The iPad is a game console
the business model its shows true colors
Feb 22, 2011 in Channel, Gaming, Microprocessors, Mobile, Opinion, Software
APPLE HAS A business model for the iPad as lucrative as printers with abusively priced toner, something that you can only do with absolute control.Their 30% “tax” on apps actually makes sense, at least for Apple, but will it spread to their other products over the long term?
As is well known, Apple has become draconian in its terms for iPad apps. Not only do developers have to give 30% of their revenue to Apple through the App store, all subscription apps have to sell through the App Store, too, with the same 30% VAT.
This sounds like a combination of highway robbery and stupendous greed. That’s how I initially interpreted it, anyway. I wasn’t alone; the policy is starting to even draw antitrust interest (see, e.g., IPad Service Draws Scrutiny). Information wants to be free, open everything conquers all, this is Evil and will go the way of IBM’s old mainframe prices, right? Right. All the technoscenti would believe that.
Then, in Wired, I read Why Nobody Can Match the iPad’s Price. Errr… what?
iPad’s price is a big, fat, anomaly. Apple is famous for high-style, high-end, high-priced products, and, well, look at it: an iPad is a high-style, high-end product that’s cheaper than the competition. How do they do it? The Wired article tries to explain this by pointing to Apple’s vertical integration in general – e.g., they own the processor design – after debunking other possible reasons like having their own stores or partnering with outlets like Best Buy. Those are all probably contributing factors, but I doubt they’re the core reasoning behind the low price point.
Then it hit me: Apple is using the business model of game consoles.
Do the comparison: Console vendors are quite willing to take it on the chin in hardware price, because a low hardware price sets up volumes that let them make far more money on the games, by taking a big cut of game revenue. Apple takes it on the chin in hardware, and sucks in 30% on the back end every time an app is sole.
It’s just like Nintendo patenting and keeping secret a magic chip they put in their cartridges, without which games can’t run on their systems. Instead of a chip, Apple has the App store. Same principle, just a different implementation.
I doubt Apple’s really going as far as the console makers allegedly do, actually losing money on each unit sold. Lower than everybody else is, after all, rather likely to be good enough. They are still cutting everybody a huge deal here, though, with a high-quality product for a relatively inexpensive price. Moreove, this isn’t a business model the rest of the tablet world is likely to be able to mimic soon.
This makes one wonder about Apple removing boxed software from its stores, and telling everybody to buy Mac software from the App Store. Will this ultimately lead to cheaper Macs through a big VAT on all Mac software? I’m sure Apple would love that outcome. There is a tiny problem in implementing this, though: I can’t see Microsoft giving Apple 30% of the revenue from Office for the Mac.
So my guess is that ultra-cheap Macs aren’t coming any too soon. But the meantime, everyone can still enjoy their cheap iPad game consoles.S|A
Thirty years in the computer industry and a Ph.D. form MIT left Greg without patience for muddy thinking, unintended or not. He writes to clear things up. If you are a major publisher or an agent, Greg would be interested in hearing from you for his next book.
6 Responses to “The iPad is a game console”
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Feb 25, 2011
[...] The iPad is a game console SemiAccurate Do the comparison: Console vendors are quite willing to take it on the chin in hardware price, because a low hardware price sets up volumes that let them make far more money on the games, by taking a big cut of game revenue. Apple takes it on the chin in hardware, and sucks in 30% on the back end every time an app is sole. It’s just like Nintendo patenting and keeping secret a magic chip they put in their cartridges, without which games can’t run on their systems. Instead of a chip, Apple has the App store. Same principle, just a different implementation. [...]
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Feb 25, 2011
[...] This post was mentioned on Twitter by Guy L. Gonzalez, Mike Cane, HN Firehose, newsery8, Regurgitating Games and others. Regurgitating Games said: The iPad is a game console http://bit.ly/dIFfaY [...]
“patenting and keeping secret”
lol wut. Someone needs to learn how patents work.
The BoM for the iPad is around $259.
(http://www.electronicsadvocate.com/2010/04/08/ipad-bom-is-25960-says-isuppli/)
Apple buys a majority of all touch panels and flash memory manufactured as well as highly optimizing the design and integration of the hardware.
The game console model would mean Apple loses money on the hardware, hoping to make it up in sw sales/fees. Obviously this is NOT the case.
@hatter:
Lowering the margins to near red or red profit is the console model. Apple can undercut because they have an AppStore that lets them make a mass profit of every unit sold. The point is, Apple does not need to make a profit of the device since they have a cash cow called royalties from the app store. Console manufacturers dont have to make a profit of consoles because they sell the software. Don’t give Apple credit, they are using a tried and proven sales method. Cellphone plans work the same. 2 year contract for a 4-500 dollar phone, but you only pay 50 or 100. The carrier profits because you pay monthly for two years.
Actually the IPad came in at the price I predicted when it was first announced. Apple got nailed on pricing in the past, and Steve Jobs knew it. So this time around he made sure that the new product was sold for a reasonable price from the start.
Rather than be a ‘game console’ business model, Apple has made sure that their competition has no room to undercut Apple’s pricing. Remember that in one conference call Apple said that they were planning on selling a product with lower margins. That’s exactly what they’ve done. Rather than have a high initial price which drops over time, Apple has an initial price that is their long term planned pricing.
And as a result their competition is in deep trouble.
Wayne