IPAD AND THE TABLET MARKET WARS,

A DISCUSSION OF AN OLIGOPOLISTIC MARKET MODEL

By Evan Pathiratne

Postgraduate and Midcareer Development Unit Faculty of Management and Finance University of Colombo

iPad and the Tablet Market Wars, A Discussion of an Oligopolistic Market Model

CHAPTER 1 THE IPAD AND THE PLAYERS

Apple Inc. produces the iPad , its own Tablet computer (hereafter referred as Tablet) alongside its other innovative technology products such as the iMac -an all-in-one desktop computer, iPod - a portable media player and iPhone -a Smartphone. Apple Inc. is ranked number 1 at Fortune magazines worlds most admired companies list (CNN, 2012) .A tablet is a mobile computer, larger than a mobile phone integrated into a flat touch screen rather than using a physical keyboard.

Figure 1: Key players in the global Tablet market

Apple Inc. has sold 67 million iPad units globally in two years since launch, easily outpacing growth in traditional laptops and desktop computers (ITPro, 2012). Tablet makers will generate $49 billion in sales by 2015, amid booming demand for devices that bridge the gap between Smartphones and laptops (Businessweek, 2011).

Figure 2: Apple iPad Differentiation, Source: PCword.com

iPad Differentiation - As figure 2 shows even though the iPad lacks a camera function and weighs heavier than others- it has more battery life, priced lower and has a larger display size (9.7 inches) than other players in the market. Apple also develops both hardware and software of the iPad -for greater control over the performance of the final product. Apples strong brand perception and ideology created as an innovative ground breaking company in terms of production design is another competitive differentiator, and therefore the demand elasticity is lowered.
iPad and the Tablet Market Wars, A Discussion of an Oligopolistic Market Model

CHAPTER 2 ECONOMIC FORCES IN A TABLET MARKET, AN OVERVIEW

The market for Tablets is an oligopoly because there are few firms and the market is relatively hard to get into/ has high barriers of entry. An oligopoly also tries to maximize profits by producing where marginal revenue equals marginal costs. Below industry traits are evidence for this.

2.1 ENTRY AND EXIT BARRIERS

2.1.1 INDUSTRY EXAMPLES OF FAILED ENTRIES
1. HP launched Touchpad Tablet in July 2011 only to be discontinued the next month. It went from a base price of $500 to $99 over that period. Customers said its performance was sluggish, and didnt offer enough applications. Best Buy had 270,000 of the devices in its inventory and managed to sell only 10% at the original price. (CIO,2012) 2. Cisco is slowly killing off its Cius Tablet less than a year after it started shipping. This featured a 7-inch touch screen and was not intended to challenge more consumer-oriented tablets such as the Apple iPad .(NetworkWolrd,2012) Lets discuss the market barriers for entry in more detail.

2.1.2 ABSOLUTE COST ADVANTAGES

Apple is an established firm with a superior supply chain and production process , according to Forune (2011) Apples manufacturing factories in China produce 2.5 million first-generation iPads a month, Foxconn (the Chinese company producer) needed 50 new production lines capable of building up to 40 million iPads per year. Businessinsider (2012) states without Tim Cook (Apple current CEO) and their supply chain process the iPad would have cost around $ 5000. Even in comparison Samsungs Tablet priced at $ 599 has a per unit $ 214.57 production budget (isuppli,2010) which means they make less than 50% margin per sale of one unit after adding other overhead costs.

2.1.3 LONG STANDING BRAND LOYALTIES

Tablet makers have long standing brands. Blackberry has a successful mobile phone product lineup; HP is a known laptop producer. Apple with its diversified hardware portfolio has the most brands. Some Apple fans even refuse to buy non Apple products, and even stand outside shops to be the 1st to buy the latest Apple product versions and upgrades.

2.1.4 UNMATCHABLE ADVERTISING BUDGETS

According to CBSNews(2012) Apples advertising budget for 2012 was $ 486 million. Its difficult for a new entrant to match this level of advertising commitment. Tablet makers are using advertising is used as a means for creating awareness, integrate the product with the life styles of the typical Tablet user, advertising is a vital ingredient in getting the word out and creating a buzz within the community, the higher the advertising budget the higher the cost of entry for a new entrant into the market.
iPad and the Tablet Market Wars, A Discussion of an Oligopolistic Market Model

2.1.5 CONSUMERS ARE LOCKED-IN

A music lover will choose iPhone , a person who needs a personal computer can choose a iMac , the iPad is designed with the same design principles and user interaction designs ( positioning of buttons and commands) , this makes it easier for a user to use such array of products. So when an existing Apple Inc buyer seeks out a Table there is a greater opportunity for a choice of iPad. Looking at the large sales that is already present in Apple Inc products it creates a huge barrier for a new comer to compete with not only iPad, but indirectly with other Apple Inc.s product fan base as well.

2.1.6 LEVEL OF TECHNICAL ACUMEN , AND STRINGENT QUALITY STANDARDS

Creating a tablet provides the dual challenge of needing knowledge and expertise in the software filed as well as the hardware field. Different operating system software has to be built individually for each tablet because any existing operating system software is licensed by the developer themselves to use on their tablet. Any potential new entrant has to invest heavily on R & D to develop their own operating system software. Even after the operating system software is developed, the Tablets needs to be interesting to the consumers. As figure 2 shows iPad has Apple App store, BlackBerry has App World, Samsung has Android market, and these are custom built applications that run on that specific Tablet. These are essential to influence buyers to buy the product.

2.1.7 ARE THERE ANY EXIT BARRIERS ?

Most of the Tablet manufacturing is done offshore (ex- countries like China) where the labour is cheap. This means the cost of non-transferable fixed assets are lower compared to a normal manufactured product. Also in this industry Jobs cuts are done as and when the management requires; without any serious political or legal blow back. The exit barriers are not that strong.

2.2 COMPLIMENTARY PRODUCTS AND SUBSTITUTES

Substitutes Effect - The classification of a direct substitute for a Tablet will depend on the profile of the consumer , depending on such consumer may consider either of the conventional desktops and laptops and Smartphones as substitutes for a Tablet. Demand for iPads is up which means that the demand curve will be dramatically shifted to the right. The price will hike up because the demand for them is high. Other PC brands will be affected because of the shift in demand, to the left on standard demand graph, from their computers which include laptops and desktops to the iPad, which is smaller, costs less, and is better for use in different settings, and its ability to be very portable. Complementary Products Effect - Increased demand due to compliments of the same brand. iPad sales are boosting iMac sales, iPad and iPhone revenue is large source of revenue for Apple (CNet.com,2010). Customers are locked into Apple Inc. product suit, increasing its maker power and the strength of the barriers of entry to this market.
iPad and the Tablet Market Wars, A Discussion of an Oligopolistic Market Model

2.3 APPLE INC.S CONTROL OVER IPAD PRICE

Any existing established player in the tablet market enjoys a high degree of market power due to the prevalent high barriers of entry. Apple Inc. is a firm that has substantial pricing or market power due to its technological superiority, efficient supply chain process, unique design and low cost production processes. As of now there are no government imposed patent filling or lawsuits that may reduce the market power of Apple Inc. Already looking at the prices even though all the positives of a better product is present the iPad is priced the lowest compared to others. The company strategy is do volume sales , gain market share and consume as much of the Tablet market as possible. Thereafter the initial unit purchased will need product upgrades and extra software downloads that gets charged. The iPad becomes a recurring steady revenue generator for Apple Inc. The distinctive feature of an oligopoly is interdependence, but in this market what the players most consider are the technical features of the Tablet and not its price as suppose to other common markets. In other words firms use non-price competition in order to accrue greater revenue and market share. Because most of the consumers who buy Tablets do not consider financial constraints if the Tablet fits his/her need there is a greater change or a purchasing decision being made. Apple Inc. as with the standard norm of an Oligopoly can retain long run abnormal profits. High barriers of entry prevent new firms from entering market to capture excess profits. When looking at the theoretical "Kinked" demand curve the best option for the oligopolist is to produce to the level of the equilibrium point/the kink point in the curve and thereby prevent the threat of a triggering a price war which may mean market share changes for the firm. The Tablet market does not behave in this manner since it will always be non-price competition and therefore Apple Inc. can keep on producing iPads and keep increasing its market share.

Recent development - Another IT industry titan Microsoft on June 18th,2012 announced for the 1st time in its history its own developed Tablet brand Surface - but a release date is not confirmed yet. It will be interesting how the market will play out and what the existing players will do to combat the threat of this new entrant. As of now Microsoft still have not disclosed any pricing of this product

iPad and the Tablet Market Wars, A Discussion of an Oligopolistic Market Model

REFERENCES
1. BusinessInsider (2012) ,'If It Weren't For Tim Cook, The iPad Would Have Cost $5,000', [WWW] Available from: http://articles.businessinsider.com/2012-0322/tech/31223756_1_ipads-tim-cook-apple [Accessed 2012/06/18] 2. Businessweek(2012), Tablet Market May Surge to $49 Billion,[WWW] Available from: http://www.businessweek.com/technology/content/apr2011/tc20110418_512247.htm [Accessed 2012/06/18] 3. CBSNews(2012) , Apple's Advertising Budget: Revealed!, [WWW] Available from: http://www.cbsnews.com/8301-505124_162-3340574/apples-advertising-budgetrevealed [Accessed 2012/06/19] 4. CIO(2012) , Tablet Flops, Flubs and Fluffs , [WWW] Available from: http://www.cio.com/slideshow/detail/52774#slide5 [Accessed 2012/06/16] 5. CNN(2012), World's Most Admired Companies 2012,[WWW] Available from:
http://money.cnn.com/magazines/fortune/most-admired/2012/snapshots/670.html?iid=splwinners

[Accessed 2012/06/18] 6. CNet,(2012), Apple now third-largest PC seller in U.S. [WWW] Available from: http://news.cnet.com/8301-31021_3-20019514-260.html [Accessed 2012/06/20] 7. Fortune(2011), Inside the Apple iPad factory 2011,[WWW] Available from: http://tech.fortune.cnn.com/2011/05/21/inside-the-apple-ipad-factory/ [Accessed 2012/06/18] 8. ITPro(2012), Microsoft tackles iPad with Surface tablet,[WWW] Available from: http://www.itpro.co.uk/641242/microsoft-tackles-ipad-with-surface-tablet/2 [Accessed 2012/06/18] 9. Isuppli (2010),Samsung Galaxy Tab Carries $205 Bill of Materials, iSuppli Teardown Reveals, [WWW] Available from: http://www.isuppli.com/Teardowns/News/Pages/SamsungGalaxy-Tab-Carries-$205-Bill-of-Materials-iSuppli-Teardown-Reveals.aspx [Accessed 2012/06/18] 10. NetworkWorld(2012) , Cisco all but kills Cius tablet computer, [WWW] Available from: http://www.networkworld.com/news/2012/052512-cisco-cius-259634.html [Accessed 2012/06/18]

iPad and the Tablet Market Wars, A Discussion of an Oligopolistic Market Model