Apple 2.0

Covering the business that Steve Jobs built

Why aren't there cheaper tablets?

March 2, 2011: 11:22 AM ET

An analyst offers four reasons nobody has managed to match Apple's iPad

Apple Inc.

"Undercutting Apple on pricing has been the de facto strategy for competitors. Surprisingly then, no competitor has yet matched Apple on tablet pricing, which begs the question of why."

So begins a note to clients issued Wednesday morning by Bernstein Research's Toni Sacconaghi, who estimates that Apple (AAPL) may have a 750 to 975 basis point (7.5% to 9.75%) cost advantage over all the other tablet makers. He lists four factors:

  • No pricing umbrella. Apple made no secret that it priced the entry level iPad lower than it usually would to give competitors less room to maneuver. Sacconaghi's analysis suggests that the iPad's gross margins were likely 26% - 30% when it launched and have improved to 32% due to falling component prices -- some 700 basis points below Apple's corporate average. He estimates that the entry level iPad gross margins today are about 25%.

  • Scale/component sourcing advantage. Apple has used its huge cash advantage to pre-buy components and manufacturing capacity, giving it a pricing edge on touch panels and displays. As the world's largest consumer of memory, it also enjoys a break on NAND flash pricing. Sacconaghi estimates that Apple's total bill of materials pricing advantage is about 350 basis points.
  • Structural distribution advantage. Sacconaghi estimates that one in three iPads are sold in Apple's own retail stores, where it doesn't have to pay commissions. As a result, the iPad's average selling price is effectively 400 basis points higher -- which works out to a 300 basis point advantage in gross margin.
  • Processor design. Apple designs its own A4 processor, saving it an estimated $10 per unit, or about 200 basis points relative to its competitors.

Making matters worse, spot shortages in key components -- such as touch panels -- are making it hard for competitors to bring their tablets to market at any price.

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[Follow Philip Elmer-DeWitt on Twitter @philiped]

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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