How the iPad 2 could cost you more than the Xoom

March 8, 2011, 12:00 a.m. EST
How the iPad 2 could cost you more than the Xoom
Commentary: The math isn’t quite as simple as Jobs suggests
Last week the chief executive of Apple Inc. /quotes/comstock/15*!aapl/quotes/nls/aapl (AAPL 356.60, +1.24, +0.35%) — emerging from sick leave — took to the stage to unveil his latest technological marvel, the new iPad 2. And in a bravura performance he successfully persuaded most of the world that it’s better and cheaper than its new competitor, the Xoom from Motorola.
No wonder shares of Motorola Mobility Holdings /quotes/comstock/13*!mmi/quotes/nls/mmi (MMI 27.16, +0.21, +0.78%) have tumbled 10% since last week’s iPad moment, falling from $30 to $27. Apple’s stock, meanwhile, is up about $4 to $354 — near a record high.
There’s just one problem.
The price difference isn’t quite what it seems.
Some of the new iPads will be cheaper than the Xoom.
But for some people, the Xoom will actually be cheaper.
If you’ve been following the media coverage over the past week, you’ve probably missed this fact. Why? Because it doesn’t seem to have caught the attention — of analysts or, perhaps, many in the media.
The headline figures look pretty straightforward: The iPad 2 starts at $499. The Xoom costs $799. So far, good for Apple.
But the $499 iPad 2 is the bare-bones model. It only comes with WiFi, lacks a 3G connection on a cellular network, and it has a mere 16 Gigabytes of memory. (More on that in a moment.)
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The $799 Xoom has 3G, and 32 gigabytes of memory.
A comparable iPad — with a 3G connection, and 32 gigs of memory — costs $729.
So the iPad 2 is still cheaper, only not by so much, right?
Not so fast.
If you buy the Xoom, and sign up for a two-year wireless contract with Verizon Wireless, you’ll only have to pay $599 for the device. You get an upfront subsidy of $200, like the subsidy you get on most cellular smartphones.
What’s the equivalent subsidy on the iPad 2?
Nada. Zip. Squat. There isn’t one.
So someone who wants the 32 gigabytes of memory, and wants to use the 3G connection every month, may actually save money by buying the Xoom instead of the iPad 2.
You didn’t hear that on stage in San Francisco last week. And you haven’t heard much about it since either.
And it doesn’t stop there.
What about someone who wants a tablet with even more memory?
You can get an iPad 2 with 64 gigabytes of memory. That’s a lot of videos, songs, and photos. It will cost you $829.
But the Xoom has something the iPad 2 doesn’t: A micro-SD slot. So — after a forthcoming update — you will be able to add memory yourself. And that’s likely to be cheaper. You can buy 32 gigabyte micro-SD cards for $65, and if you just want, say, 16 gigs you can get them for less than $30. The price is dropping all the time.
Furthermore, heavy data users may find the Xoom costs them less each month as well. Someone using a massive 10 gigabytes of data a month on Verizon Wireless would pay $5 less per month on the Xoom than the iPad 2.
None of this, naturally, is to suggest the Xoom is inherently the better product or that you should buy one instead. But it does counter the suggestion that the iPad is always the much cheaper alternative. It isn’t. Despite what Jobs would have you believe, the picture is more mixed.
In terms of technical specifications, the Xoom is heavier, but it has a better screen. It will run Flash, which means you can pretty much watch Web video as you do on your laptop or PC. The iPad won’t, partly, at least, because Jobs wants you to pay money to watch programs through iTunes. The Xoom has access to many fewer third-party applications.
Later this year the Xoom will also run on Verizon’s /quotes/comstock/13*!vz/quotes/nls/vz (VZ 36.44, +0.43, +1.19%) “4G” network, dubbed LTE. A spokeswoman explains that this runs 10 times as fast as current 3G networks.
Of course, that’s all in the future. Motorola, for reasons best known to itself, has managed to bobble the new product launch. Folks buying a Xoom today will have to wait for updates from Motorola before they can use micro-SD cards or watch web videos using Flash. It’s errors like this that keep Apple on a roll.
But the most important implication of the rising competitive environment may be financial. Apple makes its biggest margins, naturally enough, on higher-end products with the most memory. That’s been especially true of iPods, iPhones, and iPads. (So the iPad with 32 gigabytes of memory will cost you $100 more than the one with just 16 gigabytes, even though a 16-gigabyte memory card at Amazon.com costs less than $30.) But it’s precisely at the higher end that Motorola’s Xoom is more competitive. Sure, Apple wins the battle of the bare-bones tablets. But that’s not the most lucrative end of the business.
Too many fans view this as a battle. You will hear all sorts of people telling you Apple is the “winner.” But for investors, it’s not always like that. It’s not a zero-sum game. If you have serious competition, that’s going to compress profit margins.
The best news for Apple investors? The company’s amazing marketing magic continues, unabated. Regardless of whether the iPad 2 is actually better or cheaper, the Wizard of Oz has successfully wooed the world to think it is. And in the age of the Internet, where there are no facts, only opinions, isn’t that what matters?
Brett Arends is a columnist for MarketWatch and The Wall Street Journal, based in Boston.
http://www.marketwatch.com/story/how-the-ipad-could-cost-you-more-than-the-xoom-2011-03-08?pagenumber=2