
The tablet memory mark-up scandal - bane
http://blogs.which.co.uk/technology/tablets-2/the-tablet-memory-mark-up-scandal/
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thoughtsimple
A couple of points on Apple (which I’m most familiar with). First, you are
only looking at the 16-32GB upgrade. They charge the same fixed increment on
32-64 and 64-128.This should give a clue for what is going on here.

Apple has a couple of goals. For the consumer they want it to be easy to make
purchase decisions. By not varying the price for upgrading to each category,
the decision becomes easier for most customers. What can you afford for the
convenience of more storage space.

The second thing is probably more important to a successful business–profit
margins. Apple is looking at profit margins across the whole product line not
for each tier. Clearly anyone buying a 16GB or 128GB iPad is getting the best
deal and those buying a 32GB are getting the worst of it. I’m betting that the
32GB iPad is the most popular and so it has the most influence on the profit
margin for the platform. In essence, buyers of the 32GB iPad are subsidizing
the 16GB version.

As long as customers find the 32GB iPad desirable at the list price, this will
continue.

~~~
TrainedMonkey
I agree, another point that article is missing, is that buying extra 16GB of
memory will give you more mileage compared to base 16GB. That is because
significant portion of base 16GB is occupied by OS and required apps.

So adding 16GB does not double effective storage, more like increases it by
2.5-2.75 times.

~~~
tedunangst
My 16GB model has 12.8GB free. A 32GB would have 28.8GB free. So more like
increases it 28.8 / 12.8 = 2.25 times.

~~~
TrainedMonkey
After running some numbers I am coming up with even less. Using 28GB of
formatted storage (see link below as to why) I get 28/12.8 = 2.1875* . While
this is way lower compared to my original estimate of 2.5, that is still
higher than factor of 2 which is what we would expect from simply doubling
storage.

[http://reviews.cnet.com/8301-31747_7-57404587-243/why-my-
new...](http://reviews.cnet.com/8301-31747_7-57404587-243/why-my-new-ipads-
storage-doesnt-add-up/)

* This number heavily depends on what you count as required app, for my iPhone for example GPS is a must which chews into storage fast.

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SimonPStevens
This is why I lament the fading of the 'PC era'. For me the PC embodies
standards, compatibility and interoperability. Buy your PC from one company,
and if their memory upgrade price was too high, buy your memory from another.
(And your graphics card from another, and your hard drive from another...).

It's my hope that eventually similar standards will evolve for tablets (and
laptops, and perhaps phones) that allow a consumer to easily modify or custom
build a compatible device.

Unfortunately, I don't have high expectations that this will actually happen.
The market just doesn't seem to be applying the right pressure to have any
companies interested in doing such a thing.

(Out of interest, can anyone with more knowledge comment on how this
standardization came about for PC's. I presume there was a time when computers
from different companies weren't compatible. What brought about the "IBM
compatible" machine, and why did IBM not sue the pants off every company
releasing such a product?)

~~~
LukeShu
The reason the "IBM compatible" machine took of is because for the most part,
the IBM PC was made using off-the shelf, generic components; the only
proprietary part was the BIOS. Compaq invested a TON of R&D into reverse
engineering the BIOS, writing a spec for it, then having another team, who had
no idea how it worked, re-implement it. Because it was a totally independent
implementation based on described behavior, there was nothing IBM could do;
there was no copyright infringement.

As for why everyone stayed compatible with each other... I have no idea.

~~~
thoughtsimple
Early in the PC revolution there were several companies making "almost"
compatible PCs. For example the DEC Rainbow was one of these. Even IBM tried
to go it alone with their incompatible PS/2 and Microchannel bus. These
companies tried to make sure that PC/DOS software would run but that they
owned the hardware market exclusively. They all failed--they were all rejected
by the customers.

Shortly thereafter the market was inundated with white box PCs. This change
reduced the margins on PCs to such an extent that it remade the PC market
again. The rise of Dell was part of this process. The only way to beat the
local white box supplier was to have superior supply chain logistics which is
what Dell brought to the market. By this time, the requirement for compatible
hardware was so ingrained there wasn't even a discussion if it was possible to
go off on your own--unless your name was Apple.

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tpurves
Shocker, this just in, successful companies use:

\- value-based pricing instead of cost-based pricing for products and upgrades

\- set lower gross margin prices on a base model product in order to attract
customers and upsell and cross sell to high margin add-ons and premium
versions

btw. Apple has sometimes been described as a flash memory distribution
company. All the other stuff, the devices, itunes, the media business, the app
store, serve primarily to help sell more flash memory. The lion share of apple
revenue is attributed to hardware sales. Mostly iphone and ipad. Within
hardware sales the BOM and markup for flash memory chips is the largest driver
of gross margin.

~~~
seandougall
Indeed. Back in the now-lamented good ol' days of build-it-yourself PCs, I
recall learning that Intel made all their Pentium processors exactly the same,
artificially limited the clock speed on some, and sold them cheaper. So the
difference in manufacturing cost between, say, a 400 MHz processor and a 433
MHz processor was exactly $0, but somehow nobody seemed to get quite so up in
arms about paying more for the extra value.

~~~
CJefferson
I think you are mis-remembering history. People were extremely annoyed by
this, and put quite a bit of work into figuring out how to clock the
processors higher, and figuring out which processors could be safely
overclocked.

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computer
It's called market segmentation, and that by itself isn't a "scandal".

~~~
mtgx
The scandal here is that they're still releasing "flagships" with 16 GB of
storage, for the same price as it was 3 years ago, even though next year they
should be able to offer even 64 GB of storage for the same price.

Component prices drop by about 30 percent per year, or in half every 2 years,
and flash storage prices have followed that trend _exactly_ (you can Google
the iPad or iPhone build of materials from over the years, and see I'm right).

~~~
thoughtsimple
But they've also added 128 GB at the high end (also for the iPad 4 but after
launch.)

This isn't about component pricing. It is about profit margins for the whole
product line not each individual tier. Apple is using the drop in cost for one
component to offset the increased cost of others to maintain their profit
margin.

~~~
smackfu
If they are motivated by the overall product line margin, why add the 128 GB
model at all?

~~~
thoughtsimple
I'm pretty sure it was done in response to the first Microsoft Surface
release. It was obviously possible to create the 128 GB iPad and it must have
fit within Apple's profit margin structure. So I would guess it was a hedge
against losing some number of sales to a high end Surface.

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radicalbyte
I don't find the segmentation a problem - having high-end models just makes
the mid-range look like better value. Old and very common trick.

The problem is that in the age of Retina displays, apps that were a 50mb three
years ago are 150mb nowadays. So those 16gb are filled in no time at all.

Compare the iPad to the Xbox 360: the 360 launched with a 20gb hard drive. A
couple of years later, that was replaced with a 60gb drive - because system
changes made that 20gb very small.

I expect that the real reason is that Apple's margins are under pressure from
cheap Androids, and a Retina display + uber CPU/GPU are better competition
points than touching the Golden Goose..

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al2o3cr
"scandal": you keep using that word; I do not think it means what you think it
means.

Selling a device as having 16GB of flash when it only actually had 8GB would
be a scandal; pricing something higher than an author believes is "fair"
(while still selling so many that supplies are STILL constrained) is not.

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Joeri
It's odd though that there is no market effect here to drive prices down at
the high end. You could imagine a vendor selling a device with 64 gb storage
where competitors ship just 16 gb at the same price level. Why isn't anyone
doing that?

~~~
beat
It will probably happen, as Android and Windows tablets become commodities and
are forced to compete on the same rotting-vegetables pricing basis as PC
hardware. Once they go, Apple will quickly follow suit. But make hay while the
sun shines, and enjoy the prisoner's dilemma while it's still profitable for
everyone.

"Scandal" my butt. This is just market forces waiting to happen. There's a lot
of money to be made in the relative slowness of the invisible hand.

------
Someone
As others have said: it's just capitalism at work aka market segmentation.

However, it looks like there is some informal cartel, where nobody dares to
decrease his margins in a ploy for market share. If you can prove that that is
more than informal, you have a point.

For those who feel robbed when they see what $100 extra or so buys them, look
at it this way: the 16GB version has only about $10 less worth of parts, but
is sold for about $100 less. That's a bargain.

~~~
beat
It's more prisoner's dilemma than cartel. And like the prisoner's dilemma, it
won't last.

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crystaln
It is not scandalous to have your pricing correlate to value and markets,
rather than cost basis.

If it were, almost every software and saas company would be a scandal.

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benjaminwootton
It isn't necessarily that the 32gb for instance is scandalously marked up over
the 16gb. It's that the entry level is sold closer to cost in order to compete
in that segment.

Entry level tablets have seemed really cheap since the iPad was first
unveiled, and thats partly because the higher end models are subsidising the
low end ones.

~~~
MichaelGG
This teardown seems to disagree:

[http://www.isuppli.com/Teardowns/News/Pages/New-iPad-Air-
Cos...](http://www.isuppli.com/Teardowns/News/Pages/New-iPad-Air-Costs-Less-
to-Make-Than-Third-Generation-iPad-Model-,IHS-Teardown-Reveals.aspx)

The 16GB models have 45-50% "implied margin". The highest end has 60%. That
hardly sounds like subsidizing for any useful definition of subsidizing.

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smackfu
The real scandal is not upping the base model to 32 GB.

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programminggeek
Is it a scandal to sell a cup of coffee for $3? It's water and coffee grounds.
Is it a scandal that the large size is $1 more, but doesn't cost an extra $1
to provide the extra liquid?

Apple is a business that sells products to make money. Not every business is
Wal-Mart and Dell with razor thin margins.

Apple nearly killed itself by destroying its margins and cash in the 90's and
only survived by cutting all the unprofitable businesses and focusing on where
they could operate profitably. Apple has since spent nearly two decades
building up their cash reserves and only selling products that have something
like a 30+% margin on them (which is similar to software margins FWIW).

I think it's smart and a lot of people could learn from Apple's obvious
business acumen. Get good at selling your product with enough profit margin
that you can sustain a business doing it. Sell to the people who are willing
to buy at the price you are willing to sell, and ignore the unprofitable
potential customers and ignore the pundits.

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fumar
I understand market segmentation, Starbucks does a great job with this
(marketing background).

But, one of the reasons why I have lately avoided Apple's iOS devices is the
feeling of getting robbed. Why should I pay 100 dollars more for 16 GB, its
not worth it in 2013.

~~~
giarc
Imagine they charged only $20 extra for each storage increase. Who, when
buying a $400 device wouldn't just opt for the small price increase? Therefore
they would be sitting on a stockpile of 16GB tablets. Segmentation needs to
exist to allow various classes of buyers. For example, someone using a tablet
for email, web browsing only would be fine with a 16GB, but someone
downloading many large apps would benefit from the 128GB.

~~~
CJefferson
Why would they sit on a stockpile of 16GB tablets? Are Apple too stupid to
only make as many tablets of each type as required?

~~~
giarc
Sorry I was being facetious. What I meant was if they priced them too close,
no one would buy the 16GB and therefore it probably wouldn't be economical to
produce the low end tablet.

~~~
fumar
Understood. The point I was trying to convey was the bottom tier should not be
16GB anymore. It should start at 32GB and go up from there.

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paul_f
After 3 years, it seems the base iPad should have moved from 16GB to 32GB to
64GB. Why didn't this happen?

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SeanDav
No scandal, just don't buy their products, and tell all your friends to not
buy their products.

~~~
bananacurve
And when they follow your advice who do you think they will call when there is
a problem?

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georgemcbay
I wouldn't mind this segmentation if you could easily upgrade the available
flash via your own microSD card, but this option is quickly disappearing, even
on the Android side (especially among the "flagship" Google nexus devices). So
that sucks.

~~~
Guvante
Tablets are moving away from the "storage device as a directly accessible
object" model, which is a good thing. The only downside is how do you handle
heterogenous storage without making the user deal with it?

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37prime
Imagine if prices for tablets also change to reflect the ups-and-downs of
memory and flash storage prices.

iPad today $499, might be $512 or $482 next week. Depends on the market prices
on those components.

For sure companies like Apple locked in the prices for the components.

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dreamfactory
I'm a bit surprised that there isn't a diy upgrade market for ipads at least.

