Sign on the Dotted Line: How Apple Could Redefine Tablet Pricing

Apple rules the tablet market, so much so that many people will just call it an iPad market. In addition to making up a stunning majority of sales, Apple is also setting the price for tablets.

How much does Apple rule the tablet space in terms of price? Aside from the sales numbers, surveys show that consumers need to see a $100 discount from the iPad price before considering an Android tablet, and as you approach the $250 price the interest in iPad alternatives increase dramatically.

Amazon is the first competitor to come in and undercut the iPad in a meaningful way, with an attractive tablet offering. The Kindle Fire looks like an amazing device, but many people are purchasing it as an iPad alternative because they don’t want to pay the $499 iPad price.

Apple will face stiff competition this holiday season because of the price disparity, but if Apple wanted to, they could price out the Kindle Fire with one action — selling the iPad on a contract.

The off contract price of the iPhone 4S is $649, $20 more than the iPad 2 with 3G. The up front price of the iPhone is the attractive $199 because carriers subsidize the price of the phone, making up the discount on monthly fees. If you do the math, the true cost of an iPhone 4S is thousands of dollars, not $200.

The Case for a $299 iPad

iPad 2 3GIf Apple allowed carriers to sell the iPad 2 WiFi+3G subsidized, they could redefine tablet pricing yet again. The iPhone 4S is estimated to cost Apple $188 for the 16GB version and $207 for the 32GB version. The iPad 2 3G with 32GB of Memory is estimated to cost Apple $333-336 depending on the carrier.

If Apple wanted to undercut the competition, they could allow carriers to sell the 16GB iPad 2 with 3G for $299 on a two-year contract. This pricing would be plausible given the $30 to $35 per month data plans that carriers could attach to the iPad 2 sold on contract.

This would push the total cost of the iPad 2 to over $1,000 with a two-year contract, but the added value of 3G and the lower upfront price would be an attractive value for many buyers. I’m not sure if carriers would be happy with that small of a profit margin after the data plans, but it’s a possibility.

The biggest question is if Apple would be willing to make the price cut. The company certainly sells enough iPads, 11.2 million last quarter, so there may not be enough of a reason to offer a cheaper iPad with 3G yet, but with a new iPad 2S or iPad 3 rumored for 2012, we could be surprised.

That could change if the Kindle Fire starts eating away at the iPad’s lead, or as more consumers see the benefit of an always connected iPad.

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