How Apple Can Keep Control of the Tablet Market

The iPad from Apple makes up 65 percent of customer demand for tablets, according to a new ChangeWave survey that shows overall interest in tablets up 130 percent. For the first time, however, a single competitor has emerged to catch a healthy percentage of shoppers’ attention: the Kindle Fire.

The Amazon tablet was the device of choice for 22 percent of the 3,043 customers polled by ChangeWave for its latest survey. The next-closest device was the Galaxy Tab from Samsung (005930:KS), with just 4 percent of those surveyed expressing a desire to pick one up. The Kindle Fire’s emergence as a strong second to Apple’s iPad is mostly bad news for other Android-based competitors. It’s less of an issue for Apple, which currently enjoys a market share around 67 percent. That doesn’t mean Apple should quietly allow the Fire to dig itself in as the budget-conscious shopper’s tablet of choice.

The easy answer would be to make a cheap iPad—not something Apple will do easily or without a very specific, measured approach. Apple’s brand cachet and success depend on consumer perception of its products as high quality items; just pulling things out until a smaller iPad resembles a Fire in terms of specs, while running iOS, is an unlikely option. That said, Apple has never been afraid to take a good idea from the competition and make it better in order to move hardware. That’s what I think it will do in this case.

Amazon’s Fire appeals because it provides cheap access to content acquired and stored in Amazon’s extensive ecosystem of music and movies, as well as its growing Appstore. The hardware is really secondary to those considerations, which probably accounts for Amazon’s willingness to sell it so cheaply.

Narrowing the Price Gap

If Apple wants to regain its absolute dominance of the tablet market, it needs to take price off the table while it avoids setting itself up for the kind of criticism that Amazon and other low-cost tablet makers face for having cut corners. It’s a tricky balance to strike, but Apple has a lot of advantages, chief among them being Chief Executive Officer Tim Cook and his masterful control of the component supply chain. Apple doesn’t need to close the gap entirely. It needs to bring an iPad close enough that the Kindle Fire’s faults seem like unwarranted sacrifices for what you save.

Amazon is taking a big risk on a relatively unproven market (7-inch tablets). In doing so, it probably can’t achieve the parts-ordering volumes that Apple manages to achieve. That should allow Apple to eke out more profit per device, even at a much-reduced price point. Apple is also making great strides in achieving big price breaks by leveraging older hardware; the free (on contract) 3GS is a great example. A smaller iPad would automatically save on display costs, and Apple can also save money by using the older A4 processor (or an A5, if it launches alongside a next-generation A6 for the existing iPad).

It will likely be difficult for Apple to get Kindle Fire-cheap with a product it can stand behind. Still, the entry-level iPod touch recently hit that $199 mark, and a slightly larger device with similar features at $249 (same price as the Nook Tablet) or $299 isn’t too much of a stretch to imagine. It would likely kill the iPod touch by cannibalizing its sales, but Apple is famously willing to release forward-looking products, even if they might hurt past top producers.

Well-matched Content Ecosystems

Apple’s content ecosystem can go toe-to-toe with Amazon’s, especially in international markets, where much of Amazon’s content isn’t available. ICloud and access to past iTunes purchases help minimize the differences between the two. Notwithstanding Amazon’s big advantages regarding books, Apple still wins in digital movie and music sales. If a smaller, cheaper iPad can provide access to that content, with fewer hardware/software downsides, it will win customers, even with a price disadvantage.

Apple still has a huge app advantage. Along with such value-added features as AirPlay, iMessage, and other things iOS provides while the competition doesn’t, the apps will be enough to win back Apple customers who are just looking for a quality 7-incher to fill out their gadget lineup. In terms of the early adopter crowd, that alone could pay big dividends.

Apple has the elements of a low-end market play in place: the pedigree of the iPod touch, the company’s recent willingness to target mid-market by leveraging older tech, the lessons and supply chain control it has amassed in making the iPad a huge success, and the market-leading content ecosystem that continues to drive and be driven by its hardware device purchases.

Amazon’s ability to win out over other Android devices and take a big chunk of tablet interest by undercutting Apple on price might not even bother Cupertino. If it can’t work out how to make a competing device with a reasonable profit margin, it won’t bother. If Apple can, that’s when we’ll see sparks flying in the tablet market.

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