ipad-2-compare-hero-2013Two days ago, Apple announced this year’s line up of iPads. The new iPads are 64 bit, have Retina display screens and are light (well the iPad Mini is a little heavier but it is not bigger and does have a better screen). This was all expected. What was unexpected was that Apple did not discontinue the iPad 2.

The iPad 2 was launched in March 2011 and was priced at $499 for a 16Gb version. It was a big seller and interestingly when Apple introduced the iPad 3 (the new iPad) in 2012 with Retina display, they kept the iPad 2 around. One suspects that they had good reason. It was considerably lighter and probably much cheaper to produce. Last year, Apple introduced an iPad 4 as well. This included a new chip and a lightening connector but was not much better than the iPad 3 which was promptly discontinued. Again, the iPad 2 stuck around as the reasons to get rid of it hadn’t really changed.

But now the iPad 5 (or as it is called the iPad Air) no longer requires a compromise. It dominated the iPad 2 on every dimension. It is lighter and several orders of magnitude faster and I could go on. Moreover, Apple have versioning going with the iPad Mini which significantly is the same as the iPad Air but for size. In other words, Apple have 16 iPad variants out there with a very clear set of trade-offs for consumers. You would think that would be enough to get any price discrimination going but the iPad 2 remains and prominently so.

The 2014 iPad 2 is only available in 16GB (WiFi and 3G versions). It costs $399; only $100 less than in 2011. Just looking at that alone would answer the question of this post in the affirmative but it is a puzzle. Does Apple expect to sell any of these? And if not, what is it doing there?

global-ios-tablet-share2-1024x511I have puzzled over this for days and don’t have an answer but let me relay some interesting facts:

  • The iPad 2 is the tablet with the greatest share of usage in the world. Since iPads have 80% of all tablet usage and the iPad 2 is 38% of that, you do the math.
  • The iPad 2 still gets a healthy price on eBay. I saw bid prices of between $230 and $280 for the 16GB version. That is when a new one costs $399. Some of these are three years old.

From this perspective, the next two generations of iPad look a failure. Indeed, iPad sales must be plateauing which means tablets aren’t going precisely where the post-PC era thought they were going. (Actually, on that score, Apple are pushing the iPad Mini. They gave it top level specs and didn’t release an iPod Touch this year. Basically, the usage data is mostly Internet related. In other words, the iPad is mainly a reading device. And that is precisely where it is ending up. It will get into the hands of everyone but it will be as a broad reading instrument rather than a creating instrument that a computer is).

So why keep it there? Explanation No 1 is that it is versioning. The rationale behind versioning is that you offer a low quality product to charge a premium for a high quality one. Thus, if the iPad 2 didn’t exist, the next highest full size iPad would be priced at less than $499. Or the iPad Mini would be less than $399. (Although there is the old iPad Mini still there for $299). This, however, only makes sense if price-conscious people will buy an iPad 2. And that doesn’t seem plausible. (The same is true of any ‘meet the competition’ argument).

Explanation No 2 is that it is much cheaper to make an iPad 2 now compared to the other models; although there are reasons to think that is debatable. Again, that would suggest higher margins but you have to sell the product. This implies a price for the iPad 2 that would sell — something we don’t see — or at least that is what I am trying hard to see.

Explanation No 3 requires no sales to occur for the iPad 2. That explanation is that Apple are trying to manipulate the second-hand market. The normal approach is to try and push second hand prices down so they don’t compete with primary sales. But here Apple are keeping the iPad 2 around to keep prices high. I can see a rationale there because a high iPad 2 price, encourages people to sell and then to upgrade to new iPads — thereby, increasing sales.

That sounds good except that I don’t know if Apple have that power. Used iPad 2’s will sell for what they sell because of supply and demand. Will a reference price of $399 keep those prices high? There is something missing in the economic theory on this but it is so close as to be a plausible candidate anyhow. (On that score, a few months ago when I replaced my family’s iPad 2 with another from Apple — the screen was broken — I paid $250 for a replacement — which was like new — for a 64GB WiFi + 3G version. Based on current second hand prices that is looking like a great decision).

In any case, the iPad 2 surely has some claim to greatness in tech product history. One day we may learn why.

[Updated: Or maybe my assumption is wrong and they do sell iPad 2s. Looks like it was about 30% of all iPad sales in the last year.

5 Responses to Is the iPad 2 the greatest tech product ever?

  1. Aaron says:

    Other possibilities: the iPad 2 is bait. This might work two ways: the most price-conscious buyers apple can attract buy an iPad 2 at $399, then upgrade relatively soon once locked into the app and accessory ecosystem (probably handing the iPad 2 off to a family member). Or having a $399 model means some people don’t immediately strike the iPad off their list for being more expensive than competitors, but once they get into a store are convinced to buy the more expensive iPad 5.

    But the story going around the apple blogs is that it’s there for schools. That seems reasonable too, as long as it is indeed cheap enough to make.

  2. kwanghui says:

    Hi Joshua, I suspect it is because of capacity constraints. The retina screen is hard to make and multiple reports over the past weeks suggest it may bottleneck iPad production in Q4 of this year.

    While Apple might ideally want to use last year’s IPad 3 or IPad 4 as the “low end” offering, those require a large retina screen. it is much more profitable for them to put each additional retina screen available into making the new iPad Air or iPad mini. Meanwhile they have fully depreciated equipment available to make the iPad 2 which is not constrained by retina screen availability, and as you pointed out these are cheap to make.

    Another hint is that the iPad 2 uses the old 40-pin dock instead of the new Lightning connector and Apple had earlier been aggressive about moving customers and suppliers over to supporting the latter. Lightning is very lucrative for Apple due to licensing as well as its ability to sell add-ons (I know as I recently bought a bunch of Apple Lightning cables and they cost a lot). Why would they now want to promote the iPad2 with its old dock unless they had better ways to allocate resources elsewhere ?

    What do people think of this?

    kwang
    ===

    ps: it is much more challenging to produce a 9.7″ retina screen than a 7.9″ one because the likelihood of defects is proportional to the area, not linear dimension.

  3. Oupoot says:

    You think too much like a tech savvy consumer in the developed world. For the non-tech savvy consumer, an iPad is an iPad – s/he wants to buy a gift for Xmas, for him/herself because his colleagues has it, the cell company has special offers, etc. S/he sees an iPad for $399 and another for $499. As non-tech savvy, for them they look similar and with price the overriding factor, they buy the cheaper one. The target market for the iPad 2 is different than that of the iPad 5.

    Another factor could be how is the iPad2 is sold – in stores or part of cell/mobile data promotions? Apple’s incentive is simply to try and capture these consumers to the brand for then they eventually decide to upgrade 1, 2 or 3 years later.

    Lastly, globally there is still a massive unmet demand for these devices and Apple is aiming to secure as large a part of this market as they can in the face of competition, and if the iPad2 can satisfy this demand without sacrificing their ability to meet demand for new iPads in the developed world, so much the better. Much of these potential clients are not tech savvy or has the means to acquire the most up to date device. Besides, the conditions in their home countries may negate the technological differences between the devices. (E.g. Africa still sells a lot of 2G / GPRS mobiles simply because the mobile networks only offer that service)

  4. kaleberg says:

    There is also the international market where the price can make a difference. I was down in Santiago shortly after the iPad 3 launch and noticed that all the ads were for the iPad 2. If you wanted an iPad 3, you would have had to arranged to get one from the US or someplace else it was selling.

    While Apple has been known to cut off production of popular products, my guess is that they are still selling the iPad 2 and the 13″ non-retina MacBook and the iPod Classic, because people are buying them and Apple is making money selling them.

  5. kwanghui’s explanation is good and very convincing.

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