Two 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?
- 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.