The new iPad was unveiled Wednesday at Apple's highly-anticipated launch event. Key hardware upgrades and a familiar price point positions the iPad as an attractive successor to the very successful iPad 2.
More importantly, however, it cements Apple's technological lead over the tablet competition at a critical point in time for the emerging tablet market.
The new iPad boasts upgrades, including a sharper screen, faster data connectivity, a more powerful processor, and a higher-quality camera.
These upgrades, especially the higher-resolution screen, are features that we expect will resonate with mainstream consumers.
In the smartphone market, Android phones have largely closed the technological gap with the iPhone. In contrast, we believe the new iPad cements Apple's technological advantage over the tablet competition for the foreseeable future.
This technological advantage is a critical component of Apple's strategy to lock users into the iOS platform. As the platform wars evolve, the iOS and Android ecosystems are becoming stickier, with customers less likely to switch back and forth between platforms with each subsequent device purchase.
Therefore, the most effective way to acquire a sticky customer is to bring them into your ecosystem by winning their mindshare on the initial device purchase.
Though the new iPad is clearly differentiated from its predecessor, the iPad 2, it is more important right now to focus on Apple's ability to secure its share of initial tablet purchases, rather than debate the upgrade pattern of existing iOS users.
In an effort to capture a greater share of price-sensitive customers, Apple is going to continue offering the now year-old iPad 2 at a reduced price. Apple is replicating the strategy it employs in the smartphone market to fend off lower-priced alternatives.
Price has been the only effective weapon available to tablet competitors, as we can see by comparing the success of Amazon.com's $199 Kindle Fire with dozens of other tablet launches. By lowering the price of the iPad 2 to $399, Apple is positioning itself to avoid ceding large chunks of market share to low-cost products.
We were anticipating a greater discount to be offered on the iPad 2 because at $199, the Kindle Fire still offers a significant discount--even though at 7 inches, the Fire is a smaller class of device.
This may indicate that Apple intends to launch a competing 7-inch device in response to the Kindle Fire and the additional low-cost, Android-based tablets that we expect to hit the market during the next two years.
The greatest risk of offering both devices is that as the technological gap narrows, sales of the higher-margin device could be cannibalized.
The iPhone remains the most important device in Apple's product portfolio. Nonetheless, the tablet market could challenge the PC market in terms of unit shipments during the next 10 years and the iPad is establishing itself as the second-most important device driving Apple's success.
In the near term, the combination of another solid product launch and disorganized competition suggest Apple's current momentum is unstoppable.
Excerpted from Morningstar Analyst Michael Holt's Apple Stock Analyst Report available for premium subscribers of Morningstar.com, our sister US site.