Apple Surprises With Low Price Of iPad 2

One of the surprises that came out of the Apple iPad announcement was the price: $499 minus a wireless plan.

That is cheaper than a comparable Motorola Xoom, one of the most prominent tablets in the same size range that has announced price, $799 without a carrier subsidy. Hewlett-Packard hasn't said what it is selling the TouchPad for.

Sanford Bernstein analyst Toni Sacconaghi in a note to clients said one reason Apple can offer the iPad at a lower price is that it owns the retail and online stores, where a lot of the sales happen. In addition the company has bought up manufacturing capacity with its cash reserve and designs its own processor. Thus it isn't paying commissions to anyone. But there are costs to owning a store, and it isn't clear that saving $10 per iPad - Sacconaghi's estimate - makes that big of a difference.

A recent teardown from IHS iSuppli revealed that Motorola has higher component costs than the first Apple iPad, and it seems likely that pattern will continue. Even though the addition of a camera to the iPad 2 adds to the amount Apple has to pay to build one, it may not be that much compared to the price of a 4G-capable radio. Xoom's cameras cost about $14, according to iSuppli. The firm hasn't gotten hold of an iPad yet but the iPad 2's cameras probably don't add much more to the cost than that.

Motorola can add that to the Xoom and plans to do so - at no cost to the users, which means it is paid for already. Apple will come with 3G capability, and that's all. And while Apple's introductory price is $499, that goes up to $629 if you want the ability to surf the net without a wireless hotspot nearby.

The costs of displays, memory and the processor are all higher than in the Apple iPad. The processor is especially expensive compared to the Xoom. (IHS iSuppli hasn't done an analysis of the TouchPad yet). The Xoom's dual-core processor costs $20, twice what the iPad's single-core A4 processor does.

The display is another big factor. At $140, almost forty percent of the Xoom's manufacturing cost comes from the 10.1-inch touch screen. The iPad's touch screen, by contrast, costs $125.

But even taking into account offering the iPad 2 at a lower price, it seems that Apple is accepting a lower margin than it has in the past. Apple's last reported profit margins for 2010 were 40 percent, and the company has averaged in the mid-30s for several years. That is much higher than the technology industry average.

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