Apple Would Destroy Rivals With This Aggressive Move

DigiTimes is at it again. The hit-or-miss publication is out today with a new speculative report on Apple (Nasdaq: AAPL  ) and what the Mac maker might have in its pipeline.

What'll it be this time?
This time around, the Taiwanese outlet claims that Apple is planning on releasing an updated MacBook Air in the third quarter, but the real meat of the report is that Cupertino is aiming for a price point of $799, according to its "sources from the upstream supply chain." It would be a response to Intel's (Nasdaq: INTC  ) big Ultrabook push this year, which is clearly meant to take on Apple's MacBook Air family head on.

Source: Product image from Apple. Text added.

Last year, Ultrabooks simply couldn't compete with the MacBook Air on pricing, as they typically carried premiums of several hundred dollars compared with similar Apple offerings. Ironically, Intel's hefty chip prices were a major factor that was holding back OEMs from being able to lower prices, even though the MacBook Air similarly uses Chipzilla's processors.

Since then, Ultrabook prices have been steadily declining and now sit in more competitive price points, and Intel is aiming lower still. The chip giant expects Ultrabook entry-level prices to reach as low as $699 within the next few months, just in time for the back-to-school shopping season, which also happens to be an important timeframe for Apple, as it usually has various back-to-school promotions each year.

However, Digitimes' sources also don't think Ultrabooks will begin to take off until Microsoft (Nasdaq: MSFT  ) launches Windows 8 later this year.

Gadget maker Acer recently said it simply can't make a profit on a $799 entry-level Ultrabook, with its hopes being to gain market share or profit on higher-end models. That's not stopping the company from shooting for $499 offerings next year, so it had better get those manufacturing costs down if it has any aspirations of remotely breaking even.

A recent phenomenon
As far as Apple is concerned, there are cases for and against a $799 MacBook Air.

If you've paid attention to Apple's pricing strategy over the past few years, you can see that Cupertino has gotten much more aggressive. Before the first iPad launched in 2010, Apple's rumor mill was buzzing along as usual and everyone knew a tablet was imminent.

What people didn't know was the price, and most analysts were expecting Apple to launch the device starting between $800 and $1,000. Apple pleasantly surprised the market with a $500 entry price tag on the new device. When Motorola Mobility (NYSE: MMI  ) launched its rival Xoom tablet almost an entire year later, it started at $800. Apple also recently lowered the iPad 2's price to $400 to better combat Amazon.com's (Nasdaq: AMZN  ) $200 Kindle Fire.

The original MacBook Air that was introduced in 2008 had an insultingly high starting price of $1,800 for a 13-inch laptop featuring an aging Intel processor and modest tech specs. The laptop didn't seem destined for the masses at such a high price. When Apple revamped the lineup in October 2010, it kicked that entry price down to $1,000 and has enjoyed blistering sales as a result.

Despite rumors that Apple would bump up the price of the third-generation iPad by $80 to accommodate for those pricey Retina Displays, Apple stood pat at $500, eating the difference and taking a hit on gross margins. iSuppli estimates that the Retina Display costs 53% more than the iPad 2 display.

The $800 question
I have no doubt that Apple could lower the price to $800 and still turn a profit, thanks to its unparalleled manufacturing and supply-chain prowess. The real question is whether or not it makes strategic sense for Apple to sacrifice the margins for the sake of market share, which is something Apple has only started to do in recent years, most notably with the iPad.

An $800 laptop would be the lowest price ever for a new Apple laptop, and would surely boost sales significantly. At the same time, it could threaten to cannibalize high-end iPad buyers that are willing to pony up the maximum $829 for a top of the line tablet. Do you get a high-end iPad or a low-end MacBook Air?

I'm going to lean against this one, although I think it has a reasonable chance of actually happening. My jaw would literally drop if Apple went with an $800 entry-level notebook, but it would definitely leave competitors scrambling even more than they already are.

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Fool contributor Evan Niu owns shares of Apple and Amazon.com, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Intel, Amazon.com, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, Intel, and Microsoft and creating bull call spread positions in Microsoft and Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On May 07, 2012, at 9:40 PM, Mega wrote:

    "Last year, Ultrabooks simply couldn't compete with the MacBook Air on pricing, as they typically carried premiums of several hundred dollars compared with similar Apple offerings."

    False. The first ultrabooks were comparably priced with MacBook Airs, now they're around 18% cheaper.

    http://www.amazon.com/Zenbook-UX31E-DH52-13-3-Inch-Ultrabook...

    http://www.amazon.com/Apple-MacBook-MC965LL-13-3-Inch-VERSIO...

  • Report this Comment On May 08, 2012, at 1:28 AM, xmmj wrote:

    "The original MacBook Air that was introduced in 2008 had an insultingly high starting price of $1,800..."

    You have to remember, this was the first of its kind. The ultra light body with the incredibly expensive flash drives. Those were what drove the price so high. The price has dropped as the price of the drives have dropped. Remember also, that 10 years ago you could not find any laptop much under $2000.

  • Report this Comment On May 08, 2012, at 1:37 AM, xmmj wrote:

    They might actually do it. The reason being that they sell very few of their base model computers. the majority pony up for some add-ons and that adds to higher margins. And those who do buy in at the lowest level are those who most likely would not have bought any Mac if they did not have the entry point.

    BTW - you know one of the most brilliant things they ever did? Put the lighted Apple logo on the outside of the laptop. All these TV shows where they use laptops, even where there is no intentional placement, these are the people's real personal machines, if the do have a Mac - there it is bright and center. Example would be History Detectives, and a lot of news shows. They are showing up everywhere.

  • Report this Comment On May 08, 2012, at 2:32 AM, SSchlesinger wrote:

    Microsoft didn't make money on Xbox for years. They lost money on every sale and worse yet, they had to fix them for free when they got the infamous 'Red Ring of Death.' But eventually they made money and then boatloads of money from Xbox.

    What would happen if Apple does what you suggests and Intel ups it's supplier fund by a billion or two extra dollars. What if they wanted a touch screen Ultrabook in the market at a $499 entry point? What would that do to both Macbook Air and iPad sales? What if the Ultrabook came out in both Windows 8 and Android?

    It's nothing more than a game of chess. There is no checkmate yet.

  • Report this Comment On May 08, 2012, at 11:39 AM, vantan wrote:

    The lesson Apple learned from iPad launch was that pricing matters. Lowering the price on Air could make it a no brainer for driving big sales volume and profitability from their notebook business. Meanwhile component prices are falling as the production run extends (and/or get better features as with A5X vs A5 in iPad2).

    Big question is whether iPad and Air cpu-gpu converge i.e. A6 for both or Intel for both? Or maybe just ios and mac os?

    Intel's Ultrabook initiative is partly a demo and play for more of Apple's business i.e. tablet and smartphone as well as Mac OS devices.

  • Report this Comment On May 08, 2012, at 12:11 PM, TMFNewCow wrote:

    xmmj,

    The original base air only had an 80 GB standard spindle HDD (4200 RPM).

    http://www.everymac.com/systems/apple/macbook-air/specs/macb...

    -- Evan

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