Apple Has Edge on Tablet Competitors Because of IPad Costs, Bernstein Says

Apple Inc.’s iPad, which commands about three-quarters of the market for tablet computers, has an edge over rivals because of the way the company sources components and sells the device, a report says.

Several factors give Apple an iPad cost advantage of as much as 9.75 percentage points over competitors, Sanford C. Bernstein analyst Toni Sacconaghi wrote today in a research note. The company is also pricing iPad more aggressively than its other products, making it difficult for rivals to undercut the tablet, he said.

“Apple’s products have traditionally commanded a significant price premium in the marketplace,” wrote Sacconaghi, who has an “outperform” rating on the stock. “Surprisingly then, no competitor has yet matched Apple on tablet pricing, which begs the question of why.”

Today, the Cupertino, California-based company introduced the iPad 2, refreshing the product line with a second edition of the device that sparked a rush of competitors. The iPad, which in under a year eclipsed Apple’s iPod as a top seller, had a 75 percent share of global tablet shipments last quarter, according to Boston-based Strategy Analytics.

Apple pays less in commission to retailers because a third of iPads are sold through its own stores or online, said Sacconaghi. At the same time, Apple has used its reserves of cash to buy up a larger number of components and secure manufacturing capacity in advance more cheaply than its competitors, he said.

“Aspiring tablet competitors are further thwarted currently by reported shortages in key components including touch panels, which makes it harder to bring a product to market, let alone at competitive prices,” Sacconaghi said.

Processor Design

By designing its own processor, Apple generates additional margin savings of about 200 basis points, or 2 percentage points, he estimated. Combined, this gives the iPad an advantage of 750 basis points to 975 basis points in gross margin, or the percentage of sales left after subtracting production costs, Sacconaghi said.

The lowest-price iPad 2 with 16 gigabytes of memory and Wi- Fi connectivity will sell for $499. The $729 model comes with double the memory and a third-generation wireless-technology connection. The second generation of the device will be thinner and lighter than its predecessor, with front and rear cameras and a more powerful processor, Apple said today.

Motorola Mobility Holdings Inc.’s Xoom tablet with similar specifications to the $729 iPad, costs $799. Research In Motion Ltd. has said its BlackBerry PlayBook tablet, expected out this month or in April, will cost under $500 for the basic version.

Apple rose $2.81 to $352.12 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have gained 9.2 percent this year.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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