View Count: 163 |  Publish Date: April 04, 2013
Apple's iPad pricing, distribution stronger than iPhone

Wednesday, April 03, 2013, 09:44 pmApples iPad pricing, distribution stronger than iPhone
By Daniel Eran DilgerApple will have an easier time holding onto iOS market share in the tablet market than in smartphones, writes an analyst with an outperform rating on the company, thanks to more competitive pricing and better distribution.We see several differences between Apple’s approach to the smartphone and tablet markets, Toni Sacconaghi wrote for Bernstein Research in note covered by Barrons.iPhone subsidies and the pricing umbrellaThe iPhone left a price umbrella for other smartphone vendors to offer cheaper unsubsidized smartphones, even at the premium end, Sacconaghi wrote.The subsidy model allowed Apple to earn gross margins well above 50% on the iPhone, compared to ~30% on non-subsidized hardware products (Mac, iPad, iPod). Other smartphone vendors using free Android software were able to price below Apple for unsubsidized phones and still earn gross margins above 30%, especially on high-end smartphones.Apples iPhone carrier subsidies have previously been cited as a risk for the company, based on the reasoning that, were mobile providers to drop the program, users would be pushed toward cheaper phones and be more hesitant to pay the premium price of iPhone-class hardware. Of course, the reason why carriers are paying Apple subsidies is because the attraction of the iPhone is selling their more lucrative data services. Attempts to replicate the iPhones draw using Android alternatives, a strategy pursued by Verizon Wireless in its Droid campaign of 2010, havent been nearly as successful.The cost of market share: profitabilityWhile Apples competitors, including Android licensees, BlackBerry, Nokia and other Windows Phone partners, have all focused on market share by offering cheaper devices that can undercut the iPhone, Apple has intentionally focused on the much more lucrative, high end smartphone market. Thats resulted in Apple taking in the lions share of the mobile industrys profits. If Apple were simply trying to win a trophy for market share, it could have simply produced 60 million iPhone 3GS units and distributed them at cost in developing countries during the winter quarter. With a 2009 manufacturing cost of around $180 per phone (likely much less today), bragging rights to shipping the most phones in the quarter would have cost Apple less than $11 billion (likely much less, as dumping 60 million iPhones in any country would also have had a negative impact on competitors sales). Setting and maintaining such a market share record, however, is not as important to Apple as producing higher quality devices and selling them at a profit unmatched by any other manufacturer. Otherwise, Apple could simply have blown through much of its $13.1 billion quarterly profit to beat Samsung in market share, rather than allowing Samsung to do that while earning $4.8 billion less than Apple. Apple could simply have blown through much of its $13.1 billion quarterly profit to beat Samsung in market share, rather than allowing Samsung to do that while earning $4.8 billion less than Apple.The iPad offers no room for competitionWhile Apples smartphone market share has been held back by larger volumes of cheaper devices from its competitors, the same hasnt occured with the iPod touch and iPad, which have held onto majority market share longer.Apple did not leave a similar price umbrella [to the iPhone] under the iPad, Sacconaghi wrote. In fact, the iPad was cheaper than tablets with inferior features when it was first released. Now there are competitive Android tablet offerings at lower price points, especially because competitors such as Amazon and Google are aggressively pricing hardware in as their businesses makes gross profit on content and search, respectively.The difference between the iPhone and iPad pricing strategies means that while competitors could earn smaller profit margins of around 30 percent in competition with the far more profitable iPhone, in the iPad area they can only give away their devices in hopes that dumping a loss leader will create a much smaller market for selling content or pushing ads. While Google and Amazon have a business model to distribute low profit tablets in the U.S., that same plan isnt working out globally because neither company has established content stores with the global reach of Apples iTunes and App Store. That highlights a second strength of the iPad over its tablet challengers, one that isnt shared with the iPhone.The iPad has better distributionDistribution for the iPhone, at ~240 carriers, Sacconaghi wrote, is significantly lower than Samsung and Nokia, which have essentially global distribution, and Blackberry, which is distributed by >2x the number of carriers.By contrast, the iPad has stronger global distribution through Apple stores, carrier partners and network of resellers, including third-party retail outlets (e.g., Best Buy, Wal-Mart, carrier stores) and third-party websites (e.g., fact that Nokia, Samsung and Blackberry still have much greater global mobile phone distribution channels than Apple is a fact thats never mentioned when market share figures are bandied about.Most users are aware, however, that Apple was exclusive to AT&T in the U.S. until 2011, when Verizon began carrying it. Sprint didnt pick up the iPhone until the end of that year, and a variety of other significant U.S. carriers, including T-Mobile and a variety of regional carriers, didnt get the iPhone until its fifth generation. Apple is also still negotiating carrier agreements for the iPhone around the world, including China Mobile, the worlds largest carrier by subscriber count, and NTT Docomo, Japans largest, which is rapidly bleeding subscribers to its iPhone-bearing competitors. The fact that Apple has the smartphone market share it currently has despite much weaker distribution (since the iPhones inception) makes it no surprise why Apple maintains an even stronger share within the tablet market, where its distribution is superior to its loss leader tablet competitors.Sacconaghi maintains a $725 price target for Apple, which closed today at $431.99, just $13 above its 52 week low and dramatically below its all time high of $705 reached last September.

 app   Apple   Apples   carrier   carriers   cheaper   competitors   distribution   earn   fact   global   iPad   iPhone   less   market   market share   much   phone   phones   pricing   profit   Sacconaghi   Samsung   share   smartphone   tablet   earn gross margins   Sacconaghi wrote 

Picture Keywords
 app   Apple   Apples   carrier   carriers   cheaper   competitors   distribution   earn   fact   global   iPad   iPhone   less   market   market share   much   phone   phones   pricing   profit   Sacconaghi   Samsung   share   smartphone   tablet   earn gross margins   Sacconaghi wrote 
Time: 2:48  |  News Code: 241868  |  Site: appleinsider
Collecting News by Parset Crawler
Know more about Parset crawler