Apple’s Game of “Heads I Win, Tails You Lose”

Remember as kids when you were given the know-how to always win at coin-flips? By uttering those 6 simple words “heads I win, tails you lose” you were able to set-up the rules of the game in a manner that seemed fair, in that it provided an outcome for both participants, but always resulted in you being the winner of the coin-flip and your opponent the loser (until of course they realized what was going on).

This is essentially the game Apple is playing in the tablet market right now. The company, which launched the industry with the unveiling of the iPad last April, has yet to see a truly competitive offering after selling 15 million iPad units in 2010. The only notable rival last year was Samsung’s Galaxy Tab. This Android-based tablet, which launched in November at a slightly lower price point than the iPad but at the expense of comparable features (smaller touchscreen display and less internal memory though it does include front and rear-facing cameras), has not met sales expectations.

The Motorola Xoom, which gets released today, is expected to be the first viable alternative to the iPad after winning Best of Show at CES in January. This device comes equipped with Android’s tablet-specific Honeycomb operating system and hardware specs to match current versions of the iPad, with the addition of memory expansion capabilities and front and rear-facing cameras, but accomplishes this at the expense of price (higher compared to iPads) and app offering (a handful versus the iPad’s 60,000).

In both of these instances, a trade-off between product and price had to be made by the manufacturer. To compete on price, Samsung had to sacrifice on product (i.e. screen size and memory). To compete on product, Motorola had to give on price (i.e. be more expensive). Throw in research that shows the iPad has 90% awareness among consumers, and you can see why tablet manufacturers must beat Apple on both product and price to beat the iPad.

Heads Apple wins, tails tablet manufacturers lose.

While Apple competitors might be able to match, or even exceed the design and hardware capabilities of the iPad at some point in the future, doing so at a lower price point would be challenging. Apple understands their strategic price advantage and is continuously looking to expand on it.

Case in point- based on iSuppli’s research, the single most expensive component in the iPad’s manufacturing process is the touchscreen display. So it’s no surprise that Apple revealed on its most recent earnings call that it has made long-term financial commitments of $3.9 billion dollars with three suppliers believed to be display providers. If correct, this means Apple would control 60% of the global touch panel capacity according to Taiwanese industry website DigitTimes. Controlling this amount of supply would have two major effects on the tablet market as (1) it would lock in favorable pricing and predictable supply for Apple going forward in manufacturing future versions of the iPad and (2) create supply constraints and pricing pressure on tablet manufacturers.

Once again, heads Apple wins, tails tablet manufacturers lose.

The concept of vertical integration is nothing new to Apple which acquired Intrinsity last year, a semiconductor chip design firm responsible for developing the iPad’s original A4 processor, in an effort to bring the skills and development costs in-house. This became another component cost advantage over the Motorola Xoom which leverages NVIDIA’s Tegra 2 for its processor.

With Apple’s event next week expected to showcase the next iteration of the iPad, which should once again place the product’s feature set ahead of its competitors, the question to Android, Tablet OS and WebOS tablet makers is: want to flip again?

Photo credit: Algie Moncrief/Flickr

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