Higher iPad App Pricing Has Little Impact on Apple’s Stock (NASDAQ:AAPL)

AAPL: Apple logo

Apple’s (NASDAQ:AAPL) iPad apps can help slow the decline in average app pricing on the iTunes app store; however the impact on Apple’s stock of such an outcome is small.  We estimate that Apple’s iTunes and Apps business constitutes less than 6% of the $267 Trefis price estimate for Apple’s (AAPL) stock and music purchases on iTunes remain the predominant source of value for this segment.  In comparison, we estimate that Apple’s new iPad business contributes only 4% to the company’s stock.

We estimate that there could be an upside of 1% to the $267 Trefis price estimate for Apple’s (AAPL) stock if iPad can help stabilize its average apps pricing.  Below we discuss the average price on an iPad app, the significance of iPad apps for Apple’s stock and the reasons why iPad app pricing could remain higher compared to iPhone apps.

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Average Paid iPad App Costs $5

TechCrunch recently highlighted that the average price for a paid iPad app is currently around $5.  In comparison, we estimate that the average price of a paid iPhone app will be around $2 in 2010 and will decline over time to reach around $1.50 by the end of Trefis forecast period.

iPad Apps a Small Component of Total Apps

According to TechCrunch, there are over 3,000 iPad apps in the Apple app store and 80% of them are paid apps.  In comparison, there are more than 150,000 iPhone apps and about 75% of iPhone apps are paid.

We believe there will be more than 6 billion apps downloads in 2010 and that only 4% of these will be paid apps, since most people prefer to download free apps.  Given that only a small portion of downloaded apps will be iPad apps and that a fraction of those will be paid, the impact of iPad pricing for Apple’s stock is limited.

iPad App Pricing Likely to Remain Higher than iPhone App Pricing

We believe there are two main reasons why iPad apps will continued to be priced higher than many iPhone apps:

1.  iPad Apps will be optimized for the larger screen

Most of the iPhone Apps are re-developed by developers so as to optimize it for the larger resolution screen of iPad. This could require more effort and cost on the developer’s part.  For example, Scrabble App is being sold for $10 on iPad versus $3 on iPhone and Tetris App is being sold for $8 on the iPad versus $5 on the iPhone.

2.  Better features and graphics on iPad Apps

iPad’s larger screen compared to the iPhone gives developers an opportunity to provide more features and improve the graphics of an application.  The larger screen also encourages apps for the iPad that wouldn’t otherwise be available for the iPhone.  For example, OmniGraffle is a new $50 iPad app that allows for touch-based diagramming and brainstorming and is not available for the iPhone.

1% Upside to Apple’s Stock if Average Paid Apps Pricing Remains Stable

Although we forecast that Average Paid iPhone and iPad App Pricing will decline to around $1.50, there could be an upside of $3 (1%) to the $267 Trefis Price estimate for Apple’s stock if iPad apps were to help pricing remain stable at $2 over the Trefis forecast period.

You can modify our forecast for Average Paid iPhone and iPad App pricing above to see how Apple’s stock will be impacted if it were to remain stable rather than the decline that we forecast.

For additional analysis and forecasts, here is our complete model for Apple’s stock.