An iTunes Subscription Could Subsidize the Apple Tablet

The unknown variable concerning Apple’s (AAPL) rumored iTouch Tablet is how this device will connect to the Internet. Will it be Wi-Fi? Will it be 3G in 2009? Will it be Verizon’s (VZ) 4G in 2010? With all the unknowns, the only thing investors can do is speculate based on what we do know. We know that Apple has benefited from the subsidized iPhone pricing model to the tune of approximately 60% margins. We know that the first release of the iPhone didn’t generate the demand that Apple wanted so they lowered the price points down to $99, $199 and $299. Consumers are obviously uneasy about paying $499 or $599 for an electronic device that isn’t a laptop. That price point doesn’t seem to be in our cultural DNA. We also know that consumers need a phone and they need a computer but they don’t need a Tablet. Anyone who owns a Tablet will still rely on a computer and a phone. The opportunity for a subsidized pricing model on the Tablet will be determined by its mode of connectivity.

My opinion is that built-in 3G through a single carrier like AT&T (T) is not in Apple’s plans. The company seems to desire an expansion of its mobile customers to include others such as Verizon (here in the U.S.). The problem with this kind of expansion is that Verizon’s 3G network requires a different format than AT&T’s. Apple isn’t going to produce a unique Tablet for each carrier so it seems that the 3G connection between multiple carriers isn’t going to happen. Perhaps Apple waits until 2010 to release the Tablet in conjunction with Verizon’s launch of 4G, if they do this they will be alienating their loyal iPhone customers still at AT&T who would then be forced to open a second wireless account with Verizon. Distributing the Tablet through multiple wireless carriers would be a major headache and hassle to say the least. I don’t anticipate this will happen.

The other alternative is to connect the Tablet via Wi-Fi. This allows Verizon customers to utilize their Mi-Fi mobile technology while AT&T customers, along with most other international iPhone users, could use the tethering capability of the iPhone to connect the Tablet. This mode of connectivity allows the Tablet to be widely available across all carriers and it places a premium of relevancy on the iPhone as it becomes your Internet access point for the Tablet and other devices as well. This is a simple solution for the Tablet connection but the problem for Apple is that it presents a limited opportunity to subsidize the cost of the Tablet. A $50/month tethering charge from AT&T or a $50 a month Mi-Fi charge through Verizon won’t put much of a dent in the rumored $800 price tag on the Tablet.

This leads us at the Economic Weather Station to reason that Apple may tap into their $32 billion of cash to subsidize the Tablet by themselves. What if they offer buyers a two year iTunes subscription that provides all the necessary content for the Tablet to be a success? Tablet users are going to want access to newspaper subscriptions, magazine subscriptions, books, movies, apps, video games, etc... Apple could sell the Tablet for $399 along with the two year iTunes subscription and they would end up making more than the $800 for the Tablet. I find it hard to believe that Apple would ever want to abandon the subsidy model after experiencing the profits of the iPhone. iTunes has never been a profit generator for Apple and it has been the cause of much debate among content providers. A monthly payment works for the cable television industry so why can't it work for iTunes? It seems like a great alternative for the newspapers and magazines who don't know what to do about their declining advertising and subscription revenue and it seems like a great way for Apple to sell more hardware. A Tablet owner with access to all of the iTunes store content would be in media heaven. It will be very interesting to see how Steve Jobs brings this new space together.

Disclosure: Long AAPL

Comments

[John Blackburn:]

It makes no sense to say you "find it hard to believe that Apple would ever want to abandon the subsidy model after experiencing the profits of the iPhone", then to suggest that "Apple may tap into their $32 billion of cash to subsidize the Tablet by themselves". Apple has that cash because someone *else* subsidized the iPhone; subsidizing it themselves would simply be a cannibalistically lowered price, not a subsidy at all. Apple would never do that.

Jul 31 10:49 AM

[disposablei...:]

Remember Apple already has 91% of the market for computers over $1000. Their next move would likely be something that gets them into the low- to mid- range of the PC market, while preserving margins and maintaining their position as an innovator.

An Apple tablet would have to be a notebook replacement (a MacBook replacement, not a MacBook Pro replacement).

If it's more or less based on iPod Touch technology they could keep it relatively cheap (at least on par with PC notebooks -- remember the iPhone is their counter to netbooks) while maintaining healthy margins.

Pair it with a bluetooth mouse and keyboard and you have the only computer most people in this generation will ever need. And that extra sale would put a little extra in Apple's pocket (those accessories have great margins).

All I'm saying is Apple could quite conceivably capture a huge swath of the low- to mid- range PC notebook market with this new device, without cannibalizing their MacBook Pro or iPhone sales. Why ask people to carry around yet another new product, when I bet most people will gladly put down their crappy PC notebooks for a sleek tablet that does web browsing, email, games, word processing, video editing and stores their digital photos right out of the box (not to mention all the Apps that will be written for it in the coming months).

Jul 31 11:07 AM

[disposablei...:]

Sorry, forgot to make my point above. A subsidy/subscription would be an interesting addition to the story, but Apple can do this without a subsidy if they want. They'll get a good margin on the hardware, App revenue, iTunes revenue, and a bump from the sale of a keyboard & mouse with almost every unit sold.

Jul 31 11:11 AM

[FreeRange:]

Wrong when you say - "We know that the first release of the iPhone didn’t generate the demand that Apple wanted so they lowered the price points down to $99, $199 and $299."

Apple didn't lower the price, the carriers did through their subsidies. Apple still gets paid full price for the iPhone.

Jul 31 11:12 AM

[brewer:]

John, they have that cash because Mac shipments have skyrocketed and the iPod is the biggest new device we've seen in 20 years, not just because of the iPhone.

I think Jason's iTunes subscription plan is really intriguing. I'd gladly play my cable TV fee to Apple if I could get most of the same content on demand with no commercials. That would be huge.

Jul 31 11:14 AM

[disposablei...:]

@brewer, agreed. I'd pay Apple $100 a month if I could download and/or stream on demand unlimited television programming and music to my iTunes account -- but that would have to be part of another, bigger, story.

A newer/better Apple TV with that kind of subscription would make some real noise in the market. An iTunes account already supports up to 5 machines I believe. Apple TV in the living room, and tablets for entertainment (and computing) in the kids' bedrooms and on the go.

Jul 31 11:25 AM

[pk de cville:]

How about the $1B or $2B server farm they're building in NC?

Might Jobs be replacing the WHOLE cable industry with iTunes downloads to the whole iTunes (including PCs and the new iTablet) universe?

I think the Apple meta-strategy is: Let's replace dumb (cable) pipes with smart adaptable very cool systems and actually transform our customers' lives.

Jul 31 11:35 AM

[pk de cville:]

How about the $1B or $2B server farm they're building in NC?

Might Jobs be replacing the WHOLE cable industry with iTunes downloads to the whole iTunes (including PCs and the new iTablet) universe?

I think the Apple meta-strategy is: Let's replace dumb (cable) pipes with smart adaptable very cool systems and actually transform our customers' lives.

Jul 31 11:36 AM

[disposablei...:]

@pk de cville, we can only hope.

I thought Apple would use it's $32 billion cash pile to buy the TV networks.

Jul 31 11:42 AM

[isellapple:]

an iTunes subscription service is a great idea! this idea has been kicked around for awhile and if Apple were to implement it with their Tablet device it would be an instant success!

Jul 31 12:05 PM

[realitybytes:]

The whole premise of this blog/article is nonsense.

Clearly, you're not in any of the product dev loops at Apple and have no idea what management is thinking.
All of the answers to all of the questions you are posing are already in front of you.

Jul 31 12:16 PM

[Constable Odo:]

iTablet... failure or success.
I'm trying to understand whether when some of the tech industry says that the Apple tablet will be a failure, are they suggesting that all tablets will be a failure. That a tablet really doesn't fit into a large enough niche for anyone to make it into a success? And by success, do they mean that Apple must sell more units than the iPhone or MacBooks or some already existing media device. I don't know how to measure success for a tablet. If Apple can sell a million units a year and far outsell other tablet makers, will that be considered a success? Or will it only be considered successful if Apple can sell as many tablets as they do iPod Touches?

The way this tablet is being built up it seems it will nearly have to outsell MacBooks Pros in order to be a success to the tech pundits on Wall Street. Yet if Apple can build a tablet and get 50% gross margins and sell about five million a year, that should really help Apple's bottom line. I'm just pulling five million units a year out of my ass, because I have no idea what the target number could be for such a device.

What will be the criteria for success or failure of this tablet? Anyone have any current figures on Tablet PC sales and what number Apple needs to shoot for?

Jul 31 01:04 PM

[jack dee:]

Wow """"I'm just pulling five million units a year out of my ass"""""

THat has got to be one hell of an ass you got there mate. Fair play to you.

But really is this "sub" to displace another one or to be added to the list.

phone cable netflix tivo etc etc...

Jul 31 02:22 PM

[Alex Filonov:]

Shoulda, woulda, coulda...

First of all, product is not out of the door yet (iTouch, I mean). Second, even Apple had its share of flops (Cube, Apple TV). We'll see when it's out.
And be careful out there. Apple fans enthusiasm exceeds that one of Microsoft fans in the end of 1990s. Remember what happened to MSFT stock after that?
Investment should be done with cool (better yet, cold) head.

Jul 31 03:14 PM

[FreeRange:]

Where did that stat of 91% come from? Not challenging, just curious.


On Jul 31 11:07 AM disposableidentity wrote:

> Remember Apple already has 91% of the market for computers over $1000.
> Their next move would likely be something that gets them into the
> low- to mid- range of the PC market, while preserving margins and
> maintaining their position as an innovator.
>
> An Apple tablet would have to be a notebook replacement (a MacBook
> replacement, not a MacBook Pro replacement).
>
> If it's more or less based on iPod Touch technology they could keep
> it relatively cheap (at least on par with PC notebooks -- remember
> the iPhone is their counter to netbooks) while maintaining healthy
> margins.
>
> Pair it with a bluetooth mouse and keyboard and you have the only
> computer most people in this generation will ever need. And that
> extra sale would put a little extra in Apple's pocket (those accessories
> have great margins).
>
> All I'm saying is Apple could quite conceivably capture a huge swath
> of the low- to mid- range PC notebook market with this new device,
> without cannibalizing their MacBook Pro or iPhone sales. Why ask
> people to carry around yet another new product, when I bet most people
> will gladly put down their crappy PC notebooks for a sleek tablet
> that does web browsing, email, games, word processing, video editing
> and stores their digital photos right out of the box (not to mention
> all the Apps that will be written for it in the coming months).

Jul 31 09:16 PM

[FreeRange:]

Subsidies in the long run are bad ideas as they diminish the value of the device and the brand. People lose site of what a sophisticated device really costs and drives the market to commodity status. A perfect example is - what is the cost of a regular cell phone? - FREE with two years of service is the answer. Something you give away for free has greatly diminished perceived value. The carriers are about to destroy the laptop / notebook markets so look out. A real problem is that the wrong item is being discounted in this transaction - the carrier's service is the real commodity yet they are turning the high perceived, value-added product, into the commodity due to their stranglehold on the market and their draconian business practices.


On Jul 31 11:14 AM brewer wrote:

> John, they have that cash because Mac shipments have skyrocketed
> and the iPod is the biggest new device we've seen in 20 years, not
> just because of the iPhone.
>
> I think Jason's iTunes subscription plan is really intriguing.
> I'd gladly play my cable TV fee to Apple if I could get most of
> the same content on demand with no commercials. That would be huge.

Jul 31 09:21 PM

[FreeRange:]

This really not something to worry about. The market will determine if its a success.


On Jul 31 01:04 PM Constable Odo wrote:

> iTablet... failure or success.
> I'm trying to understand whether when some of the tech industry says
> that the Apple tablet will be a failure, are they suggesting that
> all tablets will be a failure. That a tablet really doesn't fit
> into a large enough niche for anyone to make it into a success?
> And by success, do they mean that Apple must sell more units than
> the iPhone or MacBooks or some already existing media device. I
> don't know how to measure success for a tablet. If Apple can sell
> a million units a year and far outsell other tablet makers, will
> that be considered a success? Or will it only be considered successful
> if Apple can sell as many tablets as they do iPod Touches?
>
> The way this tablet is being built up it seems it will nearly have
> to outsell MacBooks Pros in order to be a success to the tech pundits
> on Wall Street. Yet if Apple can build a tablet and get 50% gross
> margins and sell about five million a year, that should really help
> Apple's bottom line. I'm just pulling five million units a year
> out of my ass, because I have no idea what the target number could
> be for such a device.
>
> What will be the criteria for success or failure of this tablet?
> Anyone have any current figures on Tablet PC sales and what number
> Apple needs to shoot for?

Jul 31 09:26 PM

[FreeRange:]

One could hardly call these "flops". The cube was intended as a high end machine and never caught on to be sure, but it was a small part of a larger family of products, just one form factor, not a standalone category.

Second, Apple TV is not a flop! Millions have been sold. It is simply Apple putting their toe in the water to develop a new category in the future when the market is ready. Rest assured this will morph into a dynamic and successful opportunity for them in the future, and it has been a great learning tool for Apple.

Also, one might point to the Newton as a failure, but in fact it was a product way ahead of its time. It was really the precursor to the iPhone and a great learning experience for Apple.


On Jul 31 03:14 PM Alex Filonov wrote:

> Shoulda, woulda, coulda...
>
> First of all, product is not out of the door yet (iTouch, I mean).
> Second, even Apple had its share of flops (Cube, Apple TV). We'll
> see when it's out.
> And be careful out there. Apple fans enthusiasm exceeds that one
> of Microsoft fans in the end of 1990s. Remember what happened to
> MSFT stock after that?
> Investment should be done with cool (better yet, cold) head.

Jul 31 09:35 PM

[disposablei...:]

The 91 percent of computers over $1000 number comes from an NPD study looking at market share back in June. Can't remember where so first came accross the stat, but should be easy to track down with Google.

Aug 02 12:34 AM

[NoBody78:]

As long as they can get it below $1000 without any wireless contracts I think it will do well.

Nov 23 04:49 PM