In a move that should have surprised no one, Apple stuck with its same pricing game plan, introducing new iPads yesterday that will continue to sell at premium to rival tablets from Amazon to Google to Samsung.
CEO Tim Cook unveiled the sleeker iPad Air, the latest incarnation of the 9.7-inch tablet, and a sharper iPad mini with a Retina display on the same San Francisco stage where Apple’s tablet made its debut in 2010. The iPad still starts at $499, while the iPad mini, released last year with a starting price of $329, will now cost $399 for the entry-level, 16-gigabyte model. Apple is also selling the 16-gigabyte, iPad 2 (released back in March 2011) for $399.
The pricing strategy isn’t really a puzzle. Apple CEO Tim Cook, after many criticized the company last month for pricing the low-end iPhone 5c too high in emerging markets, said he wasn’t interested in going after the “junk” part of the market for smartphones — and tablets.
“There’s always a large junk part of the market. We’re not in the junk business,” Cook said in an interview with Bloomberg Businessweek. “There’s a segment of the market that really wants a product that does a lot for them, and I want to compete like crazy for those customers. I’m not going to lose sleep over that other market, because it’s just not who we are. Fortunately, both of these markets are so big, and there’s so many people that care and want a great experience from their phone or their tablet, that Apple can have a really good business.”
Still, some analysts giving their take on yesterday’s product news, which also included new MacBook Air notebooks, the long-awaited Mac Pro desktop, and the free-giveaway of Apple’s operating systems and apps, said they were taken aback by the iPad pricing.
“We were somewhat surprised that Apple is raising the price on the new iPad Mini to $399 creating a price overlap with the iPad 2 Wi-Fi, said Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co. “While the new Mini undoubtedly costs more to make, particularly with a Retina Display, Google, Amazon and others offer new entry level tablets for $230 or less. We do not expect the $299 price point to meaningfully re-accelerate iPad growth to near historical levels due to strong Android competition (Kindle Fire HDX, Google Nexus, etc.) at low- to mid-$200 price points.”
While smartphone competitors are challenging the iPhone, Apple is feeling more heat in the tablet market after losing share — it fell to 32 percent from 60 percent in the second quarter, according to market researcher IDC. The iPhone accounts for more than half of Apple’s revenue, while the iPad contributes about 20 percent.
Still, market share is typically tied to product rollouts, notes Piper Jaffray’s Gene Munster, who predicts the new iPads will spur an upgrade cycle. “We view the share in tablets with the potential to go the same direction as smartphones in that as some manufacturers move to make cheaper tablets with good quality, overall share numbers could be reduced, but we believe Apple will be well positioned for the higher end tablet market separate from the overall market.”
That brings the takeaway from yesterday’s news back to Apple’s profit margins. The higher-priced iPads should continue to support Apple’s profit margins, typically 36 to 38 percent, the analysts agree. Sales of the new iPads may also allay concerns that Apple has become too dependent on the iPhone; Cook said yesterday that Apple has sold 170 million iPads since the tablet debuted, better than some had estimated and implying that Apple may have sold 13 million in the quarter ended in September. Apple will announce fourth quarter results on Oct. 28.
Apple is also expected to introduce new products in the next year, including a larger-screen iPhone, an update to Apple TV, a smartwatch called the iWatch and a smart TV. It may also add new services built around the fingerprint sensor it added to the iPhone 5S last month.
Here’s a recap of what the analysts had to say about Apple’s iPad pricing, software giveaway, and the new products they expect in the coming year.
Baird Equity Research, analyst William Power: “Consistent with recent upgrades, the latest iPads are faster, thinner and lighter, though that should be enough to deliver solid growth…What didn't happen. No fingerprint authentication, though not widely expected and again no update on iTV or iWatch. The lack of an iTV update could suggest a bigger update coming.”
Barclays Capital, analyst Ben Reitzes: “Although Apple has been able to maintain strong performance from its iPhone line despite share gains from competitors, Apple has felt pressure from lower priced Android tablets that offer similar features which has hurt the iPad segments financial performance. For example, in 2012, Apple had 51 percent of the tablet market and the iPad segment brought $32.8 billion of revenue, but growth has stalled as we expect Apple to only have 34 percent of tablet unit sales in 2013 and bring in only $30.8 billion in revenue, a -6 percent y/y decrease. We believe Apple’s share should improve near-term but it will deliberately cede the low-end to competitors over the long-term to sustain its premium brand….
"On the positive side, the new products seem to protect margins with high prices (and new 128GB models) and Apple’s leading design status. However, we believe that some investors will also be disappointed that the new iPads were not equipped with the same TouchID fingerprint sensors in the iPhone 5S. All in all, we believe today’s announcement was in line with expectations, and a step toward reviving the iPad segment for Apple a bit into the holidays. We believe 2014 could be a better year for Apple in terms of product ‘wow factor’. We expect 1-2 larger screened “phablets” to launch in C2H14 – which could help drive ASPs higher as well. We also believe Apple is working on a TV and new media service to launch in late 2014 – for real. We also expect the MacBook Air could see ARM processors by at some point running iOS. We believe the new A7 processor in iPads and iPhones and free iWork software this year are laying the groundwork for this kind of product. We also believe Apple could launch a larger iPad of the 13” variety – which would hopefully come with a better keyboard accessory."
Cantor Fitzgerald, analyst Brian White: “We characterized today's iPad refresh as the most significant since the original iPad went on sale in April 2010 and we were not disappointed. In fact, Apple surprised us on the upside. With Apple today announcing that 170 million iPads have been sold (as of earlier this month) since the introduction of the iPad, we believe this will prove to be a major upgrade cycle.”
Cowen and Co., analyst Timothy Arcuri: "Net net, we believe Apple’s new iPad releases, new iOS7, free software upgrades, and higher residual values have the ability to drive a strong upgrade cycle in the coming quarters as price points move lower…Apple’s new iPad Air and iPad mini Retina combined with older generations at lower price points allows Apple to address a wider range of consumers. We believe the new hardware upgrades combined with recently announced iOS7 and free software upgrades (iLife, iWork) is compelling enough to see older iPad owners upgrade in the near-to-medium term. In addition, we believe the development of a secondary market allowing consumers to sell their old devices likely further incentives upgrades. Based on our research, Apple products generally have higher residual values than competitor products (for example a 1 year old iPad 4 still retains about 40-48% of its original value versus competitors about 24-30%) which in turn ultimately lowers the true cost to upgrade. For example, an iPad 4 user that wants to upgrade to the new iPad Air could sell their used device for about $240-$280 and then purchase an iPad Air for $499-799 with a net out of pocket cost of about $259-$519."
Morgan Stanley, analyst Katy Huberty: “At over 50% of revenue and 65% of gross profit dollars, the iPhone remains the key upside driver after a successful 5s/iOS7 launch. Newly announced iPad Air, iPad Mini w/ Retina, MacBook, and Mac Pro help stabilize the remainder of the business….New and improved iPads combined with broader price points should help stabilize revenue growth starting in 4Q13. Apple announced shipment of its 170 millionth iPad earlier this month, which aligns with our 168M cumulative shipments through the end of September.”
Nomura Equity Research, analyst Stuart Jeffrey: “Apple has defused gross margin concerns in the near term by retaining high price points for the iPhone and iPad. With new products likely to trigger replacement sales in fiscal Q1 and an increase in the buyback program a possibility, we expect the stock to retain support into a solid Q3 and likely positive Q4 guidance. This could be further underpinned by the launch of a larger-screen iPhone in 2014. However, we believe that high price points will eventually suffocate growth in developed markets and threaten Apple’s relevance in emerging markets (with local app developers likely to focus on Android). Thus, we still believe that Apple is likely to face medium- and long-term term growth challenges, with a high likelihood that gross margins disappoint.”
Piper Jaffray, analyst Gene Munster: “Based on the pricing of the iPhone 5C and raising price of the new iPad Mini with Retina, Apple is focused on holding its ground on price on mobile devices, which is directionally positive for gross margin. We are currently looking for gross margins of 36.7% in CY14. Given the positive pricing trends for iPhone and iPad, which make up 75% of sales, we believe the near-term gross margin trend should be generally stable in the 36-38% range….
"Since iPad is overshadowed by the iPhone and the tablet market largely is thought of behind the smartphone market, we believe it is useful to review the state of the tablet market. According to data from IDC, the overall tablet market grew 59 percent in Q2 2013 compared to Apple iPad sales, which were down 14 percent y/y. Additionally, given the difference in iPad growth to the market, Apple lost share y/y in the tablet market posting 33 percent share in Q2 2013 from 60 percent the prior year. We believe that quarter-to-quarter share fluctuations are significantly influenced by product release timing. Also, since Apple faced minimal competition until basically 2012 via Samsung and the Nexus tablet line, Apple’s tablet market share had headwinds that helped force the decline. Overall we expect Apple to stay in the 25-40% share range over the next year as the new line of tablets runs through its cycle. We view the share in tablets with the potential to go the same direction as smartphones in that as some manufacturers move to make cheaper tablets with good quality, overall share numbers could be reduced, but we believe Apple will be well positioned for the higher end tablet market separate from the overall market.”
Sanford C. Bernstein & Co., analyst Toni Sacconaghi: “Once again, the blogosphere was prescient, and new products (updated MacBooks, a retina display iPad Mini, and a thinner, 9.7" iPad) were largely consistent with expectations. Historically, Apple's stock has outperformed heading into iPad and iPhone product announcements and underperformed following them (i.e., "sell the news") and – consistent with this – underperformed modestly yesterday. We note that the stock's near-term trading range will be most shaped by expectations going into and coming out of Apple's Q4 earnings.
"The new iPad offerings do not change our relative conservative outlook for iPads. Our iPad estimates are meaningfully lower than consensus going forward, in part because we believe that: (1) the high end of the tablet market where Apple competes is becoming more penetrated; (2) replacement cycles may be longer than investors realize, as there is no "regular" replacement cycle, given the absence of subsidized data plans; (3) competition, particularly from Android, is increasing with high quality tablets available at price points below the iPad. We were somewhat surprised that Apple decided to raise price on its new iPad Mini, in light of the competitive environment.”
UBS, analyst Steve Milunovich: Apple's iPad and MacBook Pro refresh was impressive and mostly expected. We were surprised by $200 price reductions on MacBooks (w/Retina), a slightly higher than expected ASP for the iPad mini (w/Retina), and lack of an ASP reduction on the iPad 2. We surmise part of the higher iPad ASPs relates to the inclusion of previously a la carte software, such as iWork and iLife. Fingerprint authentication was expectedly omitted, though we were highly impressed with both compute and connectivity upgrades. In our view, Apple's new approach of including its software for free in all new devices should help to maintain premium pricing and is another step in software/vertical integration coming full-circle.”
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