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The unthinkable is happening at Apple (Nasdaq: AAPL  ) .

The class act of Cupertino may have priced its iPad out of the market this holiday season.

Goldman Sachs analyst Bill Shope is advising clients to keep an eye on iPad sales this quarter, fearing that the company is facing some near-term demand challenges for its iconic tablet. He argues, and rightfully so, that Apple is long overdue for a price cut.

It doesn't take a rocket scientist to figure out that Apple -- until now the runaway market share champ in this nascent niche -- is finally facing legitimate competition at ridiculously attractive price points.

  •'s (Nasdaq: AMZN  ) Kindle Fire hits the market today at a head-turning $199 price point. As a seven-inch tablet, it's certainly smaller than the iPad, but that may not necessarily be a bad thing.
  • Barnes & Noble's (NYSE: BKS  ) Nook Tablet hits stores in two days. The superstore chain's new gadget costs $50 more than the Kindle Fire, but it does have beefier specs in some areas.
  • There's a glut of cheap non-Android tablets out there, as Hewlett-Packard (NYSE: HPQ  ) and Research In Motion (Nasdaq: RIMM  ) mark down their first-generation devices while pondering what do to next. Android manufacturers that naively entered the market at high price points with impressive spec sheets are taking a more realistic pricing approach this time around.

They've got you surrounded, Apple. The days of selling roughly three out of every four tablets sold are over.


Limbo rock in limbo
It wouldn't surprise anyone to see Apple come up short on iPad shipments this quarter. It was all too convenient to have Amazon introduce the Kindle Fire in September, leading consumers to hop on the fence to see what the $199 tablet is all about before paying $499 and up for an iPad.

Some will argue that the Fire and Nook tabs don't come in 3G flavors, but is that really a deal breaker? If so, we're comparing the Kindle Fire to a $629 iPad that is more than three times as expensive (and that's before we delve into the 3G connectivity plans).

One way or another, Apple's next step here will be down.

How low can Apple go? The original iPhone hit the market at $599, and the markdowns have been aggressive. However, Apple was aided by wireless carriers subsidizing the popular smartphone. No one is going to subsidize an iPad, especially the cheaper Wi-Fi model.

Apple's iPod touch has stuck to more moderate pricing moves, but there hasn't been a whole lot of pressure for the company to cut prices there. It owns that space. It was never vulnerable the way that the iPad is right now.

Back to Apple's future
There was a time when Apple had to settle for a thin slice of the PC market. Macs were generally well liked by everyone, but they just weren't worth a healthy market premium for most consumers. Mac and PowerBook owners are still in the minority, but it's a much larger minority now.

Apple doesn't want to go back there. Just as Android phones are now outselling Apple's iOS handsets, there isn't really a reason for the same scenario to play itself out with tablets. Many of the popular Apple App Store downloads are available on Android. Streaming video, browsing the Web, and checking email isn't materially different, at least not to the point of justifying paying 150% more for an iPad over a Kindle Fire.

"But the screen is smaller..."

"But the Apple ecosystem rocks..."

"But there's no camera..."

Keep believing that these knocks are somehow worth 250% of the price of a new Kindle Fire, but then watch Amazon and Barnes & Noble combine to outsell Apple in this country during the holiday season.

Profit prophets
The silver lining as Apple hands the smartphone pole position to Google's (Nasdaq: GOOG  ) Android is that it doesn't matter because Apple's the one commanding the lion's share of the profits. It won't have to budge on the tablet end, sacrificing margins the way that Amazon and Barnes & Noble are right now.

Don't go there. When a fight boils down to the greedy vs. the hungry, bet on the ones with the grumbling stomachs.

The funny thing is that the carrier-subsidized iPhone is reasonably competitive to Android handsets, and it's still losing ground to Android. Why can't this play out with tablets? In other words, even a price cut may not be enough -- but it at least gives the current market share leader a chance.

Apple had no problem selling $500 to $830 iPads when all of the major manufacturers were in that ballpark, but there's a new line in the pricing sand. If Apple's response is to simply roll out a seven-inch iPad early next year at $299 -- and perhaps shave its flagship design by $100 each -- that may be enough to at least keep it in contention.

Either way, it's time to kiss Apple's healthy iPad profit margins goodbye.

If you want to follow this saga, track the latest news by adding Apple and to My Watchlist.

The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of Apple,, and Google; and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz owns a first-generation Kindle, an iPad, and will soon own a Kindle Fire. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (23) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 15, 2011, at 10:29 AM, robbieinvegas wrote:

    "Bet on the ones with the grumbling stomachs..." Duh, okay. How much should I invest in RIM? Give me profits over sales, any day. One day the market will wake up and realize that paying people an estimated $20 a unit to "buy" a Kindle doesn't always translate to more profits down the road. Neither does giving away cell phones. Just ask RIM, soon to be the next Palm. Apple CEO Tim Cook said it best by noting that its nice to have Kindle in the market because people will see how truly great the iPad is. How true.


  • Report this Comment On November 15, 2011, at 10:33 AM, gskorich wrote:

    I think the real issue will be the price rise at amazon. they will eventually need to add features to their tablet to effectively compete with iPad. once the camera, microphone and storage are added they will have to raise the price. they will eventually need to sell the device at a profit. I'm not sure what the cost v price is but have read they are selling it for less than it cost to make. the fire and iPad do have one thing in common. they are tablets. that's it. I think consumers are willing to pay more for what they get. iPad delivers

  • Report this Comment On November 15, 2011, at 10:37 AM, mjtri wrote:

    I agree that their pricing will likely be reduced, but expect that their component costs will also be reduced and money can be made elsewhere in their ecosystem.

  • Report this Comment On November 15, 2011, at 10:46 AM, dgresl00 wrote:

    Did Mercedes or Lexus cut their price when the Ford Focus came out?

  • Report this Comment On November 15, 2011, at 10:46 AM, jafutral wrote:

    Yeah, right. Apple has such a strong a history of competing on price with me-too products.

    The question should be, how long can Amazon (with the only real competition to show up in the tablet market yet and even then, not really a direct competitor) lose money on their tablet before they have to _raise_ their price?


  • Report this Comment On November 15, 2011, at 10:49 AM, InTheMiddle wrote:

    Can't compare prices between apples and oranges. iPad is still way ahead of the game in terms of features. They aren't compareable products !!

  • Report this Comment On November 15, 2011, at 10:53 AM, etgh wrote:

    Never happen because when Apple needs more iPad sales, they will simply send out the signal and the iSheep will line up at the stores and buy.

    Because.....there's an app for that....

  • Report this Comment On November 15, 2011, at 10:53 AM, CraigNotGreg wrote:

    "They've got you surrounded, Apple. The days of selling roughly three out of every four tablets sold are over."

    What is your basis for making such a definitive statement? The fact that a Goldman Sachs analyst advised clients to keep an eye on iPad sales? Even if your statement is true, it's very possible that the Fire will grow the tablet/ereader market rather than hurt iPad sales.

    You may want to actually read the Kindle Fire reviews before stating that Apple has been surrounded (Wired's is especially good). The reviews are mixed at best and almost all of them concede that the Fire and iPad are really addressing different markets ("The Fire is no iPad killer" is a popular line). One could make a strong case that the Fire is more of a threat to OTHER Android-based tablets than it is to the iPad. Wake me up when you have evidence that iPad sales are actually slowing; then we can talk about a price cut.

  • Report this Comment On November 15, 2011, at 11:10 AM, SkippyJohnJones wrote:

    "Some will argue that the Fire and Nook tabs don't come in 3G flavors, but is that really a deal breaker? If so, we're comparing the Kindle Fire to a $629 iPad that is more than three times as expensive (and that's before we delve into the 3G connectivity plans)."

    To be fair, you are adding the $129 to iPad's price and not to the hypothetical Fire 3G price. If you assume a price increase for the added hardware, it would be $329 - around half the price of the iPad. And connectivity plans can't be subsidized on Fire the way they are on a typical e-ink Kindle with no streaming media.

    And it's not just 3g. To quote CNet editor Donald Bell: "Some omissions are obvious. There's no GPS, no maps, no Bluetooth audio or keyboard support, no cameras, no microphone, no killer gaming graphics engine, no video output, no compass, no gyro sensor, no chatting, no calendar, and no card slot for extra memory." All of these things cost a lot of money, plus iPad has twice the screen and battery (even more cost).

    I'm sure the Fire is a great product, and that it will sell in numbers. But Apple's response shouldn't be to slash prices on its flagship product. Perhaps they should release a supersized iPod touch at $300-350, but I sincerely don't believe the average user will be debating between these two products when they are making buying decisions. To quote Seth Meyers from weekend update: “It’s expected to sell well among parents who always buy the wrong thing."

    I think Apple LOVES the Fire. It should sew up the bottom end of the market for a single player, wiping out camp Android from below. Meanwhile, few will be able to compete on price/features/performance vs. iPad at the top end. Retailers have been bitten multiple times by buying too many "me too" Android tablets, and will be reticent to dedicate tablet shelf space to anyone else going forward. This market should consolidate nicely with no collusion. Also, Apple must love that Amazon will so effectively monetize Android without paying a single penny to Google - not even through services. Google has little recourse because of the open nature of its mobile product.

  • Report this Comment On November 15, 2011, at 11:38 AM, skippywonder wrote:

    "Keep believing that these knocks are somehow worth 250% of the price of a new Kindle Fire..."

    You forgot the most important "knock". Early reviews (lots of them) are suggesting that the Fire is choppy and slow. Poor loading times, unresponsive touch screen. Forget straw man arguments like "ecosystem" and "lack of camera" no one wants to use a piece of junk. And nothing says "piece of junk" like a touch screen that doesn't always respond when touched.

    The Fire will sell well for the holidays. And it will be a walking billboard for "you get what you pay for". The iPad will look very good alongside of this color e-reader.

  • Report this Comment On November 15, 2011, at 12:53 PM, infektu wrote:


    What does this Apple/Android tablet thingie have to do with RIM?

    However, do you want profits over sales? RIM has a stellar return, whether you look at it over the past 10 years or 10 months.

    I am not sure whom you asked on how much you should invest in RIM (if at all), but you can look at what the big boys did over the last 6 months: loaded up while shaking the tree of the fearful.

    Don't take my word, check it out for yourself on wallstcheatsheet dot com.

    Just search for research-in-motion-major-institutional-shareholder-changes-for-q3

    Of course, you can also go ahead and short the stock after everybody saw the horse out of the barn.

    You are free to believe the media mantra palm=rim, and lose your shirt, medium or long term.

    When was the last time Palm turned a $1 profit?

  • Report this Comment On November 15, 2011, at 1:18 PM, Turfscape wrote:

    Apple is facing lower-priced competition on many fronts...I wonder if they've ever seen that situation before? I wonder what the results were? Is there ANY history we can look at? Oh, why oh WHY can't we have some sort of insight that shows how Apple responds to this sort of competition?'s happened every year with every product they've ever made in the last decade...never mind. I guess the world isn't collapsing.

  • Report this Comment On November 15, 2011, at 1:23 PM, griderX wrote:

    There has been a lot written on Kindle vs. thing I'd love to see which may be more difficult to analyze is how "Price" sensitive your average iPad user is? Does he or she care about spending $2-300 more for all the bells and whistles?

    How does the saying go? Business should NEVER compete on price? I think Apple is strong believer in the concept...and it has proven VERY rewarding.

  • Report this Comment On November 15, 2011, at 1:40 PM, Spssguy wrote:

    This is the most supremely stupid idea on any tech forum today.

    The kindle isn't even a tablet, just an ereader.

    It's totally lacking any ability whatsoever to actually compete with the iPad.

    It's amazingly daft to even think that iPad would need to be the same price when it lacks most of the iPad capabilities.

    Kindle fire doesn't even run a modern version of Android. If anything, KF will disrupt what there is of a non-iPad market. There really isn't much of a market for non-iPad 'tablets'. Look at the dismal failures of every 'tablet' (not the iPad) ever introduced. Even, the obvious iPad copy cat wanna-be 'tablets' (non-stylus, non-Windoze)

  • Report this Comment On November 15, 2011, at 1:48 PM, Spssguy wrote:


    Yeah, it's the 'sheeple' allright. LOL, all those crazy people who want to buy a great product that actually works and doesn't require you to keep an IT guy on retainer.

    Those people are real idiots, right? You are the smart one. LOL

  • Report this Comment On November 15, 2011, at 3:07 PM, TMFBreakerRick wrote:

    << Did Mercedes or Lexus cut their price when the Ford Focus came out? >>

    @dgresl00, you can be sure that IF Mercedes or Lexus commanded 75% of the car market and Ford came in at a price 60% lower that Mercedes or Lexus would no longer sell three out of every four cars anymore.

    If you don't think Apple will have a sub $400 iPad on the market in a few months you're just misreading the tealeaves.

  • Report this Comment On November 15, 2011, at 3:32 PM, SkippyJohnJones wrote:

    "@dgresl00, you can be sure that IF Mercedes or Lexus commanded 75% of the car market and Ford came in at a price 60% lower that Mercedes or Lexus would no longer sell three out of every four cars anymore."

    OK, then let's look at the history of iPods. This is the only product segment Apple has ever owned, and they still do after 10 years. They attacked the lower end once they sensed saturation of the flagship product. They did this less through price drops than through differentiated products at lower prices. Eventually prices decline, but only in line with costs - never at the expense of margin.

    This situation is a bit unique because Amazon is a very different breed of competitor, and is a disruptor itself. They are not trying to protect their own juicy profit and market share, and they don't even seem to mind not making money.

    Still though, these products are not easily mistaken in any type of side-by-side comparison. I'm sure many Fire buyers will come at Apple's expense, but the presence of a second player will also add weight to the product category on the whole. Remember, tablets have only existed (relevantly) for 18ish months. The market is growing at 100% plus. Apple can make a lot of money at 50-60% share.

    Also, you are only considering the individual consumer market. A huge chunk of iPad's sales volume is to large corporations, educational institutions at every level, medical professionals, etc. On these fronts, Fire falls woefully short. And it will continue to fall short until the proprietary app selection gets into the tens of thousands. Even then, many of the apps utilize onboard 3G, GPS, gyro, cameras, microphones, etc. If/when Amazon can release a $200 tablet with these key features, Apple will be forced to drop price.

  • Report this Comment On November 15, 2011, at 6:30 PM, ejclason2 wrote:

    I doubt Apple will reduce their margins much. Apple almost never buys/protects market share by reducing their margins. Apple is about not being in the comodity business. Of course Apple wants both market share and margins. But if it can't have both, it will choose margin.

  • Report this Comment On November 16, 2011, at 5:02 AM, TurbulentTime wrote:

    At one point in time, businesses should start to realize that it is not price that matter the most. It is how it function, how it facilitates our everyday's lives, how well it does all the things that are expected to do. How much of values we, as consumers, do get from the product. Do you buy a Lexus or BMW and pay the price of a Honda or Toyota? And the iPad2 is so nice. I love the cameras, I love how easy it is to type in other languages, e.g. Chinese (no need for Pin Yin), Japanese, etc. Your fingers can do so many great things with the iPad2. Besides iPad3 is coming, can the other "me-too" manufacturers keep up with Apple? Apple is the ultimate innovative company of this century, I still do not see others having any power of knocking it off, rather others are still only trying to make copies... with lesser abilities and lower prices...

  • Report this Comment On November 16, 2011, at 5:13 AM, TurbulentTime wrote:

    TMFBreakerRick , you are missing the point of dgres100. I just realize that TMFBreakerRick also mention the same point that I mention. Now, here you need to learn this man. If there is the luxury market, which customers always are ahead of others, always have the capital to invest in the latest and most powerful gadgets of their segments, would these people be buying something cheaper, yet offer less functions? Ask this to yourself.

    "you can be sure that IF Mercedes or Lexus commanded 75% of the car market and Ford came in at a price 60% lower that Mercedes or Lexus would no longer sell three out of every four cars anymore.

    If you don't think Apple will have a sub $400 iPad on the market in a few months you're just misreading the tealeaves. "

    See, the point that you make here is the same as the points which many PC people have made, including me once made. Why, now have you ever heard of PC people saying that Apple laptop costing 2,000 more when a PC costs only 400 will make Apple laptop prices come trumbling down? Now, are you in the same situation like those folks before. And, what has history taught us? The price of those Apple laptop remain over 2,000 apiece while those who cannot afford will buy PC and other laptops. Do you understand the law of market segments? Are you an economic major?

  • Report this Comment On November 16, 2011, at 9:37 AM, jafutral wrote:

    I find it interesting that somehow price is the big factor in this article. If an iPad had lacked even just some of the features that the Fire lacks, everyone would say it is dead in the water before it even gets released no matter what the price.


  • Report this Comment On November 16, 2011, at 9:55 AM, Zankudo wrote:

    You pay for what you is just that simple. Take yourself out of the economics. Apple is the 21st century and will be the 22nd when that one rolls around. The rest of them are just copy-cats.

  • Report this Comment On November 17, 2011, at 11:15 AM, SkippyJohnJones wrote:

    One last thought that just came to me. Maybe everyone is right. If the rumors of a hi-res iPad3 prove true, Apple may very well keep the iPad2 on the market at reduced prices. It would fit the program Apple uses for iPhones. They continue to make and sell the previous year's model and sell it (with smaller onboard memory) for a $100 reduction in price. With the recent introduction of the 4S, Apple has chosen to keep two previous models in stock; this allows them to offer a phone at each price point.

    This technique is slick because it also makes inventory management much easier as they transition away from a product. They never do any deep discounting, and the capital spend can be dedicated to new tooling without a major hiccup on production of older hardware. The iPhone 3GS was one of the top selling phones of 2011 because of Apple's strategy.

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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