When iPad 2 Hits, Will iPad 1 Go Cheap Or Extinct?

With iOS 4.2 finally out in the wild, the iPad has effectively been rejuvenated. And there’s no question that Apple is going to sell a massive amount of them during the Holiday shopping season. But what comes next? Well, the iPad 2, of course.

You don’t need to be an analyst looking for inside information to know that Apple has a pretty standard policy of refreshing their product lines about once a year. And with iOS devices, it’s more or less clockwork. Since the iPad was released in early April last year, that’s the most obvious target for when the iPad 2 will hit. But there’s a side question that will go along with that launch: what will happen to the iPad 1? Will it go cheap? Or will it go extinct?

Essentially, the question is whether Apple will follow the iPhone model, or whether they’ll follow the iPod touch model. The iPhone is updated each year, and since the launch of the iPhone 3GS 18 months ago, Apple has been deeply discounting the previous generation model while keeping it available for sale. With the iPod touch, they don’t do that. Once it’s updated, the old inventory runs dry and isn’t replenished; the new one takes its place.

Now, there’s a good reason for Apple to do that for the iPhone. The idea of a sub-$100 smartphone is very sexy to a lot of consumers — especially if it’s an iPhone, which carries the allure of an Apple product. All indications are that the newer models (which sell for $199 and $299) easily outsell the $99 version, but it helps Apple to more fully cover the market. And given Apple’s huge margins, they still likely make a pretty penny on the $99 iPhone.

Of course, a huge reason for that is the subsidy paid to them by AT&T (in the U.S., anyway) on the device. The iPad is different. There is a 3G version, but it’s not subsidized by any carrier. In fact, it’s more expensive to the consumer — both in initial price, and the need to pay a monthly cellular fee. In other words, any cost eaten on selling a cheaper iPad, would be Apple’s alone.

And the iPad is already an interesting product for Apple in the sense that it has a lower margin than they’re typically used to. Apple very aggressively priced the iPad out of the gate with prices starting at $499, which was much less than many people had been anticipating. Of course, most accounts still have Apple making close to a 50 percent margin on the device. And with costs presumably coming down over time, they probably have some room to sell a cheaper version if they wanted to.

But how cheap?

$100 off is the obvious choice. But would a $399 iPad really be all that more enticing than a $499 iPad? It might not seem so, but those type of price cuts have long worked in the video game console business. And, if looked at a certain way, the iPad is already one hell of a video game console. One that can do about 100 other things too.

But initial video game console cuts usually come before the follow-up product is on the market. A $199 Xbox looks awesome compared to a $299 Xbox. But if it were a $199 Xbox versus a $299 Xbox 360, it might not look so hot. That’s what Apple would have to contend with. A $399 iPad versus a $499 iPad 2.

What if they shaved $200 off the price? Given what the margins are currently thought to be, that would seem to be impossible for Apple. But remember that 2011 is likely to see an onslaught of competition in the tablet space. Rivals RIM and Microsoft are both slated to make major pushes into the tablet space. And, of course, Android will be coming full charge.

Apple CEO Steve Jobs is quick to point out now that no one can match their tablet prices. But next year, some of these competitors likely will — and some will even go below them. Apple could blow them out of the water with a $299 iPad 1. While at the same time, keeping the watermark very high with the $499 iPad 2.

As we all know, Apple is a company that has always favored profits over marketshare. So maybe the $299 iPad is completely out of the question. But again, with the iPad, they’ve taken a little bit different approach, and shaved margins down. It’s something which has caused a few jitters amongst Wall Street analysts. Even with component prices coming way down, a $299 iPad would probably have razor-thin margins. And that just doesn’t sound like Apple.

And, of course, there’s the other scenario. What if Apple decides simply to kill off the iPad 1 when the iPad 2 comes along? That may not be nearly as fun for my juicy speculation game, but it’s at least just as likely of a scenario. Perhaps even more likely given the margin picture and the lack of carrier subsidy.

It just seems as if Apple is so far ahead in the tablet space right now with the iPad 1, that it would be a shame to kill it off without opening it up to even more users at a lower price point. But Apple makes moves like that all the time. Along those lines, here’s a favorite Jobs quote of mine from a Wired article looking back at 25 years of the Mac:

When I got back here in 1997, I was looking for more room, and I found an archive of old Macs and other stuff. I said, ‘Get it away!’ and I shipped all that shit off to Stanford. If you look backward in this business, you’ll be crushed. You have to look forward.

It’s not about nostalgia, it’s about the future. And the future is the iPad 2.

[photos: flickr/bfishadow and flickr/mapgoblin]