Why the next iPad needs to cost less than $400

A Profit-based Analysis

When the tech world first received word that Apple was preparing to launch a tablet, many said that a sub-$1000 price point would make a big impact on the technology business. So it was no surprise that jaws dropped when steve jobs got onstage and announced the iPad 1's cost: $500. At least, that's what the cheapest version cost. As you probably know, there is a rigid model in terms of pricing based on memory and networking capabilities, allowing a more extreme (or rich) user to spend up to $830 on the device. Still, people wondered at Apple's ability to produce such a low-cost device and yet again create a brand-new category of machine.

However, the iPad's virtual monopoly on all things tablet did not last long, and new devices began to flood the market. Now, I'm not saying specs are everything in terms of user experience, but in terms of production costs they mean a lot. One of the first quality Android tablets, the Motorola XOOM, didn't exactly take off (partially due to Homeycomb's incompleteness in terms of apps and user experience), but it showed that it was possible to create a tablet that could reach the same price point.

Fast-forward to now. Android tablets took a 30% market share in Q3 of 2011, led by the Asus Transformer. The impact of Q4 breakthroughs like the $200 Kindle Fire, the Quad-Core Transformer Prime beating the same-memory iPad 2's price by $100, and Android 4.0, which added a fresh polish to tablets and phones alike, are yet to be explored. And yet, even with prices dropping all around them, Apple still keeps the newest-generation iPad's starting price at $500.

Different Forms of Profit

Recent estimates say that Amazon loses more than $2 per Kindle Fire sold. That's Amazon's strategy, though - It sells its products at a loss, but integrates its services so deeply into every device that it's practically guaranteed to make much more than that back in content sold. Most android tablet makers, however, don't have an ecosystem like Amazon and Apple's and instead seek to make money off of the initial sale - because after that, the relationship between the company and the consumer is over. Both strategies have some potential, although in the end it is clear that a larger ecosystem will have more power.

What Apple pulls off, however, confuses me. I've heard my fair share of Android fanboys saying that people just buy Apple's products for the logo, and I've also heard plenty of Apple fanboys defending Apple's business model. But I just can't figure out how Apple will continue to dominate if they keep offering products at hardware company prices, even though they have one of the most profitable content ecosystems in the industry. I can see how they could do it for almost five years, with the only system of its kind, but now that Amazon has a comparable distribution system on its devices I can't see how Apple can keep its initial prices high. Because let's face it - Apple's devices may be high quality, but that's no reason for them to demand unnecessarily high prices on them. They have the same advantage over the hardware companies as Amazon does; they just need to take advantage of it.