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Apple's future as a luxury brand in a commodity business may depend on "reductive innovation." Courtesy / Lisa Mahapatra

“We’re often faced with a paradox when we design: To make products smaller and lighter, while at the same time more powerful. The more we reduce a product’s physical volume, the more difficult it becomes to increase its power and maintain its battery life. But if we can overcome these challenges, we can make something without compromises.”

This statement from Apple’s lead designer, Jony Ive, which the company used to introduce the iPad Air at its Tuesday media event, concisely sums up the biggest uphill battle Apple must overcome in the next decade: how to balance refinement with innovation.

Media outlets like the Washington Post lamented the new iPad for its lack of fresh features, despite its new form factor, saying the iPad Air has “lost its veneer of cool.” But what the critics fail to realize is that Apple can’t keep its current pace by leapfrogging itself from one product iteration to another; rather, it must temper its creativity with a healthy dose of editing.

The high price of innovation

Creating an “insanely great” product isn’t cheap. In 2011, each 32GB iPad 2 cost $326 to manufacture; its list price was $599. And that was before Apple introduced the expensive, power-hungry Retina display and LTE bands in the third-generation iPad in 2012: The 32GB version of that cellular tablet, which cost $38 more to make than the iPad 2, was $130 more expensive than its predecessor at $729. As you’d expect, Apple’s profit margins have grown with each new iPad release -- $273 from each iPad 2, $365 from each iPad 3, and so on.

In other words, Apple's strategy has generally been to improve profit margins by raising prices more quickly than costs increase. But there's a limit to that approach; at some point, customers balk at paying more for a product that is not much different than rival machines, no matter how much cachet the product has. So if Apple hopes to sell its equipment at the upper end of the price continuum while not scaring consumers away with even higher prices, it must find ways to introduce “newness” without adding expensive features for the sake of change alone. A difficult feat since innovation, large or small, doesn't come cheap. The voice recognition system Siri cost Apple $200 million and its fingerprint sensor was acquired for about $356 million.

To grasp the challenge Apple faces in balancing additional features with the already high price tag of its products, consider the iPad lineup: Besides their different sizes, weights, screen resolutions and a few other incremental differences in Wi-Fi and cellular capabilities, the slim, one-pound iPad Air ($499), the Retina iPad mini ($399), the older iPad 2 ($399) and the first-gen iPad mini ($299) are almost all completely alike. One could argue there’s plenty of refinement between these products, but very little innovation. Meanwhile, Google's new Nexus 7, which features a similar pixel density as the Retina iPad mini, costs $170 less than Apple’s 7-inch tablet at just $229. Amazon’s Kindle Fire HDX, another 7-inch tablet with a comparable “Retina” display, also starts at $229. These rival tablets aren’t as well-reviewed as the iPad, but they’re closing the gap in market share. Apple's global tablet market share has dropped from 60 percent in second-quarter 2012 to just 32 percent in the same period this year, according to researchers International Data Corp. Samsung, whose highest-end tablets cost about $300, is in second place with 18 percent market share.

“It seems as though Apple is trying to push average selling prices for iPads back up again after they've dropped steadily over the past year,” Jan Dawson, chief analyst at London-based market research firm Ovum, told IBTimes. “Both (the iPad Air and Retina iPad mini) should sell very well, especially over the holiday period, but Apple held off being as disruptive as they might have been by pricing them relatively high.”

Fans of Apple will already be sold on the new iPads, but undecided customers may settle for cheaper alternatives. It doesn’t matter if Apple’s iPad is the better tablet; its high starting price makes it simply unattainable for many people. Steve Beck, founder of management consultancy cg42, told IBTimes that 31 percent of consumers consider Apple to be the most innovative tablet brand, but 78 percent of consumers are undecided about which brand of device they will purchase next. Even Apple’s 2-year-old iPad 2, which is priced the same as the new Retina iPad mini, doesn’t make the choice any easier for consumers at its $399 starting price.

“This is the clearest statement Apple could have made that it is only interested in competing in the premium tablet space,” Dawson told IBTimes. “The yawning gap between the specs of the cheaper iPad Mini and iPad 2 and the new iPads signifies that it is only willing to compete at the lower price points with older models. This leaves a huge chunk of the tablet market unserved by Apple while others such as Google, Amazon and a raft of others aggressively target the sub-$400 market. This reinforces our view that Apple's share in tablets will continue to fall as Android's share rises over the coming years.”

Addition by subtraction

Apple has set the bar very high by releasing new iPhones, iPads, computers and operating systems each year. The phrase, “If it ain’t broke, don’t fix it,” doesn’t really apply to Apple; the company feels constant pressure from consumers, rivals and Wall Street to continually do better, to improve, and most importantly, to exceed expectations.

Marisa Shockley, the director of global engagement strategy at the Tribal Worldwide ad agency based in New York, told IBTimes that Apple faces “an urgency to adapt, which solidifies the importance of putting the consumer first, regardless of the internal politics, time or budget it may take to get there.” The problem is, putting consumers first isn’t an easy task when consumers currently expect so much from their devices in terms of performance and “newness.”

Apple’s board of directors in August expressed concern that the Cupertino, Calif.-based company wasn’t innovating fast enough. But continuous innovation may not be the solution for a company that wants to maintain high profit margins with high price points. A more efficient and less costly way to sustain customer loyalty could be by improving how the current hardware and software performs, either for the user or behind the scenes. Earlier this year, Apple proved it could make old devices feel new by refining its mobile operating system with its critically praised iOS 7. The iPhone, MacBook Air, Retina MacBook Pro and iPad mini all evolved in 2013 without Apple needing to change the devices’ form factors, and according to early reports of OS X Mavericks, Apple's latest computer operating system, all Mac laptops have received improved battery life as a result of the new software. So while refinement may not be as flashy as a new feature or function, polishing innovative products may be just as important to Apple’s strategy as innovating them in the first place.

In all, it's a heady challenge for Apple. The company has built up a war chest of more than $100 billion -- even after stock buybacks and dividends -- by driving the highest profit margins in the industry. Apple's reputation for creativity and design has helped it sell luxury products in a commodity business. But the competition is getting stiffer and the price wars more intense. So to continue to play in the lofty heights that it has chosen, Apple may have to perfect a skill that eludes most manufacturers: reductive innovation. Designer Ive has been pondering this approach for some time; indeed, his description of it evinces how difficult it is to achieve yet perfectly limns the product conundrum that Apple faces.

“As you bring order to complexity, you find a way to make the product defer to you,” Ive told Jobs’ biographer Walter Isaacson. “To be truly simple, you have to go really deep. For example, to have no screws on something, you can end up having a product that is so convoluted and so complex. The better way is to go deeper with the simplicity, to understand everything about it and how it’s manufactured. You have to deeply understand the essence of a product in order to be able to get rid of the parts that are not essential."

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