Apple iPad Success: Deals With Suppliers Likely To Fuel Continued Domination

Apple

First Posted: 03/ 8/2012 5:21 pm Updated: 03/ 8/2012 9:02 pm

NEW YORK, N.Y. - Apple certainly has lots of buzz and corporate cache behind its products, but there's a hidden — almost mundane — reason its newest iPad is likely to dominate the competition: the advantageous deals the company cuts with components manufacturers.

Apple's size, and the fact that the iPad shares components with the highly popular iPhone, means that the company can buy crucial parts such as processing chips and display screens at lower prices. Any company that wants to make a tablet computer that matches the iPad's $499 starting price has to endure higher costs.

As a result, Apple's tablet-making competitors have flailed — and failed. And with the new iPad, Apple is expected to extend its 62 per cent market share in the tablet computer category it created. IMS Research expects Apple to capture 70 per cent of the market this year.

A year ago, scores of companies all thought they had a shot at emulating Apple's success. More than 100 tablet models were on display at the annual consumer electronics trade show in Las Vegas in January 2011. Many of them ran on the Android operating system, developed by Silicon Valley powerhouse Google.

As the year progressed, those dreams crumbled. The iPad 2, launched in March, proved nearly unassailable.

A big part of the reason was that Apple has priced the iPad aggressively. At just under $500 for the basic model, Apple's profit margin on the device is lower than on the iPhone, a smaller device for which it charges phone companies a wholesale rate of $600 or more.

On Wednesday, Apple stuck to that price point when it unveiled the new iPad model. It has a screen that displays sharper images and deeper, more vibrant colours to set it apart from the competition. The new tablet goes on sale March 16 in the U.S. and several other countries.

Apple has other advantages, too. The company sells about a third of all iPads in its own stores or from its website. By cutting out the middleman, Apple is able to keep more of the slim profit margin for itself.

Because it produces tens of millions of iPads and uses some of the same components as the highly popular iPhone, Apple can buy crucial components such as chips and displays at lower prices.

According to research firm IHS iSuppli, Apple is the world's largest buyer of the microprocessor chips that serve as the "brains" of various devices. In January 2011, Apple said it had spent $3.9 billion on long-term contracts to secure supplies for two years of a "very strategic" component it wouldn't name. Few other companies are able to commit that much money.

Many suppliers are happy to sell to Apple, given the company's success in mobile products. ARM Holdings PLC, a British chip-maker that licenses the technology used in iPhone and iPad chips, for instance, saw its stock rise nearly 4 per cent Thursday, a day after Apple unveiled iPads with faster processors. Other Apple suppliers, including Cirrus Logic Inc., Jabil Circuit Inc. and Skyworks Solutions, have all experienced healthy stock gains in recent months.

The iPad's pricing created an odd situation. Usually, the first gadget of its kind to hit the market is expensive. Competition then gradually brings prices down.

With the iPad, the reverse happened: Competing products from makers such as Samsung Electronics Co. and Motorola Mobility Holdings Inc. were more expensive, at least for the first year.

The most tragic example of a tablet failure is Research In Motion Ltd., the maker of the BlackBerry.

In late 2010, RIM's co-CEO at the time, Jim Balsillie, said interest in the planned PlayBook tablet was "really overwhelming," particularly from corporate customers, a key market for BlackBerry phones. In March, just before it launched, Balsillie said the PlayBook "may well be the most significant development for RIM since the launch of the first BlackBerry device back in 1999."

But the PlayBook was widely panned because of its software, which RIM had put together. It was also expensive. It cost the same as an entry-level iPad 2 despite being half as big.

When sales failed to materialize, RIM had to slash the price of the PlayBook from $500 to $200. It ended up taking a pre-tax charge of $485 million for the declining value of its inventory.

Other manufacturers slashed prices too, culminating in a "fire sale" during the recent holiday season, said Rhoda Alexander, an analyst who covers tablets for IHS iSuppli.

"Those price discounts have come out of the profit margin, to a large degree," she said.

Hewlett-Packard Co., meanwhile, left the market completely. In August, it decided to discontinue the fledging TouchPad tablet along with its line of smartphones, despite great reviews for the in-house software running them.

Samsung has been one of the survivors, selling 6.1 million tablets last year, according to IHS iSuppli. That makes it the second largest tablet maker after Apple, with a market share of 9 per cent compared with Apple's 62 per cent. Samsung is also one of the world's leading makers of smartphones, chips and display screens. The company is, therefore, big enough to capture some of the advantages that Apple has as a buyer of components in bulk.

Samsung has put out a bevy of tablets in different screen sizes, hoping to capture buyers, who for one reason or another, want something other than the 9.7-inch screen of the iPad.

In November, another successful challenger appeared: Amazon.com Inc. The Internet retailer figured out that people would buy a device other than an iPad if the price was considerably lower. It put together a Spartan tablet with a minimum of frills and started selling it at $199. Amazon doesn't make a profit on its Kindle Fire, according to IHS iSuppli, but it hopes the device will help boost sales of movies, music and electronic books at its online store.

Analysts estimate that Amazon sold 3.9 million to 6 million Kindle Fires in the first six weeks, making it the third-largest seller of tablets last year. Looking solely at the last three months of 2011, Amazon beat Samsung as the second-largest seller of tablets.

Barnes & Noble Inc. adopted a similar strategy and was also successful, at least considering that it's a bookseller venturing into consumer electronics. It updated its Nook Color e-reader to make it more of a general-purpose device and called it the Nook Tablet. ISuppli estimates that it sold 3.3 million Nook tablets last year.

During this year's holiday shopping season, a new raft of challengers will appear: tablets powered by Microsoft Corp.'s Windows 8. Microsoft has provided software for PC-style tablets before, but they've never been more than a niche product. Now, the company is creating a version of Windows that runs on phone-style processors such as those used in the iPad. Reviews of the pre-production software have been positive. It will allow users to do some things they can't on an iPad, such as running two applications side by side on the same screen.

Still, analysts expect Apple to regain market share, after losing some because of the unsustainable discounting by competitors late last year. On Wednesday, Apple said it would keep the iPad 2 in production and cut the starting price to $399 — the same price as Samsung's Galaxy Note Tab 10.1.

Loading Slideshow...
  • Show-Stopping Display

    The photo above shows the difference between the iPad 2's 1,024 x 768 pixel display and the new iPad's high-definition Retina display, which has double the resolution and four times the pixels (2,048 x 1,536 pixels). <a href="http://www.apple.com/ipodtouch/features/retina-display.html" target="_hplink">Apple has described a Retina display as</a> "pixel density is so high your eye is unable to distinguish individual pixels." And how does it stack up to other tablet displays? <a href="http://twitter.com/ryan/statuses/177548523254988800" target="_hplink">GDGT's Ryan Block said</a> of his first hands-on with the new device: "It's the best display I've ever seen. Anywhere, period."

  • 4G, A First For Apple

    Apple's March 7 event marked a first for Apple, the arrival of 4G LTE connectivity on a mobile device. Purchased with a two-year contract from either AT&T or Verizon, <a href="http://www.huffingtonpost.com/2012/03/06/ipad-hd-apples-next-ipad-_n_1323535.html" target="_hplink">a 4G iPad</a> will, <a href="http://online.wsj.com/article/SB10001424052970204603004577267441821060940.html" target="_hplink">according to The Wall Street Journal,</a> "allow users to connect a[t] speeds roughly 10 times faster than current 3G data networks." 4G models will also "work on any 3G network," <a href="http://gigaom.com/apple/apple-ipad-event-live-blog/" target="_hplink">per GigaOm</a>. New iPad models equipped with this unique feature, however, will cost users slightly more than models without 4G. (More on this later.)

  • Meatier Specs

    The new iPad may look pretty similar to the old one, but it's packing some serious hardware upgrades within its thin frame. <a href="http://www.engadget.com/2012/03/07/new-ipad-vs-ipad-2/" target="_hplink">These include a faster processor</a>, the "quad-core" 1GHz Apple A5X, which Apple claims to offer twice the processing power of the A5 CPU (found in the iPad2) and four times the graphics-rendering power of the Tegra 3 processor found in many Android tablets, <a href="http://www.wired.com/gadgetlab/2012/03/live-blog-apple-ipad3-event/ " target="_hplink">per Wired's live blog of the event</a>. <a href="http://gizmodo.com/5891158/new-ipad-hd-the-third-generation" target="_hplink">Gizmodo argues</a> that Apple has also probably upped the device's RAM, "if only to handle the new resolution."

  • No Siri

    The new iPad did not get Apple standout iPhone 4S feature, the voice-activated virtual personal assistant, Siri. What it did get was Voice Dictation, which will be a blessing for anyone who has ever tried to type on the iPad's tricky virtual keyboard. To use the handy new feature, just tap the microphone icon on the keyboard and start talking. <a href="http://techcrunch.com/2012/03/07/ios-5-update-siri-speaks-japanese-voice-dictation-comes-to-new-ipad/" target="_hplink">Current languages supported by dictation</a> include U.S., U.K. and Australian English as well as Japanese, French and German.

  • Familiar Look

    While the new iPad offers quite a bit more than the iPad 2 in terms of display, hardware, and connectivity, the outside remains almost identical to its predecessor, measuring 9.5 x 7.31 inches. As expected, <a href="http://www.huffingtonpost.com/2012/02/27/ipad-3-iphone-5-charger-dock-apple-rumors_n_1304388.html" target="_hplink">the biggest difference between the updated Apple tablet and its predecessor is its thickness...</a>

  • A Bit More Heft

    Compared to the .34 inch iPad 2, the new iPad measures .37 inches deep, <a href="http://www.apple.com/ipad/compare/" target="_hplink">according to Apple's website</a>. In addition, the new iPad has .11 pounds on the iPad 2, weighing in at 1.44 lbs. The 4G version of the new iPad is even heavier, weighing in at a whopping 1.46 lbs.

  • Upgraded Photo Tools

    <a href="http://www.engadget.com/2012/03/07/new-ipad-vs-ipad-2/" target="_hplink">The new iPad boasts 5-megapixel rear-facing iSight camera that shoots 1,080p HD video.</a> The iPad 2's rear camera was only .7-megapixels <a href="http://www.apple.com/ipad/compare/" target="_hplink">and recorded video in a paltry 720p.</a> <a href="http://techcrunch.com/2012/03/07/iphoto-on-ipad/" target="_hplink">iPhoto</a>, Apple's photo-editing software, is now available for the iPad. The app can be used for editing, effects, beaming photos between devices and sending finished products to iCloud or social networking accounts. The app also lets users create photo journals, digital scrapbooks into which users can insert maps, notes and weather widgets. <a href="http://news.cnet.com/8301-17938_105-57392601-1/apple-launches-ipad-app-for-iphoto-updates-others/" target="_hplink">The new iPhoto app costs $4.99 and is available today. </a>

  • Personal Hotspot

    The 4G version of the new iPad also comes with a feature called Personal Hotspot, which "can be used to share the fast network connection on your iPad with up to 5 other devices using Wi-Fi, Bluetooth or USB," <a href="http://www.apple.com/pr/library/2012/03/07Apple-Launches-New-iPad.html" target="_hplink">according to an Apple press release</a>. Currently, this feature is available only for Verizon customers.

  • Powerful Battery

    Even though the new features like Retina Display and 4G connectivity will be consuming a lot more juice, a larger, more powerful battery will keep the new tablet charged for the same amount of time as the previous model. Phil Schiller, Apple's senior vice president of Worldwide Marketing, had the following to say about the battery during Apple's Wednesday event (<a href="http://live.gdgt.com/live-apple-ipad-3-event-coverage/" target="_hplink">per GDGT</a>): "You may recall we claim 10 hours of battery life, and 9 hours on 3G. The new iPad delivers the same 10 hours of battery life, and 4G is 9 hours."

  • Price And Availability

    <a href="http://www.apple.com/ipad/compare/" target="_hplink">The WiFi-only iPad starts at $499 for the 16GB then jumps to $599 for the 32GB and $699 for the 64GB.</a> The 4G version starts at $629 for 16GB and tops out at $829 for the 64GB version. The iPad is available for pre-order now <a href="http://www.apple.com/ipad/" target="_hplink">and will begin shipping on March 16. </a> [<strong>CORRECTION</strong>: An earlier version of this slideshow incorrectly listed the pricing of the WiFi-only iPad.]

  • New Apps

    Along with Apple's announcement of the new iPad came a league of updated apps that will put the device's Retina Display to good use. According to Engadget, <a href="http://www.engadget.com/2012/03/07/apple-ipad-3-liveblog/" target="_hplink">all of the stock apps have been updated,</a> optimized, and scaled up so text will automatically be rendered in high resolution. In addition to uniform updates, several native Apple apps also received new features. <a href="http://www.apple.com/pr/library/2012/03/07Apple-Completes-iLife-for-iOS-With-Introduction-of-iPhoto-Major-Updates-to-iMovie-GarageBand.html" target="_hplink">Garage Band, for example, will now allow you to save creations to and easily share them through iCloud.</a> Also, <a href="http://www.macworld.com/article/165730/2012/03/apple_updates_imovie_garageband_iwork_for_ios.html" target="_hplink">according to MacWorld,</a> users will now be able to add an automatic string orchestra to their creations through the Smart Strings feature and fine-tune their recordings with Garage Band's Note Editor. Apple's updated iMovie app will feature more advanced editing tools and will enable sharing of videos in 1080p resolution to YouTube, Facebook, Vimeo, and Apple TV, <a href="http://www.theverge.com/2012/3/7/2851783/apple-imovie-update/in/2615987" target="_hplink">The Verge reported.</a> The new iMovie will also let users cut trailers while recording video, take advantage of nine different genre templates, and incorporate custom soundtracks from famous composers. In addition to its own apps, Apple also introduced a new generation of apps made specifically with the new iPad's higher resolution and enhanced hardware capabilities in mind. According to Engadget, these apps <a href="http://www.engadget.com/2012/03/07/apple-reveals-next-generation-apps-for-the-new-ipad-infinity-bl/" target="_hplink">came courtesy of third-party developers </a> like game-maker Namco, which previewed its jet combat simulator SkyGamblers, and Epic Games, the developer behind popular role-playing sword-fighting game Infinity Blade and creator of the new Retina display-optimized Infinity Blade: Dungeons. In addition, 3-D design software manufacturer Autodesk showed off its Sketchbook app, which allows for a whole new level of sketch detail thanks to the new iPad's improved display.

  • ALSO ON THE HUFFINGTON POST

FOLLOW HUFFPOST CANADA BUSINESS

Filed by Christian Cotroneo  |