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Price and Distribution make the iPad stronger than the iPhone

According to an analysis we can read today, Apple will find it easier to hold on to iOS’ market share in the tablet market than in the smartphone market, thanks to the more competitive prices of the iPad and better distribution. The analyst in question is Toni Sacconaghi of Bersntein Research , who wrote: “we see several differences between Apple’s approach to the smartphone and tablet market” .

iPhone subsidies and the price margin

“The iPhone has left a price margin to other smartphone vendors sufficient to offer cheaper devices without subsidy, even in the high-end” , wrote Sacconaghi.

Price and Distribution make the iPad stronger than the iPhone
Price and Distribution make the iPad stronger than the iPhone

The companies’ iPhone subsidies have been cited previously as a risk to Cupertino’s company, basing their reasoning on the fact that if mobile providers abandon the program, users could be pushed towards cheaper phones and be more reluctant to pay the high price of the iPhone.

Of course, the reason why companies are paying subsidies to Apple is because of the attraction the iPhone creates, thus managing to sell their most lucrative data services. Attempts to replicate this system with Android phones have not been as successful.

The cost of market share: profitability

While Apple’s competitors, such as Android, BlackBerry, Nokia and Windows Phone, have focused on market share by offering cheaper devices that can undermine the iPhone, Apple has intentionally focused on the much more lucrative market of high-end smartphones.

This has resulted in Apple getting most of the benefits of the mobile industry. If Apple were simply looking to win “the trophy” for the largest market share, it could have simply produced 60 million iPhone 3GS and distributed them at low cost in developing countries.

With a 2009 manufacturing cost of around $180 per phone (this cost will probably be much lower today) , being able to boast of having sold the most phones in a quarter would cost Apple less than $11 billion.

Establishing and maintaining a “market share record” , however, is not as important to Apple as producing higher quality devices and selling them at a profit unattainable by any other manufacturer. Otherwise, Apple could have simply spent part of its $13.1 billion quarterly profit on “winning” market share from Samsung, instead of allowing Koreans to make $4.8 billion less profit than Apple.

The iPad offers no margin to the competition

While Apple’s iPhone market share has been held back by the higher volumes of cheaper devices from its competitors, the same has not happened with the iPod Touch and iPad, which have been leading the market for longer.

As Sacconaghi wrote:

The difference between the pricing of the iPhone and the iPad means that competitors may have lower profit margins, while the profit margins of around 30% that we discussed in the case of the iPhone is much more profitable, in the area of the iPad they can only almost give away their devices in the hope that they will attract customers to their ecosystems and that these customers will buy a lot of content to make a profit.

While Google and Amazon have a business model that consists of distributing tablets with a very low profit in the U.S., the same model does not work globally because neither company has good content stores in other countries, as is the case with iTunes and Apple’s App Store. This highlights a second strong point of the iPad against its rivals, something that is not so clear in the case of the iPhone.

The iPad has a better distribution

Sacconaghi writes:

The fact that Nokia, Samsung and BlackBerry have much larger distribution channels for their smartphones than Apple, is a fact that is never mentioned when the market share figures are given.

Most users are aware, however, that Apple was exclusive to AT&T in the U.S. until 2011, when Verizon began having it. Sprint did not get to have the iPhone until later that year, and a variety of other major U.S. companies, such as T-Mobile, have not managed to get the iPhone until the release of iPhone 5.

Apple is still in negotiations for iPhone support agreements around the world, including China Mobile, the world’s largest telecommunications company by number of customers, and NTT Docomo, Japan’s largest.

The fact that Apple has a fairly high market share for smartphones at present despite weaker distribution is not surprising, as Apple maintains its strongest share in the tablet market, where its distribution is higher than that of its competitors worldwide.

Sacconaghi also dared to set a target of $725 per Apple share, which yesterday was at $431.99, only $13 above its minimum after 52 weeks of consecutive decline after reaching its historical high of $705 per share last September.

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