How Not to Compete with Apple

February 10th, 2011

So I read a report this week that the spanking new 10-inch Motorola Xoom tablet computer will debut later this month for $799, according to a product listing at Best Buy. Sporting Android 3.0, a version specifically designed for tablets, it is touted as a potentially ultimate iPad killer.

That is, until you apply a little logic to the situation.

Ahead of the iPad’s introduction at an Apple media event, speculation had the new tablet selling for $799 to $1,000 per edition, as many tech pundits attacked its prospects for success. It was too expensive, tablets hadn’t shown much success in the marketplace, and so on and so forth. Even when Apple announced an aggressive starting price of $499 for a 16-GB version, the critics pronounced it as nothing more than an iPod touch in serious need of a diet.

How wrong they were!

But you know that, and I suppose most of you also know that you can’t compete with a $499 cultural icon for $799. It doesn’t matter if Android 3.0, code-named Honeycomb (the name of a 1950’s rockabilly song)) is equal to the iOS or possibly superior. Motorola’s starting price puts the entire Apple-is-overpriced meme on its head. In passing, the cost of the just-announced HP tablet, based on Palm’s WebOS, wasn’t immediately revealed.

The situation is not too different from the dilemma faced by Samsung with their 7-inch Galaxy Tab, which carries a $399 subsidized price. Yes, subsidized, which means you have to sign up for a two-year data contract with a wireless carrier, or pay hundreds more. So here we have a major consumer electronics maker, with a well-earned reputation for mostly well-designed gear, trying to compete by building an inferior product that costs more than the iPad unless you tie yourself to a data plan. Worse, the version of the Android OS used by the Galaxy Tab was never certified by Google to work on anything but a smartphone. What were they thinking? Can Samsung be that desperate?

Does that make sense to you?

As you have heard, over 15% of Galaxy Tab customers have returned them, which his quite high for such gear. The actual sales are unknown. Although Samsung reportedly shipped over two million units in the last quarter to dealers, real deliveries to customers wasn’t revealed. Samsung’s corporate spin department revised an initial estimate of “quite small” to “quite smooth.” The revision means absolutely nothing. Smooth might mean the sell-through is consistent, but it doesn’t explain why anyone would want one of these things, unless the iPad wasn’t available in their country.

The media still claims Apple applies premium pricing for its gear, implying that you can get the same thing elsewhere, without the Apple polish or label, for far less. In the real world, it doesn’t work for their mobile products. In addition to the iPad, the iPhone, at its subsidized price of $199 and $299 in the U.S., costs the same as competing premium smartphones sporting the Android OS, Blackberry or Windows Phone 7 OS. Even though you can get a cheaper smartphone, consider that AT&T still offers the 2009 iPhone 3GS for $49 with the contract, which makes it a great value even compared to those so-called free phones.

The iPod starts at $49. Tell me if you can find any portable media player with similar storage capacity for much less.

Where Apple usually earns the premium pricing label is for Macs. Even here, comparisons can be bogus. Yes, you can buy a generic PC note-book for $500 or so, but if you take a $999 MacBook or MacBook Air, and equip the PC portable with the same standard equipment, add the value of the software bundle (in other words the Ultimate version of Windows 7, not the cheaper feature-crippled editions), suddenly Apple’s pricing isn’t so far out of whack. On the higher end, Apple can sometimes be cheaper than any PC brand with a similar configuration.

The real reason the Mac is growing ahead of most of the PC industry, however, is that customers would prefer not to buy cheap junk unless they can’t afford any better. Macs last longer, require less maintenance, and generally earn a higher resale price if you choose to sell yours after upgrading. If you figure the real cost of ownership, rather than the initial purchase price, the Mac is usually cheaper. That was true even when all Macs were demonstrably more expensive than any really comparable PC.

I don’t expect Mac prices to change much, although the MacBook Air is priced aggressively compared to many thin and light note-books. On the other hand, Apple expects to move tens of millions of mobile gadgets every year. They leverage parts across platforms to allow them to buy larger quantities and receive better pricing.

With billions of dollars in spare cash to order those parts years in advance, Apple doesn’t just corner the market on critical components, but make it more and more difficult for even the larger players to compete on price.

It doesn’t matter if the Motorola Xoom has provable advantages over the iPad beyond adding useless extra features. The $799 opening price is a deal breaker. Worse, I doubt that Motorola can afford to beat the iPad on price unless it wants to take a huge loss on every unit sold. That’s no way to build market share. Besides, the iPad has pretty much become a verb for at tablet computer. Unless Apple screws up big time, how do you compete with that?

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18 Responses to “How Not to Compete with Apple”

  1. Randy A says:

    Gene, I’m going to have to agree on the price of the Xoom. Honeycomb LOOKS sweet (to an iPad, Pre+ and Android owning person like me) and I would really like to buy one. $799 is a little steep and I don’t think I could choke this one down given that WiFi is said to be locked until you pay VZW a one month data ransom. A WiFi only model made it to the FCC recently but I doubt it will be priced any more reasonably than the 3G/4G model is.

    Now the TouchPad from HP last night, that has my attention currently. My use of my iPad centers around mail, documents and Internet and for those things that TouchPad will be good to go right out of the box. I would be willing to risk developers not coming in droves, so long as it can keep me working. My comfort zone is going to be south of $700 and if they can get it to $600 I’ll buy on release day like I did my iPad.

    And the 15% return rate on Tabs has been disputed by Samsung. An official statement from Samsung says the number is 2%. You post what you want to but I will take the official word of a company with legal obligations to disclose material facts about the company over an analysts guess any day. Link to story:

    And the Tab does and always will suck. Honeycomb will not run on it like it will a tablet that is designed to run it and that is awful for the people that bought that thing with thought that they would get an update to Honeycomb down the line. I know a Tab owner and she loves it, but I think she got jobbed.

    • @Randy A, When it comes to Samsung’s spin control, when they say 2%, is that the number returned to dealers, or returned by dealers to them? Consider the potential differences, and they probably won’t tell you which.


      • Randy A says:

        @Gene Steinberg, Right, it is corporate spin. However, you injected the 15% number as though it were fact and clearly it isn’t. I wouldn’t be shocked if it is actually 20 or 25%, but it’s all a guess.

  2. Kaleberg says:

    This is what happens when hardware companies try to compete with computer companies. A computer requires hardware and software, ideally well tuned to each other. There is a requirements checklist based mindset that tries to split a computer into hardware + software, but the end result is usually awfully clunky. The pieces rarely fit well. It’s hard to articulate, but just about everyone recognizes it, and the less they know about computers, the more easily they recognize it.

    I think the Android phones are going to get better, but the iPhone and iPad will remain the phones of choice, particularly for people who are spending their own money and don’t consider price the primary criterion. Those are the same people who are buying Macs.

    I think HP has a chance. They know hardware, and they may still have enough of Palm’s team to do something with it. Palm had been moving towards the iPhone/iPod Touch for a while, but they’ve lost momentum. If nothing else, the hardware game was a bit beyond them. They got caught by a gap in the hardware technology. They needed to take a leap to the next generation, but the costs hadn’t come down enough. Apple started later and used their cash hoard to push down the cost curve. I’m not saying that HP is the next big thing, but rather that their approach has a realistic chance of securing a niche.

  3. jase says:

    There is a lot going on currently with the various competitors to iOS. In addition to the WebOS event from HP, it looks like Nokia is about to adopt Windows 7 with an announcement tomorrow. That would be quite a tectonic shift, since Symbian, basically a creation on Nokia, has long been dominant in Europe and strong in other markets outside North America.

    • jase says:

      Also, look at this report that Apple is preparing cheaper iPhones to blunt the market share gains by Android:

      • Randy A says:

        @jase, I find that highly suspect. Doing that would be an admission that Android is a bigger threat than they keep telling everyone that it is. I can’t ever recall Apple releasing a bottom dollar product in response to another company selling more of something than they do.

        It could happen, but I doubt it.

        • jase says:

          @Randy A, If it were a product better than an iPhone 3gs, but cheaper to produce, then I would be OK with that.

        • Al says:

          @Randy A, I always thought that just like with iPod, Apple will eventually come up with iPhone varieties to populate a wider pricing range. I’m not sure how they will differentiate across the price spectrum but I expect that just like iPod, lower end models will NOT be crappily built products.

          • @jase, The fly in the ointment is this: If there’s a smaller iPhone with a smaller screen, there’s are potential fragmentation issues for existing App Store developers having to build software for yet another smartphone with a different screen size. I suppose if Apple kept the display only slightly smaller, with the same proportions, maybe it wouldn’t make so much of a difference, other than to exhibit tinier lettering for basic functions.

            If Apple hopes for a cheaper iPhone, they could simply offer last year’s model, the iPhone 4, for a discount price when the iPhone 5 arrives. Remember, you can buy a 2009 iPhone 3GS today for $49 if you can’t afford the latest and greatest.


            • jase says:

              @Gene Steinberg, To Gene and Randy, I completely agree with your points about platform fragmentation and the inferior usability of a smaller display. I am totally against a smaller display for the iPhone and the iPad.

              I hope that Apple does not introduce a smaller iPhone, but the WSJ usually does not report wild or inaccurate rumors. It looks to me as though Apple may in fact produce a smaller, cheaper iPhone. Apple delivers great products almost every time, but it is possible for them to have mis-steps. The original MacBook Air was too expensive and tended to overheat, and the button-less iPod Shuffle was a step backwards in terms of usability.

          • Randy A says:

            @jase, I still don’t buy it. Gene touched on fragmentation but there would be another hit to marketing catcphases: best user experience.

            I have a Palm Pre as a second phone. Beautiful OS with a tiny little screen. The keyboard sucks too, but that’s neither here nor there. A small screen is NOT a good user experience on a touch device. I can’t see SJ signing off on one. No sir.

            I could be (probably am) wrong but that’s ok.

  4. SonOfA says:

    Gene, Gene, Gene.. I heard you say this in your Podcast and now it’s in your commentaries as well. The word iPad has not become a verb, no more than, the word iPod has become a verb. You can’t iPad something and you don’t iPod something. You can’t say iPodded that song without sound very silly. A verb is an action word, not a descriptor. Google on the other hand has become a verb. You can google something (search for something on Example, I googled the meaning of verb. 😉

    iPod and iPad have become adjectives for tablets and music players respectively, or more precisely, they have become synonymous with tablets and music players. When you think of a tablet, you are most likely to think of the iPad. When you think of a music player you are most likely to think of the iPod. Neither iPod or iPad have become verbs though, only synonymous with other words.

    Just sayin..

  5. SonOfA says:

    Well, the point was that you were using the word wrong.

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