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Apple Starting a Race to the Bottom (With Itself?)

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Something strange is happening with Apple. Its product price points are drawing tears. Not tears of frustration, like they used to (its gadgets are cool, but so pricey), but tears of joy.

Because all at once, Apple has started to go cheap. Real cheap. For Apple, at least.

It started with the iPad. A mere $499 for an off-contract Wi-Fi tablet computer -- a remarkable price for the first tablet, when one considers that the original iPhone went for $600 on an expensive two year AT&T contract.

Next came the iPhone 4 announcement. Price: $199. And a reduced price for the iPhone 3GS, $99.

Then a redesigned MacBook Air, the first laptop completely based on flash storage - $999 which is twice as much as the most expensive netbook on the market, but still the cheapest laptop in Apple's arsenal.

And don't forget Apple TV, now selling for $99 a pop. Compare that with Sony's Internet TV Blu-ray Disc player, priced at $399, or Google TV for $599.

So the question is, will cheaper prices be the new norm for Apple?

For those of you out there who don't appreciate the radical nature of this suggestion, consider that Apple is the company that invented the personal computer -- which it now prices above every other competing computer brand on the market. It also made mainstream the $600 cell phone market in the United States, which we now call "smartphones."

The company has long played the role of packaging innovator and a market laggard. Meaning, it takes established markets, spellbinds the press, establishes a loyal cult-like following, then dips below the radar while its competitors flood the market with cheaper knockoffs. Apple maintains focus on innovation, not market share. As a result, it takes a smaller percentage of the market it created, but usually earns a better price per purchase than its competitors.

There's an old saying that when a lion kills an antelope, the real winner is the hyena. The same could also be said for Apple when it invents a crystallizes markets.

Except this time, it seems the company is changing its tactics.

When Apple unveiled the iPad in January, at a remarkable (Apple) price of $499, it was the start of speculation within some in the tech community that the company wanted to do more than make a market; it wanted to be price competitive too. It was hard to tell, however, if this was indeed true. After all, the iPad was a new product for a new market, and pricing is one of the hardest elements of business strategy. So Jobs' decision could have been a one-off -- and an effort to go at a new market cautiously. Since Apple's iPad rolled out, a gaggle of other tablets have been announced: Samsung Galaxy Tab ($399-$600), HP Slate 500 ($799), Dell Streak ($549.99), BlackBerry Playbook (rumored at $400-$500), etc.

Apple's iPad isn't the cheapest tablet, but notice how it is the median price. That, in itself, is new for Apple.

Since January, Apple has followed this path on other products, including Apple TV, which it dropped to $99 in September, and the redesigned MacBook Air, which it unveiled in October at $999.

Is Apple Inc. starting a race to the bottom (with itself, at least), in the new markets? Is Apple likely to keep on this path of competitive pricing strategy?

Yes. And here are three reasons why:

Seamless Vertical Ownership

Seamless vertical ownership is the key for Apple. The company is in an enviable market position because it creates, designs, builds and retails all of its own software and hardware products. This is a huge advantage. Not only in terms of product integrity and vision consistency, but also because, in theory at least, it enables the company to cut costs its competitors can't.

Although a few other companies -- namely, Microsoft, Dell, HP -- are somewhat able to match Apple in this regard, no one yet has the vertical integration that Steve Jobs does. Apple remains the only company with complete control of desktop, laptop, tablet and phone products, plus the software and operating systems to go with them, from concept to point-of-purchase.

The Cloud of Apple

When Apple unveiled its newly redesigned MacBook Air on October 20th, the key refrain was "flash storage." And another key point: "we learned a lot from the iPad." Remember, Apple just completed a 500,000 square foot server farm in North Carolina and may be planning to expand it to twice the current size. Although no one knows exactly what Apple plans to do with the farm, in-the-cloud storage and services, such as MobileMe, would be a pretty good guess.

Apple's coming cloud will not only make life easier for its customers, it will also make life easier on its hardware devices. No more large memory cache needed to run well. Instead, cloud-based memory and services mean the computers and laptops can keep getting smaller, thinner and lighter.

And cheaper.

Apple's New Market Cap

When Apple invented the personal computer in the 1980s, it enjoyed a brief dominance of the market. Consumers turned to Apple for their PC needs. But Apple quickly lost its market share to Microsoft, which was able to produce similar, competitive computers and retail them at a significantly lower cost than Apple. Ever since, Apple has played second fiddle to Microsoft. But in the last few years, the Cupertino-based company has been able to reclaim the computer market by creating and dominating the new mobile computing market. In May, Apple's market capitalization actually surpassed Microsoft's for the first time ever. Personally, I have noticed that even in the enterprise, Apple products are being held by all types of employees, not just design workers.

I admit, this is more gut feeling than verifiable fact. But I get the sense that Steve Jobs is more interested now, than in years past, of controlling a majority share of the new markets he's making. With the popularity and awareness of products being higher than ever before combined with the volume of products it is shipping, Apple is also benefiting from lower production costs due to the large volumes and vendors who are willing to offer cut-throat, competitive pricing in the hopes of winning a coveted Apple contract.

As a result, expect the company to continue beating competitors on price-per-purchase, which means products won't be the cheapest on the shelf, but the prices will scale down. In a nutshell, Apple will start competing against its own historic pricing model to be more competitive in the market.

The bottom line for consumers is that Apple's desktops, laptops, iPads, iPhones, Internet TV platforms and whatever else the company invents over the next decade, will likely be cheaper to buy than they were in years past.

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