The New MacBook Air Pricing – Not just the iOS UI is seeing flattening

Two years ago I presented you with the following analysis of MacBook Air pricing.

Macbookair from Iterative Path

In summary, there are two prominent choice dimensions – screen size and disk capacity. There are minor differences in CPU but the two dimensions Apple wanted customers to focus on were clear. I showed you why there was a 11″ MacBook Air in the pre-configured models.

One thing you would have noticed in the last line up was the multiple levels and gaps.

With yesterday’s announcement at WWDC there is a new much cleaner product lineup.

No more 8 possibilities with 4 holes but a complete 2×2 with no gaps. This is a result of two standardization decisions

1. No more 64GB model. With prices of SSD continuing to fall, Apple found they cannot maintain their price premium. Instead of keeping 64GB version and lowering ASP they simply moved to 128GB that protected their ASP and likely their gross margin (due to decrease in SSD costs)
2. Single CPU model – 1.3GHz, dual core Intel I5 processor. While this likely reduced the ASP because of elimination of $1599 model, they likely kept their margin because of lower marginal cost.  The $1599 model was likely losing volume anyway as it shoots past  13″ MacBook Pro that offers Retina display ($1499).
   Furthermore for those who wanted customization they do get to capture $150 in incremental revenue from CPU upgrades.

Another point you would have noticed in the previous line-up is both the 11″ models were priced below the lowest priced 13″ model. That is no longer true. Gone is the perfect price diagonal and in its place a zig-zag pattern.

This is because of the price premium they were able to charge for the 13″ over 11″. It dropped from $200-$300 to mere $100. And this is something they likely found using conjoint analysis (don’t believe those who say Apple does not do customer research).

The perfect price diagonal is now replaced with another simple pricing rule

- Move along X axis, price changes by $100
- Move along Y axis, price changes by $200

So not only is the iOS seeing design simplification (or flattening), their pricing is also going through simplification. Every model that is there now is there to serve a specific segment and not as a ploy to sell another model.

Compare this to MacBook Pro models (HDD models configured as 8GB RAM for comparison)

 

 

If I make a prediction for what is ahead for new MacBook Pro models, similar model flattening and simpler pricing.

 

How many iPad minis did Apple sell? 12.5 million

Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof  – John Kenneth Galbraith

When Apple announced iPad mini I wrote in GigaOm,

At the high end, Apple could sell as many as 58 million (full year), but those chances are very very slim (1 percent). Considering all the possible scenarios, the expected value of volume is 40 million.

Apple released its Q1FY13 earnings today, let us estimate how many iPad minis Apple most likely sold. The iPad mini numbers are based on the Apple‘s report.

They sold a total of 22.8 million iPads (new iPad, iPad2 and iPad mini), compared to 14.03 million in the previous quarter (pre iPad mini). If you were to attribute all incremental volume to iPad mini it comes to 8.77 million. I could stop here and say my model is correct.

If you compare the Average Selling Price (ASP) between two periods, in Q4FY12 the iPad ASP (iPad and iPad2) was $508 but it dropped to $467 this quarter (Q1FY13).

So let us plug in these numbers into the model I recently built to estimate the number of iPad minis Apple sold. We find that the 8.77 million is actually the lower limit. With the assumptions I have made, Apple likely sold 12.5 million iPad minis (all editions combined).

Apple put on some impressive iPad mini numbers. Did it cannibalize its full priced iPad? You bet it did. Last quarter Apple sold about 9.84 million full size iPad. (Again see the model.) That number dropped to 7.42 million units, thanks to iPad mini. So a cannibalization of 2.42 million units  — that is 2.42 million people who would’ve chosen full size iPad chose iPad mini.

How did I do with my previous prediction of iPad mini numbers in my GigaOm article?

I predicted an annual expected volume (considering all possible scenarios) of 40 million. But Apple could end up selling at least 50 (4 times 12.5) million iPad minis in FY13.

What did my model say were the chances of selling 50 million (full year) units or more?

Mere 12%.

As Galbraith said I could get busy arguing that is still within my scenarios and I am still correct. Galbraith’s writings have influenced my thought process in many ways, I will note his warning and not get busy with my proof.

It indeed appears I had started with some overly conservative numbers on iPad mini uptake based on the survey results I had used. Hence my model underestimated the iPad mini volumes considerably as iPad mini yearly volume could be 50-60 million units.

Model is only as good as the informed input we start with. After all we are paid to make better hypotheses and make informed assumptions.

 

 

 

 

How Retina Display Indeed Brightened Apple’s Profit

When Apple announced MacBook Pro Retina Display at $2199 price point, I wrote this in GigaOm

This clever price discrimination will result in two positive effects on the units sold. One, some who would have settled for a MacBook Air or the 13-inch MacBook Pro will upgrade to the $2,199 MacBook Pro. Two, it will push some who preferred the 15-inch MacBook Pro to the $2,199 version with Retina Display. The net result is a higher ASP than the current $1,245 number. Even if one in ten customers of first category and one in five in the second category upgrade to Retina Display, Apple will see the MacBook ASP (Average Selling Price) go up to $1,363.

Apple announced its Q4 numbers yesterday. Despite its hits and misses with iPhone and iPad there is one bright spot – its portables (MacBook line) did very well. MacBook volume came in at 3.95 million, up 10% YoY and revenue from MacBook revenue came in at $5.363 billion, up 16.9% YoY.

I predicted Apple’s ASP could go up to $1,363. If you the math with the revenue and volume numbers you will find that the ASP came in at $1,356. That is within margin of error.

The net result of increased volume and higher ASP is $297 million in additional revenue which is mostly profit because of incrementally higher margins on higher priced units, meaning Apple is also on track to add $1 billion in profit (full year) as I predicted.

That is one magical product indeed.

How can you find the number of $399 iPads sold?

When Apple announced their new iPad, they kept their current iPad2 model and said that they will sell this at $399. The $399 iPad2 is targeted at two segments

1. Leaning towards Kindle Fire: Those who are attracted to Amazon’s $199 Kindle Fire but  now see higher value for their money in a $399 iPad (but do not find value in $499 iPad)
2. Waiting it out: Those who do not find value in both the Kindle Fire due to its size etc.  despite its price  and  the feature rich $499 iPad due to its price

There is a third segment they don’t want to target but cannot avoid – new customers who would have picked the new iPad but find the $100 price drop attractive and hence choose that instead.

Add them up, you have the number of $399 iPad2 Apple will sell.

Why this is important? Because it tells us the market share Apple is going to take from Kindle Fire.

But we don’t have the customer segmentation data (Apple does). Furthermore, Apple does not breakout numbers on individual iPad lines.

We are not going to find the answer until next earnings report. But here is how you can model that number:

1. In its quarterly earnings report Apple tells us the number of iPad devices sold and the revenue from the line. From these two data points we can find the average selling price (ASP)
2. Luckily for our analysis Apple just kept one $399 model and discontinued all other iPad2 models.
3. Last quarter they sold 15.5 million iPad2 units. Analysts are predicting similar number for next quarter. Any increase we see is from selling $399 units (n1)  and from increase in new iPad numbers  (n2) due to retina display  its support for 4G.
   n1 + n2 = the increase in number of iPad units from previous quarter
4. We have two unknowns and one equation. We need one more equation
   For this we use the revenue from iPad numbers from Apple’s report. The change in revenue between two quarters is due to revenues from n1 and n2. ASP of n1 units is $399 and for n2 units we can assume the same ASP as previous quarter when there was no $399 iPad.
   n1 X $399 + n2  X last quarter ASP = Increase in iPad revenue

The number n1 will also tell us the market share Apple took from Amazon’s Kindle Fire.

Now you can be the first to report this number when Apple reports its earnings next quarter.

What if the reported iPad numbers are lower than previous quarter (or the same)? Not that difficult to do similar math and is left as an exercise to the reader.