Herein I predict the future.
A friend recently asked, “Should he buy the AppleCare extended warranty for his new iPad?” I am generally opposed to spending money for extended warranties. I decided that it would be better to do an analysis this time rather than give a knee-jerk response.
I started by going to the basement and finding my copy of Robert Schlaifer’s seminal tome Analysis of Decisions Under Uncertainty. This was my textbook from a course at Harvard, many years ago. I needed to brush up on this stuff as I had not done a formal analysis in quite some time. 
This type of analysis works fine for many things besides an iPad extended warranty. In essence you look at the possible outcomes and build a decision tree. You assess the individual outcome’s monetary cost or benefit and assign probabilities to the outcomes to determine an expected value for each outcome. You then choose the branch of the tree with the best expected value.
The facts:
- 16GB WiFi-only iPad costs $499.
- AppleCare costs $99.
- AppleCare extends 1 year warranty by another year.
- AppleCare extends Apple support from 90 days by 640 days (~1¾ years).
- Probability of repair within 2 years of purchase is unknown.
- Cost of repair for item 5 above is also unknown but no more than $499.
Let us discount the extended support as having zero value. After all, there are Google, Twitter and Facebook to help us out. And remember that by the 1 year anniversary of the iPad launch there will likely be both price reductions and newer, improved models. Let us further assume that lost use of the iPad is not catastrophic the way losing the use of a cellphone or a main computer is. Finally, we assume the probability of repair within 2 years of purchase is 5% and the cost of that repair would be $200.
- There are 2 branches, either buy AppleCare or not and thus there are 4 possible outcomes. Either you purchase AppleCare or you do not and either the iPad needs repair within the second year of AppleCare window or it does not. Remember you have a 1 year warranty without AppleCare.
- Outcomes
- 1. No AppleCare and no repair, cost is zero.
- 2. No AppleCare and repair, cost is $200.
- 3. AppleCare and no repair, cost is $99.
- 4. AppleCare and repair, cost is $99.
We yield a simplified expected cost of repair of $10 ($200 x .05) for branch 1 (outcome 1 and 2), the self-insurance branches. The expected cost for the second branch, buying AppleCare is $99, a fixed cost. In this case AppleCare is a bad buy because it costs us $89 more than it is worth.
Testing these assumptions to see where breakeven occurs is a good idea. If the repair cost $498 the expected value without AppleCare is $24.90, still a bad buy. If the probability of repair skyrockets to 50% and the cost of repair is $198, we break even. If the probability of repair exceeds 50% (or even nears it) the original decision to buy an iPad is flawed. If you buy one of the more expensive models, the most expensive costs $829, AppleCare is a better insurance value because repair costs can now exceed $500, but still questionable.
- My response to the original question is skip AppleCare. Buy an iPad accessory instead or, better yet, I will be happy to accept a gift of some of what I just saved you!
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The only problem with this is that the repair could cost a LOT more than $200 if you were to crack the screen or brick the device. Lets say you drop the iPad then you are out $600 and you would regret not spending the extra money on the AppleCare? If you can estimate an Apple repair at 200 then you have never had anything fixed by Apple because it runs far more. What if the battery dies then what? Because of these reasons I purchased the Squaretrade warranty option for 3 years at $135. The reason for this is the battery will die eventually and Apple charges $100 to change it even if you have AppleCare. Also, the ST option covers ADH and water damage to the device in addition to mechanical issues.
The warranty comes to $45 per year and the iPad already comes with one year. The purchase of AppleCare extends your coverage from 1 to 2 years meaning that the actual value is about $45 since the first year is already free. Now if you consider that they don’t cover ADH or water damage then ST looks like a way better option. Sure, maybe nothing will happen and my money will be wasted. Either that or maybe one day the screen will crack and they will fix it like new. Better to spend $135 than risk $600 loss especially because it is covered for three years.
Good work on the AppleCare, but I know for a fact that a cracked iPhone screen is $200 and other things like a dead battery that will eventually occur make ST a great option.
Thank you for your comments.
I only looked at AppleCare.
The maximum repair cost for an iPad is limited to the cost of buying a new one. Therefore if you bought the 16GB WiFi model, which I assumed, the maximum repair cost can never exceed $499.
I was not assessing SquareTrade’s warranty. I assume it too is a poor economic choice, perhaps not as bad as AppleCare, and apparently with much better warranty coverage than AppleCare.
I have no idea what the likelihood of breakage due to mistreatment will be, e.g. water damage or dropping the iPad, it is hard to assess the expected cost/benefit for you or someone else.
I agree in general, especially since the iPad should be more reliable than most computer products due to having no moving hard drive and AppleCare only extends the warranty by one year.
However, I did buy the SquareTrade Warranty, where a number of factors were different. My iPad was $829, so the maximum risk was higher, the warranty was under $120 with a coupon code, it extended the warranty to three years rather than two, and, most importantly, it covered the types of problems that ACTUALLY HAPPEN, drops and spilled liquids, which are more likely to happen to a portable device that everyone wants to use when they see it
@Bob D
I think your extended warranty purchase makes much more sense than AppleCare. I don’t know if it is economically optimized but for $120 you have peace of mind. I agree that the coverage for drops and spills is a great idea.
SquareTrade has a good reputation, especially in my household. My 17 year-old daughter, who is hell on cellphones has a BlackBerry insured by them. They have been quite good in dealing with its “issues”.
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Actually, I think the value of AppleCare may be even less than you calculated. I might be wrong, but I don’t think you fully considered the optionality of the decision process.
One additional point I would make is that AppleCare purchasing is not an all/nothing proposition. AppleCare need not be purchased concurrent with the original sale – it can be purchased anytime within the 1 year warranty. Theer is NEVER a good reason to purchase AppleCare until the end of the warranty period. If we make our decision in 12 months we gain the benefit of additional information – the known failure rates for others as well as our personal experience (if the device fails and is replaced, it is probably safe to assume that our risk of a second failure in the following 12 months is LOWER). Therefore, one should 1. never under any circumstances purchase AppleCare until the last possible day and 2. probably not purchase AppleCare if the device failed in the first year and was replaced.
The problem with waiting until the last day to purchase the extended warranty is forgetfulness. I’d say wait until the last week or month. And then follow through! I forgot to get my iMac covered in its 11th month, and now I wish I had. The hard drive died, I replaced it, then 6 months later that one died. Sigh. More than paid for the AppleCare tax.
Some credit cards offer extended warranties on purchased products (up to an additional year), thereby making the 2-year AppleCare redundant.
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This is why salesmen in store always try to coerce for buying extended warranties because they make hell lot of profit on these!
The assumption that the probability of repair in 2 years is 5% is a bit low IMO. Because I’m just getting my first tablet (iPad) maybe the 5% isn’t that far off but if I compare to smart phones like the iPhone then I think it’s way low. For me the need for total replacement under warranty has been 100% each year for the past 3 years.
Hudson:
As I wrote above, I tested a 50% defect rate too as well as the initial assumption of 5%. You would break even at that defect rate.
Isn’t there also a “hidden” value factor in the technical support offered. So if buying for grandma, who is likely to have a lot of questions, isn’t it good for her to have a “lifeline” to call?