While commenting on the recent story at MacRumors about the possibility of iPad 2 being offered alongside the new iPad 3, Marco Arment makes an interesting and generally right conclusion — offering the iPad 2 at a lower price point as the low-end model does makes more than enough sense from a business standpoint. However, I strongly disagree with his remark at the end:
How far down can Apple push the price of the iPad 2’s basic design, maybe with only 8 GB of flash? $199 probably isn’t possible and $399 probably isn’t a significant enough reduction to change anything, but if they can get it down to $299, that would take a lot of wind out of the 7” tablets’ half-assed sails.
First of all I seriously doubt that Apple is currently able to sell a “iPad 2″ calibre tablet for just $299 and still get a good margin on it — unlike some other companies, Apple isn’t in the business of selling hardware without making some healthy profits form it. Adding another $100 to the price will surely make this a far more realistic scenario.
Plus, I completely disagree with the whole premise that a $399 iPad 2 isn’t a significant enough reduction to change anything — shaving of a $100 from an entry price will result in a massive explosion in demand. And don’t just take my word for it — lets look at history, which has a tendency to repeat itself.
In January 2004 Apple introduced the iPod mini — it was small, cool and came in colors. The new device had only 4 GB of storage and was priced at $249 — just $50 less than a full-blown iPod with 15 Gb of storage. The result? iPod mini’s sold like crazy, with demand outpacing supply for something like a half of the year.
The problem is that Marco tries to look at this from a logical standpoint, while for most regular people “price sensitivity” beats logic, hence the popularity of low-end iPhones on contracts: people are willing to get a “worse” (but still rather good) device like the iPhone 3GS instead of the iPhone 4/4S just to save something like $100 – $200 on a contract that will cost the more than a thousand dollars.