the tablet/ e-reader industry jaime de la hoz sacasa colombe bommelaer christy kung alex nelson aem...

The Tablet/E-reader Industry

Jaime De La Hoz SacasaColombe Bommelaer

Christy Kung Alex Nelson

AEM 4160: Strategic Pricing

Table of Contents

Introduction

Industry Structure

Pricing Strategies

Recommendations

Introduction

Industry Structure

RecommendationPricing

Strategies

New and exciting

Growth rate potentially reaching maturity

Evolving Concentration

Disruptive technology

Various pricing strategies

Why this industry?

Industry Structure

Introduction

Industry Structure


Strategies

• Allow users to easily read e-books without a computer

Lightweight

Affordable

Difference between E-readers & Tablets

E-Readers Tablets• Serves broader purpose

& functionalityOperate via touchscreen

E-Reader functionality in addition to browsing the Web, watching movies, sharing files, taking photos, and using social media.

Introduction

Industry Structure


Strategies

• Larger selection than at a brick & mortar stores that mainly carry the “best-sellers”

• More niche content available to the readers

• Accessible with Internet connection

The Long Tail Advantage

Introduction

Industry Structure


Strategies

Target Market

13-17 18-24 25-34 35-54 55+0%

5%

10%

15%

20%

25%

30%

19%

14%

26%

4%

17%

Age Distribution TabletsAge Distribution Tablets

Introduction

Industry Structure


Strategies

Tablet ownership over time

May 2010

May 2011

Dec. 2011

Nov 2012

Sept 2013

Jan 2014

0%5%

10%15%20%25%30%35%40%45%

% of American adults ages 18+ who own a tablet

% of American adults ages 18+ who own a tablet

Introduction

Industry Structure


Strategies

• Retail Stores: Apple and Samsung Stores

Distribution

Introduction

Industry Structure


Strategies

•Official distributors (Best Buy, Walmart…)

Introduction

Industry Structure


Strategies

Online Stores: Apple, Amazon, Ebay

Official Site Wal-Mart Best-Buy Ebay

Apple Ipad Air 2

(wifi)

$499 $489 $499 $448

AmazonKindle Fire

HDX716GB

$179 -- $179.99 $99

AmazonKindle Fire

HDX8.916GB

$379 -- $379.99 $284.99

Samsung Tab 4 -10.1 16GB

(wifi)

$299 $321 $299 $234.69

Google Nexus 9

32GB - LTE

$599 $792 $479.99 $479.99

13

Apple “Price Umbrella”

Introduction

Industry Structure


Strategies

• Capital intensive industry

• Existing companies have:• Cost advantages

• Consumer brand loyalties

• Established advertising budgets

• Locked in consumers

High Barriers To Entry

Introduction

Industry Structure


Strategies

•Large size of competing companies.•Aggressive competition through innovation and pricing.•Exits costs are low.

High Degree of Rivalry

Introduction

Industry Structure


Strategies

Major Players

Introduction

Industry Structure


Strategies

HHI/ CR4

Top 5 Tablets Market Share 2012

Source: IDC Worldwide Quarterly Tablet Tracker, February 2, 2015

CR4 85.08

HHI 2953.7184

Introduction

Industry Structure


Strategies

HHI/ CR4

Top 5 Tablets Market Share 2013


CR4 62

HHI 1537.66

Introduction

Industry Structure


Strategies

HHI/ CR4

Top 5 Tablets Market Share Q4 2014


CR4 51.4

HHI 1044.19

Introduction

Industry Structure


Strategies

HHI/ CR4

Top 5 Tablets Market Share Q1 2015


CR4 55

HHI 1135.19

Introduction

Industry Structure


Strategies

Introduction

Industry Structure


Strategies

• iPad launched in April 2010• First mover advantage• Disruptive technology• Created a new market

Apple’s iPad

Introduction

Industry Structure


Strategies

• Launched in September 2010• 2nd major player of the industry• Major supplier of Apple products

Samsung’s Galaxy Tab

Introduction

Industry Structure


Strategies

• Launched in November 2011• Tablet version of Amazon’s e-reader• Runs on a custom version of Google’s Android OS

Amazon’s Kindle Fire

Introduction

Industry Structure


Strategies

• Nexus line: smartphones, tablets and digital media players• First tablet (Nexus 7) launched in 2012• Google manages the design, development,

and marketing• Devices manufactured by various

companies

Google’s Nexus

Manufactured by HTC

Introduction

Industry Structure


Strategies

Sourcing – GoogleModel Google Nexus 7

(First Generation)Google Nexus 7 Google Nexus 2010 Google Nexus 9

Year 2012 (Discontinued in

2013)

2013 2012 2014

Manufacturer ASUS ASUS Samsung HTC

Android Version

4.1 Jelly Bean 4.3 Jelly Bean 4.2 Jelly Bean 5.0 Lollipop

Introduction

Industry Structure


Strategies

Sourcing – Apple

Part Manufacturer

Display Samsung Electronics Co. Ltd

Display Driver IC Chip Samsung Electronics Co. Ltd

Flash Memory SK Hynics Inc

Touch Controller Broadcom

Microchips Fairchild Semiconductor International Inc.

Introduction

Industry Structure


Strategies

• Example of other parts:

Sourcing – Apple

Display Samsung/LG

Flash Memory Toshiba

DRAM Chips Elpida Memory/Micron Group/SK Hynics

A Series Chips (A5X or A8) Qualcomm/Samsung/ Taiwan Semiconductor Manufacturing Co.

Introduction

Industry Structure


Strategies

•Over the last 3 years, Apple & Samsung have filed over 40 patent lawsuits against each other.•Apple has also filed lawsuits against Nokia &

HTC.•However, Apple & Samsung are still business

partners: Samsung supplies key components for most Apple devices.

Patent Lawsuits

Introduction

Industry Structure


Strategies

Major Tablet Producer MarginsModel iPad Air Google Nexus 7 Samsung Galaxy

Tab 3Kindle Fire HDX

Year 2013(November)

2013(July)

2013(July)

2013(October)

Manufacturer Apple ASUS/Google Samsung Amazon

Retail Price $499 $249 $300 $229

Hard Costs $274 $159.25 $214.57 $175

Gross Margin 45.09% 36.04% 28.48% 23.58%

Pricing Strategies

Introduction

Industry Structure


Strategies

Goldilocks Effect

Versioning

Intertemporal Pricing

Tying

Pricing Strategies

Introduction

Industry Structure


Strategies

Goldilocks Effect

Retail Pricing (As of November 2012) $299.00

Total BOM Cost $188.00

Manufacturing Cost $10.00

BOM + Manufacturing $198.00

NAND Flash $9.20

DRAM $6.30

Display $60.00

Touchscreen $20.00

Processor $13.00

Camera $11.00

Wireless Section (Module) $ -

User Interface & Sensors $15.00

WLAN/BT/FM $5.00

Power Management $7.50

Battery $13.50 Mechanical/Electro-Mechanical/Other $26.00

Box Contents $6.00

Introduction

Industry Structure


Strategies

Goldilocks Effect

Retail Pricing (As of November 2012) $499.00




NAND Flash $9.20

DRAM $10.50

Display $90.00

Touchscreen $43.00

Processor $18.00

Camera $9.00



WLAN/BT/FM $5.00



Box Contents $6.00

Introduction

Industry Structure


Strategies

Goldilocks Effect

Retail Pricing (As of November 2012) $399




NAND Flash $16.80

DRAM $7.60

Display $57.00

Touchscreen $40.00

Processor $14.20

Camera $4.10



WLAN/BT/FM $5.35



Box Contents $5.50

Introduction

Industry Structure


Strategies

Goldilocks Effect

Introduction

Industry Structure


Strategies

Versioning

What is it?

Versioning is the creation of and management of multiple releases of a product, all of which have the same general function but are improved, upgraded, or customized .

Software (SV) Hardware (HV)

Free or inexpensive

Great margins

Introduction

Industry Structure


Strategies

HV examples: Apple

Introduction

Industry Structure


Strategies

Capacity Space Increases MarginsiPad Third Generation

WiFi Only WiFi + 4GComponents/Hardware Elements 16GB 32GB 64GB 16GB 32GB 64GBRetail Pricing (As of November 2012) $499 $599 $699 $629 $729 $829 Total BOM Cost $306.05 $322.85 $356.45 $347.55 $364.35 $397.95 Manufacturing Cost $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 BOM + Manufacturing $316.05 $332.85 $366.45 $357.55 $374.35 $407.95 Major Cost Drivers NAND Flash $16.80 $33.60 $67.20 $16.80 $33.60 $67.20 DRAM $13.90 $13.90 $13.90 $13.90 $13.90 $13.90 Display $87.00 $87.00 $87.00 $87.00 $87.00 $87.00 Touchscreen $40.00 $40.00 $40.00 $40.00 $40.00 $40.00 Processor $23.00 $23.00 $23.00 $23.00 $23.00 $23.00 Camera $12.35 $12.35 $12.35 $12.35 $12.35 $12.35 Wireless Section (Module) $- $- $- $41.50 $41.50 $41.50 User Interface & Sensors $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 WLAN/BT/FM $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 Power Management $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 Battery $32.00 $32.00 $32.00 $32.00 $32.00 $32.00 Mechanical/Electro-Mechanical/Other $50.50 $50.50 $50.50 $50.50 $50.50 $50.50 Box Contents $5.50 $5.50 $5.50 $5.50 $5.50 $5.50

Introduction

Industry Structure


Strategies

Storage Capacity Margins – iPad 3WiFi Only

Components/Hardware Elements 16GB 32GB 64GBRetail Pricing (As of November 2012) $499 $599 $699 Total BOM Cost $306.05 $322.85 $356.45 Manufacturing Cost $10.00 $10.00 $10.00 BOM + Manufacturing $316.05 $332.85 $366.45 Major Cost Drivers NAND Flash $16.80 $33.60 $67.20

Introduction

Industry Structure


Strategies

4G Capability Margins – iPad 3iPad Third Generation

WiFi Only WiFi + 4GComponents/Hardware Elements 64GB 64GBRetail Pricing (As of November 2012) $699 $829 Total BOM Cost $356.45 $397.95 Manufacturing Cost $10.00 $10.00 BOM + Manufacturing $366.45 $407.95 Major Cost Drivers NAND Flash $67.20 $67.20 Wireless Section (Module) $- $41.50

Introduction

Industry Structure


Strategies

Samsung

Introduction

Industry Structure


Strategies

• This industry is unique because it is moving so fast. Apple has switched from the iPad mini 2 to 3 in a very short time (less than a year).

• With this pricing strategy, companies can maximize benefits as they target a higher price for a new products, but at the same time reduce the price of the “older” versions to attract more customers

Versioning

Introduction

Industry Structure


Strategies

• The product is first launched at a high price.

• As the weeks/months go by, we observe a decrease in price

• Allows for 2nd degree discrimination where consumers are discriminated based on their WTP.

• Consumers with higher WTP (i.e., early adopters) will buy the product as soon as it is launched.

• Consumers with lower WTP will buy the product once its price is lower.

Intertemporal Pricing

Introduction

Industry Structure


Strategies

Apple iPad Prices

Launch

1 Month

2 Month

s

3 Month

s

4 Month

s

5 Month

s

6 Month

s

7 Month

s

8 Month

s

9 Month

s

10 Month

s

11 Month

s

12 Month

s$390

$410

$430

$450

$470

$490

$510

Ipad 2Ipad 3Ipad 4Ipad Air

Introduction

Industry Structure


Strategies

Kindle Fire HDX 7

24-Apr-1

4

15-May

-14

5-Jun-14

26-Jun-14

17-Jul-1

4

7-Aug-1

4

28-Aug-1

4

18-Sep-14

9-Oct-

14

30-Oct-

14

20-Nov-1

4

11-Dec-1

4

1-Jan-15

22-Jan-15

12-Feb-15

5-Mar-

15

26-Mar-

15

16-Apr-1

50

50

100

150

200

250

300

Price History ($) Price History ($)

Introduction

Industry Structure


Strategies

Kindle Fire

Model Fire HDX 8.9 Fire HDX Fire HD 7

Initial Price $429 $239 $199

2nd Price $379 $199 $169

3rd Price $159

Final Price $139

Introduction

Industry Structure


Strategies

• To buy one product/service, a consumer must buy another product/service.

• The purchase of a tablet or e-reader is tied to the purchase of apps and other downloadable content.• A tablet’s utility increases with the number of apps

it contains [Metcalfe’s Law]

Tying

Introduction

Industry Structure


Strategies

•Amazon Kindle + e-books• The Kindle is sold at cost or at a low price in order

to make it affordable to many consumers.• However, you must purchase e-books for the

Kindle to be useful.

•Apple iPad + apps

Tying - Examples

Introduction

Industry Structure


Strategies

•Tying arrangements have been the subject of extensive litigation.•Violates antitrust laws if:• Distinct products exist• Firm has sufficient monopoly power• Forecloses volume of trade

•Example: United States v. Apple

Tying Arrangements and Antitrust Laws

Recommendations

Introduction

Industry Structure


Strategies

• The industry is becoming obsolete, need to redefine

Shakeout

• Consolidation of the industry in which businesses are eliminated through intense competition

Investment Perspective

Introduction

Industry Structure


Strategies

Google Trends

Introduction

Industry Structure


Strategies

It´s starts looking like:“By 2018,

tablets will be obsolete, I don’t think there’ll be a reason to have

a tablet anymore ”

Heins, Blackberry CEO

Introduction

Industry Structure


Strategies

• They have to redefine the industry, otherwise, if they continue selling just tablets and compete in price: Commodity• Be more than just a tablet•Apple “does not sell tablets”, they sell iPads

Pricing Strategy

Introduction

Industry Structure


Strategies

The Future?

Introduction

Industry Structure


Strategies

MacBook Pro tablet

Questions?Presentation

Target MarketTablet Ownership Over TimeDistributionTablet Prices by DistributorApple “Price Umbrella”HHI/CR4Major Player ProductsSourcing AppleSourcing GooglePatent LawsuitsTablet Producer MarginsGoldilocks EffectCapacity Margin Increases4G Margin IncreasesiPad Intertemporal PricingKindle Fire Intertemporal PricingSamsung Intertemporal PricingTyingTying Arrangements and Antitrust LawsInvestment RecommendationGoogle Trends

Additional Information iSuppli iPad BreakdowniSuppli Kindle Fire BreakdowniSuppli Nexus 7 BreakdowniSuppli Samsung Tab BreakdowniPad Prices Today (Refurbished)Adoption Rate by GenerationMoore’s Law Not ApplicableConsumption Spreads Faster Today

iSuppli iPad Breakdown

iSuppli Nexus/Kindle Breakdown

iSuppli Samsung Breakdown

63

Model Initial Price Refurbished Price

Percent Change

iPad $499 $109.95 - 78%

iPad 2 $499 $159.99 -68%

iPad 3 $499 $199.99 -60%

iPad 4 $499 $239.99 -52%

iPad Mini $399 $175.99 -56%

iPad Mini 2 $499 $249.99 -50%

iPad Air $499 $299.99 -67%

iPad Prices Today (Refurbished)

Introduction

Industry Structure


Strategies

iPad Prices Today (Refurbished)

Moore’s Law not in effect?

66

Consumption Spreading Faster

the tablet/ e-reader industry jaime de la hoz sacasa colombe bommelaer christy kung alex nelson aem...

Documents

new industry

industry structurechristy

growth rate

new market

ereaders source

existing market

todays market

larger market