Why Apple’s Competitors Can’t Compete With the iPad’s $500 Price Point

Now that the Motorola Xoom is announced and will soon hit the shelves at retail outlets we will see if people are willing to pay a price premium for an Android tablet. Our guess is they won’t. So why doesn’t Motorola undercut Apple, the current tablet sales trendsetter?

Most observers are saying that the $500 iPad has the perfect price point and if the upstart wants to win this fight or just compete they need to at least meet Apple’s price and probably beat it. A really good $399 Android Tablet would likely sell well. Case in point: the Samsung Galaxy Tab is selling well and right now buyers can snag one at T-Mobile with a two-year contract for $249.99 or $499.99 without the weight of the contract. Other carriers have decent prices too on Samsung’s Tab.

So why is the Xoom starting out at $799 without a contract and $600 for the Wi-Fi only version? They want you to believe it is because of its superior specs – it has the 4G LTE network capability, will run flash, and Android 3.0, an OS designed for tablets without the closed nature of the iOS app store. It also has more flash memory than the $500 iPad. But is all that worth $300 or $100 for the Wi-Fi only version? And by the way, the Xoom won’t have Flash capability out the door. Engadget reported that it won’t be till Spring before it gets it. We don’t think consumers will see the iPad next to the Xoom and say the latter is worth an extra $100-$300.

The answer, according Jason Hiner at Tech Republic, is that other vendors can’t compete with Apple on the price point because they can’t make a comparable profit on each unit.  Apple makes a $500 16GB iPad for about $230 according to iSuppli. That’s $270 to cover things like marketing and overhead. No one knows how much of that is pure profit but the bean counters at Apple.

When you add the fact that Apple sells their iPads directly to the customer via the online and offline Apple Store. Some are sold at third-party retailers like Best Buy and Target. But most go directly from Apple to a customer. Cutting out the middle man adds to Apple’s bottom line. No one else has that kind of leverage. For that reason, they are not able to price their tablets at the same price as Apple without cutting the profit margin too thin. They would likely determine it is not worth the effort to produce in the first place. The solution is to partner with the wireless carriers to make up the difference. They know that Verizon, AT&T, T-Mobile and Sprint will subsidize the difference and sell the tablets at or below Apple’s $500 price. Could this be why we haven’t seen the Wi-Fi only Samsung Galaxy Tab?

What they miss is that most people don’t want to add another wireless bill or add to the one they already have. Why do they think people jailbreak iPhones to add wireless tethering for a one time fee of about $20 versus the monthly $20 fee Verizon and now AT&T are charging. Even that is more likely than a $30-$60 data plan for a 3G or 4G tablet. A lot of the 3G iPads sold were never even activated. Tablets are tools to be used at home or work where Wi-Fi is prevalent. When on the road there is often a Wi-Fi signal just a coffee shop away. The cell phone model will help sell a few over-priced Android tablets. But we don’t expect them to sell enough to make them anything but blips on the tablet sales graph while Apple chugs along with the iPad 2 about to be release and likely to sell tens of millions.