The Tablet/
E-reader Industry
AEM 4160: Strategic Pricing
Jaime De La Hoz Sacasa
Colombe Bommelaer
Christy Kung
Alex Nelson
Table of Contents
Introduction
Industry Structure
Pricing Strategies
Recommendations
Why this industry?
Growth rate
potentially
reaching
maturity
New and
exciting
Disruptive
technology
Introduction
Industry
Structure
Evolving
Concentration
Various pricing
strategies
Pricing
Strategies
Recommendation
Industry Structure
Difference between
E-readers & Tablets
E-Readers
Tablets
• Allow users to
easily read e-books
without a computer
• Serves broader purpose
& functionality
Lightweight
E-Reader functionality in
addition to browsing the
Web, watching movies,
sharing files, taking photos,
and using social media.
Affordable
Introduction
Industry
Structure
Operate via touchscreen
Pricing
Strategies
Recommendation
The Long Tail Advantage
• Larger selection
than at a brick &
mortar stores that
mainly carry the
“best-sellers”
• More niche
content available
to the readers
• Accessible with
Internet connection
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Target Market
Age Distribution Tablets
Age Distribution Tablets
30%
26%
25%
20%
19%
17%
14%
15%
10%
4%
5%
0%
13-17
Introduction
18-24
Industry
Structure
25-34
35-54
Pricing
Strategies
55+
Recommendation
Tablet ownership over time
% of American adults ages 18+ who own a tablet
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
% of American adults
ages 18+ who own a
tablet
May
2010
Introduction
May Dec. Nov
2011 2011 2012
Industry
Structure
Sept Jan
2013 2014
Pricing
Strategies
Recommendation
Distribution
• Retail Stores: Apple and Samsung Stores
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
• Official distributors (Best Buy, Walmart…)
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Online Stores: Apple, Amazon, Ebay
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Official Site
Wal-Mart
Best-Buy
Ebay
Apple
Ipad Air 2
(wifi)
$499
$489
$499
$448
Amazon
Kindle Fire
HDX7
16GB
$179
--
$179.99
$99
Amazon
Kindle Fire
HDX8.9
16GB
$379
--
$379.99
$284.99
Samsung Tab
4 -10.1 16GB
(wifi)
$299
$321
$299
$234.69
Google Nexus
9
32GB - LTE
$599
$792
$479.99
$479.99
Apple “Price Umbrella”
1
High Barriers To Entry
• Capital intensive industry
• Existing companies have:
• Cost advantages
• Consumer brand loyalties
• Established advertising budgets
• Locked in consumers
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
High Degree of Rivalry
• Large size of competing companies.
• Aggressive competition through
innovation and pricing.
• Exits costs are low.
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Major Players
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
HHI/ CR4
Market Share 2012
Top 5 Tablets
CR4
85.08
HHI
2953.7184
Source: IDC Worldwide Quarterly Tablet Tracker, February 2, 2015
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
HHI/ CR4
Market Share 2013
Top 5 Tablets
CR4
62
HHI
1537.66
Source: IDC Worldwide Quarterly Tablet Tracker, February 2, 2015
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
HHI/ CR4
Market Share Q4 2014
Top 5 Tablets
CR4
51.4
HHI
1044.19
Source: IDC Worldwide Quarterly Tablet Tracker, February 2, 2015
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
HHI/ CR4
Market Share Q1 2015
Top 5 Tablets
CR4
55
HHI
1135.19
Source: IDC Worldwide Quarterly Tablet Tracker, February 2, 2015
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Apple’s iPad
• iPad launched in April 2010
• First mover advantage
• Disruptive technology
• Created a new market
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Samsung’s Galaxy Tab
• Launched in September 2010
• 2nd major player of the industry
• Major supplier of Apple products
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Amazon’s Kindle Fire
• Launched in November 2011
• Tablet version of Amazon’s e-reader
• Runs on a custom version of Google’s Android OS
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Google’s Nexus
• Nexus line: smartphones, tablets and digital
media players
• First tablet (Nexus 7) launched in 2012
• Google manages the design, development,
and marketing
• Devices manufactured by various
companies
Manufactured
by HTC
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Sourcing – Google
Model
Google Nexus 7
(First Generation)
Google Nexus 7
Google Nexus 2010
Google Nexus 9
Year
2012
(Discontinued in
2013)
2013
2012
2014
Manufacturer
ASUS
ASUS
Samsung
HTC
Android
Version
4.1 Jelly Bean
4.3 Jelly Bean
4.2 Jelly Bean
5.0 Lollipop
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Sourcing – Apple
Part
Manufacturer
Display
Samsung Electronics Co. Ltd
Display Driver IC Chip
Samsung Electronics Co. Ltd
Flash Memory
SK Hynics Inc
Touch Controller
Broadcom
Microchips
Fairchild Semiconductor
International Inc.
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Sourcing – Apple
• Example of other parts:
Display
Samsung/LG
Flash Memory
Toshiba
DRAM Chips
Elpida Memory/Micron Group/SK Hynics
A Series Chips (A5X or A8)
Qualcomm/Samsung/ Taiwan
Semiconductor Manufacturing Co.
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Patent Lawsuits
• Over the last 3 years, Apple
& Samsung have filed over
40 patent lawsuits against each other.
• Apple has also filed lawsuits against Nokia &
HTC.
• However, Apple & Samsung are still business
partners: Samsung supplies key components for
most Apple devices.
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Major Tablet Producer Margins
Model
iPad Air
Google Nexus 7
Samsung Galaxy
Tab 3
Kindle Fire HDX
Year
2013
(November)
2013
(July)
2013
(July)
2013
(October)
Manufacturer
Apple
ASUS/Google
Samsung
Amazon
Retail Price
$499
$249
$300
$229
Hard Costs
$274
$159.25
$214.57
$175
Gross Margin
45.09%
36.04%
28.48%
23.58%
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Pricing Strategies
Pricing Strategies
Goldilocks Effect
Versioning
Intertemporal Pricing
Tying
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Goldilocks Effect
NAND Flash
$9.20
DRAM
$6.30
Display
$60.00
Touchscreen
$20.00
Processor
$13.00
Camera
$11.00
Wireless Section (Module)
$ -
User Interface & Sensors
$15.00
WLAN/BT/FM
$5.00
Retail Pricing (As of November 2012)
$299.00
Power Management
$7.50
Total BOM Cost
$188.00
$13.50
Manufacturing Cost
$10.00
Battery
Mechanical/ElectroMechanical/Other
BOM + Manufacturing
$198.00
Box Contents
$6.00
Introduction
Industry
Structure
Pricing
Strategies
$26.00
Recommendation
Goldilocks Effect
NAND Flash
$9.20
DRAM
$10.50
Display
$90.00
Touchscreen
$43.00
Processor
$18.00
Camera
$9.00
Wireless Section (Module)
$ -
User Interface & Sensors
$10.00
WLAN/BT/FM
$5.00
Retail Pricing (As of November 2012)
$499.00
Power Management
$7.25
Total BOM Cost
$269.00
$19.00
Manufacturing Cost
$5.00
Battery
Mechanical/ElectroMechanical/Other
BOM + Manufacturing
$274.00
Box Contents
$6.00
Introduction
Industry
Structure
Pricing
Strategies
$42.00
Recommendation
Goldilocks Effect
NAND Flash
$16.80
DRAM
$7.60
Display
$57.00
Touchscreen
$40.00
Processor
$14.20
Camera
$4.10
Wireless Section (Module)
$ -
User Interface & Sensors
$10.00
WLAN/BT/FM
$5.35
Retail Pricing (As of November 2012)
$399
Power Management
$5.85
Total BOM Cost
$236.95
$22.75
Manufacturing Cost
$8.15
Battery
Mechanical/ElectroMechanical/Other
BOM + Manufacturing
$245.10
Box Contents
$5.50
Introduction
Industry
Structure
Pricing
Strategies
$47.80
Recommendation
Goldilocks Effect
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Versioning
What is it?
Versioning is the creation of and management of multiple releases of a product, all of which
have the same general function but are improved, upgraded, or customized .
Software (SV)
Free or
inexpensive
Introduction
Hardware (HV)
Great margins
Industry
Structure
Pricing
Strategies
Recommendation
HV examples: Apple
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Capacity Space Increases Margins
iPad Third Generation
Components/Hardware Elements
Retail Pricing (As of November 2012)
Total BOM Cost
Manufacturing Cost
BOM + Manufacturing
Major Cost Drivers
NAND Flash
DRAM
Display
Touchscreen
Processor
Camera
Wireless Section (Module)
User Interface & Sensors
WLAN/BT/FM
Power Management
Battery
Mechanical/Electro-Mechanical/Other
Box Contents
Introduction
16GB
$499
$306.05
$10.00
$316.05
WiFi Only
32GB
$599
$322.85
$10.00
$332.85
64GB
$699
$356.45
$10.00
$366.45
$16.80
$13.90
$87.00
$40.00
$23.00
$12.35
$$10.00
$5.00
$10.00
$32.00
$50.50
$5.50
$33.60
$13.90
$87.00
$40.00
$23.00
$12.35
$$10.00
$5.00
$10.00
$32.00
$50.50
$5.50
$67.20
$13.90
$87.00
$40.00
$23.00
$12.35
$$10.00
$5.00
$10.00
$32.00
$50.50
$5.50
Industry
Structure
Pricing
Strategies
16GB
$629
$347.55
$10.00
$357.55
WiFi + 4G
32GB
$729
$364.35
$10.00
$374.35
64GB
$829
$397.95
$10.00
$407.95
$16.80
$13.90
$87.00
$40.00
$23.00
$12.35
$41.50
$10.00
$5.00
$10.00
$32.00
$50.50
$5.50
$33.60
$13.90
$87.00
$40.00
$23.00
$12.35
$41.50
$10.00
$5.00
$10.00
$32.00
$50.50
$5.50
$67.20
$13.90
$87.00
$40.00
$23.00
$12.35
$41.50
$10.00
$5.00
$10.00
$32.00
$50.50
$5.50
Recommendation
Storage Capacity Margins – iPad 3
Components/Hardware Elements
Retail Pricing (As of November 2012)
Total BOM Cost
Manufacturing Cost
BOM + Manufacturing
Major Cost Drivers
NAND Flash
Introduction
Industry
Structure
16GB
$499
$306.05
$10.00
$316.05
WiFi Only
32GB
$599
$322.85
$10.00
$332.85
64GB
$699
$356.45
$10.00
$366.45
$16.80
$33.60
$67.20
Pricing
Strategies
Recommendation
4G Capability Margins – iPad 3
iPad Third Generation
Components/Hardware Elements
Retail Pricing (As of November 2012)
Total BOM Cost
Manufacturing Cost
BOM + Manufacturing
Major Cost Drivers
NAND Flash
Wireless Section (Module)
Introduction
Industry
Structure
WiFi Only
64GB
$699
$356.45
$10.00
$366.45
WiFi + 4G
64GB
$829
$397.95
$10.00
$407.95
$67.20
$-
$67.20
$41.50
Pricing
Strategies
Recommendation
Samsung
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Versioning
• This industry is unique because it is moving so fast.
Apple has switched from the iPad mini 2 to 3 in a very
short time (less than a year).
• With this pricing strategy, companies can maximize
benefits as they target a higher price for a new
products, but at the same time reduce the price of the
“older” versions to attract more customers
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Intertemporal Pricing
• The product is first launched at a high price.
• As the weeks/months go by, we observe a decrease in
price
• Allows for 2nd degree discrimination where consumers
are discriminated based on their WTP.
• Consumers with higher WTP (i.e., early adopters) will
buy the product as soon as it is launched.
• Consumers with lower WTP will buy the product once
its price is lower.
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Apple iPad Prices
$510
$490
$470
Ipad 2
$450
Ipad 3
$430
Ipad 4
$410
Ipad Air
$390
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Kindle Fire HDX 7
Price History ($)
Price History ($)
300
250
200
150
100
Introduction
Industry
Structure
Pricing
Strategies
24-Mar-15
24-Feb-15
24-Jan-15
24-Dec-14
24-Nov-14
24-Oct-14
24-Sep-14
24-Aug-14
24-Jul-14
24-Jun-14
24-Apr-14
0
24-May-…
50
Recommendation
Kindle Fire
Model
Fire HDX 8.9
Fire HDX
Fire HD 7
Initial Price
$429
$239
$199
2nd Price
$379
$199
$169
3rd Price
$159
Final Price
$139
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Tying
• To buy one product/service, a consumer must
buy another product/service.
• The purchase of a tablet or e-reader is tied to
the purchase of apps and other downloadable
content.
• A tablet’s utility increases with the number of apps
it contains [Metcalfe’s Law]
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Tying - Examples
• Amazon Kindle + e-books
• The Kindle is sold at cost or at a low price in order
to make it affordable to many consumers.
• However, you must purchase e-books for the
Kindle to be useful.
• Apple iPad + apps
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Tying Arrangements and
Antitrust Laws
• Tying arrangements have been the subject
of extensive litigation.
• Violates antitrust laws if:
• Distinct products exist
• Firm has sufficient monopoly power
• Forecloses volume of trade
• Example: United States v. Apple
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Recommendations
Investment Perspective
• The industry is becoming obsolete, need to redefine
Shakeout
• Consolidation of the industry in which businesses are
eliminated through intense competition
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Google Trends
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
It´s starts looking like:
“By 2018,
tablets will be
obsolete, I don’t
think there’ll be
a reason to
have a tablet
anymore ”
Heins,
Blackberry CEO
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Pricing Strategy
• They have to redefine the industry, otherwise, if
they continue selling just tablets and compete in
price: Commodity
• Be more than just a tablet
• Apple “does not sell tablets”, they sell iPads
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
The Future?
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
MacBook Pro tablet
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Questions?
Presentation
Additional Information
Target Market
Tablet Ownership Over Time
Distribution
Tablet Prices by Distributor
Apple “Price Umbrella”
HHI/CR4
Major Player Products
Sourcing Apple
Sourcing Google
Patent Lawsuits
Tablet Producer Margins
Goldilocks Effect
Capacity Margin Increases
4G Margin Increases
iPad Intertemporal Pricing
Kindle Fire Intertemporal Pricing
Samsung Intertemporal Pricing
Tying
Tying Arrangements and Antitrust Laws
Investment Recommendation
Google Trends
iSuppli iPad Breakdown
iSuppli Kindle Fire Breakdown
iSuppli Nexus 7 Breakdown
iSuppli Samsung Tab Breakdown
iPad Prices Today (Refurbished)
Adoption Rate by Generation
Moore’s Law Not Applicable
Consumption Spreads Faster Today
iSuppli iPad Breakdown
iSuppli Nexus/Kindle Breakdown
iSuppli Samsung Breakdown
iPad Prices Today (Refurbished)
Model
Initial Price
Refurbished
Price
Percent Change
iPad
$499
$109.95
- 78%
iPad 2
$499
$159.99
-68%
iPad 3
$499
$199.99
-60%
iPad 4
$499
$239.99
-52%
iPad Mini
$399
$175.99
-56%
iPad Mini 2
$499
$249.99
-50%
iPad Air
$499
$299.99
-67%
6
iPad Prices Today (Refurbished)
Introduction
Industry
Structure
Pricing
Strategies
Recommendation
Moore’s Law not in effect?
Consumption Spreading Faster
6