Apple and the tablets

Grip on the tablet market it created is tighter than it looks

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When Apple launched the iPad less than a year ago, most people did not know what it was for, let alone how many the company would sell. Wall Street forecasts for first year sales ranged from anything between 1m and 10m units. Curmudgeons, look away now: consumers bought 16m tablet computers last year and 15m of them were iPads.

This sort of success can go to a company’s head. In February, Apple upset media companies – many of which hoped the tablet would be their saviour – by demanding a 30 per cent cut of subscription revenues. Critics say this could drive content companies into the arms of rivals and loosen Apple’s lead in a fluid market, which has already seen several new entrants. But while Apple may have been greedy in this case, its grip on the tablet market is stronger than it looks.

Admittedly, devices using Google’s Android operating system now have the biggest share of the smartphone market. But Apple’s iPhone is deliberately expensive. It has a gross margin of 50 per cent or so and leaves rivals plenty of room to sell cheaper smartphones and still make a decent profit.

Apple took a different tack with the iPad: at $499-$829, the device has a gross margin of just 20-25 per cent, estimates Barclays Capital, well below the company’s overall 38.5 per cent margin. That leaves rivals struggling to compete on price, especially since Apple’s tablet reaps years of incremental innovation on its music player and phone. Motorola’s Xoom (the first rival device with new Google software that appears to match the iPad) went on sale this month for $800.

Meanwhile, Apple launches the new and presumably enhanced version of the iPad on Wednesday, as tablet sales surge. Media companies may be disgruntled with Apple but few will be brave enough to jump off this train.

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