Apple’s Success With iPad Creates Giant Sucking Sound For Mac Notebook Pricing

iPad stands accused of cannibalism

The average price of Apple’s Macintosh (Mac) notebook has declined from an estimated $1,460 in 2007 to around $1,230 in 2010, ^[] led by greater demand for notebooks over desktops causing PC manufacturers like Apple, Hewlett-Packard and Dell to increase production and lower prices in order to boost sales.

Despite the weak economy, Apple’s notebook prices have remained more resilient than competitors while the increased market share suggests it has more room to use pricing to stimulate demand. However, Apple’s own iPad gives customers another choice for a mobile computing device without leaving the Apple family of products, and this fact combined with hyper competition in the notebook market, might add downward pricing pressure for Mac’s notebook line.

We estimate that notebook sales make up 8% of our current Trefis price estimate of $418 for Apple’s stock, which is about 36% above the current market price of $307.

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iPad Weighing on Mac Prices

There is a growing consensus that tablets like the iPad are cannibalizing sales of notebooks. In a September 2010 article in Wall Street Journal, Best Buy CEO Brian Dunn said that internal estimates showed that the iPad had cannibalized sales from laptop PCs, especially netbooks, by as much as 50%. Most data include netbooks as a subset of the overall notebook market.

Another article in Fortune, sourcing Morgan Stanley/NPD research, states that tablet cannibalization is one of the key factors responsible for the negative growth in the notebook market in the past eight months. ^[]

In a previous article dated April 3, we explored the implications of the iPad on Mac sales and suggested that since a significant portion of Mac notebook buyers were primarily content consumers rather than content creators, Mac notebook cannibalization from the iPad could be significant.

In hindsight, the iPad created a new market for tablets which to this point has not affected Mac notebooks noticeably. It also took share from the netbook market where Apple was not active.

Pricing vs. Market Share

Apple was forced to cut prices of its MacBook Pro and MacBook Air products by between 6% and 28% last year, which is uncustomary for the company. ^[] Its price declines are still less than those for competitors HP and Dell.

Going forward, we believe that the iPad’s pricing in the market place is below that of notebooks and above that of netbooks. This could make it hard for Apple to raise (or maintain) prices on its notebooks in the future as some customers will view the iPad as a cheaper substitute without having to leave the Apple family – or conversely a cheaper way to join the Apple family without buying a notebook.

We expect modest price cuts could play a role in increasing Apple’s notebook market share from an estimated 6.5% in 2010 to 10.5% in 2017. (chart above)

The Trefis community expects Mac notebook pricing to decrease from $1,200 in 2011 to $995 by 2017, compared to the Trefis baseline estimate of a decrease from $1,170 to $860 during the same period suggesting slight upside from our price estimate.

Our complete analysis for Apple’s stock is here.

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Dish Stock Still Has Big Upside But Not As Much If Promotional Pricing Persists

Watch those prices

Dish Network’s average subscription price for its high-definition TV service has declined in recent years from our estimate of $20 a month in 2006 to about $10 in 2009 amid increasing competition from DirecTV, AT&T and Verizon, which also offer HDTV services.

Dish Network, DirectTV and Verizon are extending promotional plans in the hopes of attracting new customers while Time Warner Cable does not charge extra for HD channels. This combined with ongoing disputes with content owners that provide HD programming are creating a challenging pricing environment.

We expect average subscription prices to stay around current levels in the near term; however, if promotional activities continue longer than expected or new content agreements adversely impact Dish, this could lower our price estimate of $25.84, which is currently 30% higher than the current market price.

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Promotional Extension Hurts Pricing

Dish Network’s recent marketing campaign offers to waive the $10 per month add-on fee for HD programming if customers commit to a two-year contract. Initially this offer was intended to last until the end of September 2010; however, the company recently extended this offer until January 2011.

We interpret this as a sign of poor pricing power as Dish is willing to sacrifice HD revenues in an effort to attract new customers. While we do not know how successful this strategy might be, the willingness to offer free programming hurts pricing for HD services overall. If Dish extends promotions even further, this will lead us to lower our estimates for average HD pricing.

Dispute with Content Owners

Dish has been in disputes with content owners like Disney and Fox over increases in HD programming costs and recently faced a complete blackout from Fox due to an impasse. The company argues that if it agrees to higher content prices, it would need to pass these costs on to its customers hurting its business and image as a low cost service provider.

While an agreement was finally reached with Fox, service interruptions frustrate customers and hurt brand value pointing to further pricing issues for the company. In these circumstances, Dish becomes more reliant on offering promotions to attract new customers or retain current ones, further eroding the perceived pricing premium associated with HD services.

Since competitors like DirecTV also offer free HD programming for new customers and Time Warner Cable is not charging for HD channels, Dish is forced to compete on price, which makes it more likely that further price cuts will come.

Lower Pricing on the Horizon

We currently forecast that average HD subscription prices will decline slightly and stabilize around $9.50. However as issues mount for HD providers, we believe that pricing might decline further. If average prices gradually reach $5.00 by the end of our forecast period, this subtracts 4% from our price estimate.

You can modify our forecast above to see how Dish Network’s price estimate is impacted by change in average HD subscription fee.

You can see the complete $25.84 Trefis price estimate for Dish Network’s stock here.

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