On a past Apple conference call, Tim Cook said "one thing we'll make sure is that we don't leave a price umbrella for people". What's that? A price umbrella is when a company with dominant market share maintains high prices, leaving an opening for new competitors to enter at lower price points. In the case of the iPad, the price umbrella until recently was at $499. Someone could enter that market at lower prices and exhibit classic disruption to push them out from the bottom up.
Apple has already solved this problem twice, with the iPod and iPhone. So let's look at what they did.
With the iPod they created the iPod Nano and iPod Shuffle, both of which are cheaper products.
With the iPhone they kept selling the iPhone 3GS, which is old hardware that benefits from economies of scale, and they also get carriers (At&t and Verizon) to subsidize the phone costs by $400.
So, these are their 3 strategies:
- create a new product line
- keep selling old hardware
- get someone else to subsidize the product
What will they do for the iPad? Well, we have already seen Apple apply the methodology of keeping old hardware on the market - they now sell the iPad 2 at $399. But, this isn't really eliminating the pricing umbrella, it just lowers it. In order to eliminate the pricing umbrella Apple needs to serve the $199 to $399 price range. ($199 is the bottom of the market until new technologies emerge, new price models emerge, or a company decides to sell the hardware at a loss to gain market share.)
Let's see all this visualized. This is every current model of iPhone, iPod, and iPad graphed by price.
Looking at the red iPhone price points, notice that most of the lower prices are served by iPhones that say "Locked". These are subsidized by $400 by the carriers. And at the lowest price point ($0) is the older iPhone 3GS, which benefits from being subsidized and from being older cheaper hardware.
Looking at the blue iPod price points, notice that the price points are clearly served by different product lines. iPod Touch at the high end, iPod Nano in the middle, and iPod Shuffle at the bottom. Just like we said, they used product lines here to eliminate any umbrella.
Looking at the green iPad price points, we can see the the iPad 2 served to push down the umbrella from $499 to $399. However, there is an obvious umbrella and it's clear that Apple needs a product to cover the $199 to $399 price range. Insert the iPad Mini here.
They've already used the older hardware strategy, so the remaining two strategies are 1) get subsidies or 2) create a new product line.