Why Apple’s new creation will be free.

[Update: I was, of course, wrong. iPad costs $500-$800 depending on configuration options, data plans are $15 or $30 per month depending on download volume, data contracts can be canceled any time–no lock in on them.]

I think the new iTablet/iSlate/iPad thing will be free.

All the current predictions for something that’s supposed to be a game-changer seem really tame to me: “it’s going to be somewhere between the size an iphone an laptop” or “it’ll have wifi and 3G” or “it’ll have multi-touch.” I mean really. That doesn’t sound game changing. So here’s my take on Apple’s creation and why it’s going to be free.

Same basic business model as cell carrier subsidies

The iPhone is way cheaper than the iPod Touch because ATT subsidizes the cost of the iPhone. Apple’s iTablet thingy will be subsidized as well, but by the publishing industry. So instead of being subsidized by one corporation, the iTablet thingy will be subsidized by several corporations. Why will publishers want to fully subsidize the cost of making/distributing/marketing the Apple iTablet thingy?

• The cost of printing things on paper is an enormous drain on the publishing industry. Eliminating the expense of operating a printing press would free them up to focus on their core businesses: creating content + selling advertising. If the NYTimes stopped making a paper edition, they could buy two kindles for every subscriber, and that’s just one publisher. Some information from Metafilter suggests that the paper alone is running the NYTimes about $150,000 a week.
• If publications were distributed digitally it would be much easier to control subscriptions and eliminate the used market. This one hits both newspaper publishers (who would admittedly have to start using real subscriber numbers when talking to advertisers) and textbook publishers (how many of you who went to college bought new textbooks for all your classes?).
• Digital distribution will allow advertising-driven publishers the ability to align their offerings with the needs of their customers. The newspaper industry lost their classifieds section to Craigslist over flexibility in deadlines. They’re in the middle of losing their real estate section because of the inability to track ROI. Getting completely digital will give them the opportunity to try and get back in the game.
• If Apple follows the Appstore pricing model, which allows creators to price things as they wish and Apple just takes a 30% cut, then it will be the most favorable digital distribution deal around.

Why would Apple give it away for free?

Apple doesn’t compete on price, so why wouldn’t they charge something for it?

• They will make their profit on the device itself from the subsidies of the news and publishing industry.
• They will make ongoing revenue/profit from the Appstore ecosystem via their 30% cut of sales targeted to the device.
• That ongoing revenue of 30% will scale faster the more devices are in the hands of consumers.
• Who would be able to compete with Apple’s device at that price without losing money? Remember how Microsoft thought it could take on the iPod by losing money? Apple would become the ubiquitous device among an offering of has-beens.

Real issue will be one of how to keep up with demand if the thing is free. Who knows how they’ll do that without charging anything. But I’m sure they’ve figured it out. Maybe starting by only giving them out to people who are subscribing to one of the organizations subsidizing the expense.

Networked growth strategy

The strategy at play here is one of making ongoing revenue from the network and ecosystem while also making the money to subsidize the capital expense of making/marketing/delivering the device via subsidies. It can work because the subsidizers are in a tight situation: they have a product people want but the production and distribution method of that product exceeds the price their customers are willing to pay. The subsidizers will go out of business if they can’t find a solution to this problem so they are highly motivated to solve it. Apple has a track record in precisely this situation.

The value created for the publishing and news industries scales in accordance with the ubiquity of the platform, as a result of this they will be willing to shoulder the costs of making the thing ubiquitous. Apple’s ongoing revenue will also scale so they will be willing to develop the product ecosystem.

I realize this is a way out there crazy prediction. But I wanted to read at least one prediction for this big event that was so far outside the box that it might be worthy of Apple’s ability be a game changer.