices despite increased competition

   
AAPL Reveals Risky iPad Strategy

Anticipation was high going into Apple’s (AAPL) recent iPad event. The company that launched and then owned the tablet industry has seen its market share gutted by Android-running competitors, while Microsoft (MSFT) pushes hard in the enterprise arena with business-friendly, Windows-powered Surface tablets.

Last year’s iPad Mini was a big step for Apple and quickly became its top selling model. But at $329 it was expensive, and its specs — especially the low-resolution display — were not competitive. Instead of the lower-priced iPad Mini with Retina Display Apple was expected to unveil, AAPL boosted the price on its new model by more than 20%, proving that it intends to concentrate on the high-margin premium market rather than battle for sales volume with lower-priced competitors.

That’s a risky strategy.

Apple’s share of world tablet sales has crumbled in the past year, and despite the increasing popularity of tablets, iPad sales declined 14% year-over-year in the previous quarter. Today, with Android tablets holding a greater than 60% market share, Google (GOOG) Play has also surpassed Apple’s App Store as the biggest mobile app store. A cheaper, updated iPad Mini would have narrowed the gap with competing 7-inch Android tablets.

AAPL did throw a bone to those looking for a more competitively priced tablet by keeping the original iPad Mini in its line up and knocking 30 bucks off the price. Will the $30 discount help Apple make inroads in the low-cost tablet market? The Slant’s Jeff Reeves thinks the move is going to help Apple win low end sales, but I’m not entirely convinced.

Amazon’s (AMZN) 7-inch Kindle Fire HDX is $229 (with Special Offers ads), and the latest 7-inch Google Nexus is also $229. Both of these tablets are well-made, well-reviewed, have name-brand recognition, offer a healthy app and digital media ecosystem — and their specs are competitive with the newly announced iPad Mini with Retina Display. But they’re priced nearly 25% cheaper than Apple’s discounted, older model.

The question is, will price-conscious tablet shoppers go for the iPad Mini? To me, it seems unlikely, but that’s not the only problem for AAPL.

At the same time that Apple’s fighting a low-cost volume war with Android tablets, it’s facing a challenge from Microsoft for the enterprise tablet customer. Last year, Microsoft came out of nowhere to take a stab at recapturing bleeding PC sales with its business-friendly Surface tablet that offered an innovative keyboard case and the familiarity of Windows and Office. There was speculation AAPL might release a similar built-in keyboard option for the iPad — the “we still have a lot to cover” tag on event invites helped fuel that — but they didn’t appear.

Apple did pick some fights with Microsoft though.

If you watch the keynote, you’ll hear Apple CEO Tim Cook take aim at Microsoft’s efforts, saying: “Our competition is different. They’re confused. They chased after netbooks, now they’re trying to make PCs into tablets and tablets into PCs. Who knows that they’ll do next?” After that zinger, AAPL went on to announce that its OSX desktop operating system would join iOS as a free offering, adding its cross-device iWork productivity suite would also be free. In other words, positioning the Mac and iPad combo as a more cost effective and coherently designed business solution than Microsoft’s Windows/Office/PC/Surface offering.

It didn’t take long for Microsoft to respond with a lengthy entry on the company’s official blog. Microsoft dissed the iPad’s lack of a keyboard or trackpad option, along with the free iWork inclusion: “Now since iWork has never gotten much traction, and was already priced like an afterthought, it’s hardly that surprising or significant a move. And it doesn’t change the fact that it’s much harder to get work done on a device that lacks precision input and a desktop for true side-by-side multitasking.” MSFT went on to say that the Surface is “the most productive tablet you can buy today.”

They do have a point. I’ve been an iPad owner since the original was released — there are five in the house right now — and I’ve tried using them as a laptop replacement and quickly given up. On the other hand, Windows tablets like the Surface have been much more productive to use, and I prefer Microsoft’s approach to Apple’s on that front.

So, after the big iPad event, where is Apple’s iPad strategy heading? I’d say that it’s firmly committed to the premium consumer market. This means sacrificing volume and market share in the name of higher margins. The approach has worked in the smartphone market where the iPhone still commands 53% of industry profits despite a 14% global market share. The risks include first-time tablet buyers going Android and remaining with Android, ceding the enterprise tablet market to Microsoft and falling behind in developer support as Android becomes the dominant tablet platform.

Offering slightly discounted previous generation iPads and throwing in iWork apps for free helps reduce those risks, but it’s hard to image a scenario (other than a short-term upgrade rush) where higher iPad prices spur a recovery in iPad sales.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/10/aapl-risky-ipad-strategy/.

©2014 InvestorPlace Media, LLC

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