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  • 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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