Apple In Trouble If It Needs Big Discounts to Sell the iPad

Last Updated Apr 7, 2010 6:43 PM EDT

In early February, analyst firm iSuppli estimated that the iPad manufacturing cost would run from $229 to $346. In that scenario, Apple (AAPL) would have had plenty of room to drop the iPad's price after introduction, as it did with the iPhone. However, a new iSuppli teardown puts the cost higher. If Apple has to cut prices as it did with the iPhone to move units and keep Wall Street happy, Steve Jobs and company are out of luck.

Back in February, iSuppli thought that mid-range iPads would generate maximum profits for Apple. The low-end 16GB Wi-Fi only model would cost $229.35 and sell for $499. The 64GB version with 3G service would cost $346.15 and sell for $829. The sweet profit spot was supposed to be the 32GB 3G model selling for $729 and costing $287.15. The cost estimates put product margin in a range of 54 percent to 61 percent. Take out discounts to retailers and Apple would likely still have had significant room to drop prices if necessary. The company did 67 days after the introduction of the first iPhone, presumably because it wasn't getting the volume movement it wanted.

But the new iSuppli cost estimates, based on the teardown, change the equation. The Wi-Fi only models run from $259.60 for the 16GB version to 348.10 for the 64GB. That translates into 48 percent margin for the first, 51.7 percent margin for the second, and 50.2 percent margin on the third. That means less room for discounting.

Potential discounts are important because Apple found with the original iPhone that it had to drop the price by $200 to really get the units moving. That was possible because AT&T (T) was subsidizing the price to consumers.

Room to discount is important if you look at the iPad relative to the original iPhone, which which sold 270,000 units in the first 30 hours of introduction. Analysts expected roughly double that. Within two months, Apple knocked $200 off the price and then units flew out the door. But that sort of discount won't be possible this time. Dropping $200 from the price of the low-end model, for example, would provide only 8 percent margin -- far less than Apple is accustomed to. And certainly far less than major investors will tolerate. Back in February, I thought that Apple would have enough room to discount if necessary, but not at the level it needed for the iPhone. If unit sales don't pick up through customer word-of-mouth, the company might find that the payoff for all that promotion might be a lot less than it expected.

Shopping bag image via RGBStock.com user nazreth, site standard license.

  • Erik Sherman On Twitter» On Facebook»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.