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Apple Inc. (AAPL) is responding to growing competition in tablet computers by holding firm to a strategy of selling iPads at a premium.
Even as rivals such as Amazon.com Inc. (AMZN), Samsung Electronics Co. (005930) and Google Inc. (GOOG) introduce tablets at lower prices, Apple Chief Executive Officer Tim Cook went in the opposite direction yesterday. He unveiled a new iPad mini with a high-definition screen that starts at $399, $70 more expensive than last year’s model. Apple also introduced a lighter and thinner design for its larger tablet, renamed iPad Air, starting at the same price of $499.
The new iPads follow the debut of the iPhone 5c last month at a heftier price than analysts expected, underscoring how Apple is appealing to the higher end of the market where more profit is made. The Cupertino, California-based company is betting customers see its products as a unique mix of hardware, software and services that are more valuable than lower-cost alternatives.
“You can see from the pricing decision that Apple doesn’t really fear much competition,” said Benedict Evans, an analyst at Enders Analysis, who attended Apple’s event in downtown San Francisco yesterday.
Apple’s top marketing executive, Phil Schiller, said the company sees the tablet market bifurcating. On one end, Apple is focused on delivering high-quality devices, while the other has lower-quality devices and faces more pricing pressure, he said.
Schiller added that the iPad mini’s increased price is mainly the result of steeper costs for the new high-definition screens. Apple also dropped the price of last year’s iPad mini model to $299.
Crowded Market
Apple’s new iPads, which will be shipped next month, are debuting in a crowded market where companies including Samsung, Asustek Computer Inc. (2357), Google and Amazon have unveiled tablets, often at lower prices. The competition ramps up pressure on Apple because the iPad is its second-largest revenue source after its flagship iPhone. Success of the new models is critical as the company attempts to reignite revenue growth, which has slowed.
Apple’s new iPads, which also include more powerful processors and faster wireless speeds, are part of a broad product update ahead of the lucrative holiday shopping season. The company released the new iPhone 5s and 5c last month.
“We couldn’t be more pleased to introduce all of them to you in time for the holidays,” said Cook.
Many Macs
Apple also announced that it will for the first time start giving away its Mac software for free, starting with the latest release called Mavericks that was available for download yesterday. Apple’s productivity software, including iPhoto, iMovie and Pages, also are being made available for free with the purchase of a Mac, iPhone or iPad. And the company showed an updated high-end Mac Pro desktop computer aimed at professions that need extra computing power, as well as new MacBook Pro laptops.
“Last month was all iPhone and this was everything else,” Carl Howe, an analyst with Yankee Group, said after the event.
Apple rose 1 percent to $524.96 in New York today. The shares have declined 1.4 percent this year, compared with a 22 percent gain for the Standard & Poor’s 500.
Apple’s challenge with the iPad is similar to what it faces with the iPhone. Rivals are introducing devices based on Google’s Android software that are cheaper.
Samsung, Asustek, Lenovo Group Ltd. (992), Acer Inc. (2353) and others are offering tablets with prices starting at less than half of the iPad mini’s previous starting cost of $329. Amazon.com introduced new Kindle Fires last month with higher-resolution screens at prices starting from $229, while Microsoft Corp. and Nokia Oyj (NOK1V) took the wraps off new tablets this week.
Falling Share
Amid the competition, Apple’s tablet market share slid to 32 percent in the second quarter, compared to 60 percent a year earlier, according to IDC. Apple for the first time sold fewer iPads last quarter than it had in the year earlier period.
In addition, more than three years after Steve Jobs unveiled the iPad, the growth of the global tablet market is showing signs of decelerating. Tablet shipments are projected to increase 28 percent in 2014 to 301 million units, after doubling in 2012, according to Counterpoint Research.
Cook alluded to the competition yesterday, noting “everybody seems to be making a tablet.”
More Usage
Yet Cook said the iPad still is used four times more than all other tablets put together, partly because of the 470,000-plus tablet-specific applications available through its App Store. Apple has sold more than 170 million iPads, he said. Apple also will roll out the new iPad Air in China at the same time as other markets.
“Regardless of what you might hear or read about how many are sold or activated, iPad is used more than any of the rest,” Cook said.
Thus far, Apple hasn’t sacrificed its industry-leading profit margins to lower the iPad’s price and attract more customers.
“Apple has never been about market share,” said Howe. “They are content to take the profitable piece of the market.”
Developers at Apple’s event said the updated iPads will attract consumers, especially the lighter and thinner iPad Air.
“When you have a lighter-weight device, you’re going to get more usage,” said Mike McCue, co-founder of news-reading application Flipboard Inc. “People are more likely to throw it in a backpack, pick it up or use it.”
Free Software
Apple also is going on the offensive by offering its operating system software and productivity tools for free. It’s an example of how Apple is disrupting the personal-computer business that long dominated the technology industry by having customers pay separately for hardware and software.
With the rise of mobile devices such as the iPhone, iPad and others running Google’s Android software, PC-era stalwarts like Microsoft, Intel Corp. (INTC) and Hewlett-Packard Co. (HPQ) have seen sales slump. PC sales are projected to fall more than 11 percent this year, according to Gartner.
“The PC era is over,” said Howe of Yankee Group.
To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net
To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net
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