My friends and I have been discussing whether the iPad market will be More like the iPod market or whether the iPad market will be more like the Windows market. The iPod market, or MP3 player market is completely dominated by Apple despite the best efforts of Microsoft and dozens of other companies intent on beating the iPod. Ten years later, Apple still dominates because of the iTunes store. As it turns out, players that can’t play or sell the songs you want won’t cut it no matter how much cheaper it is, and as Apple has proven, as long as your price is in a narrow band compared to the competition, a premium value can win if you have a sustainable advantage, like iTunes store.

The Windows market showed that a cheaper multivendor solution can win even with an inferior product. In this case, Apples price differential was too high relative to a similarly equipped Windows machine and Apple had no sustainable advantage. Better software was’t enough.

Which is the tablet market? I argue that it is more like the iPod, MP3 player market and less like the PC market. Apple has a commanding lead in tablet market after defining the category (less than a year ago). The challengers, like the Motorola Xoom are smaller devices where screen size is a value, running inferior software (Android offers fewer features, is a lower quality development environment and enables more promiscuous (bad for security) than iOS) and are MORE expensive for about the same package.

is it significant that Apple iPads are cheaper than Xoom? You bet it is. Probably fatally for Motorola. I believe that Apple is building a commanding lead through it’s prudent investments in the multitouch screen supply chain. Years ago, when Apple was winning with the iPhone, they realized that the most critical element in the package was the wonderful touch display and committed to significant investments to help Chinese manufacturers strengthen the quality and quantity of supply. These manufacturers committed their factories to Apple and Apple devices. To me this is a brilliant move like Rockefeller signing contracts with the railroads in the 19th century that disadvantaged his competitors. From what I’ve read, this means that Apple’s competitors have only inferior screens and less quantities available. Ergo, they have to use higher prices to regulate the limited supply of Xoom and other challenger tablets.

After all, the eight million iPad tablets shipped in 2010 is a massive 2.5 million square feet of active touch screen surface. The forecast for five times more iPads to be shipped in 2011 brings that to 12.6 million square feet. Apple’s sustained supply chain advantage will be tough for any challengers to upset in the forseeable future. These manufacturing processes are complex, automated and very expensive. And, that is why I believe Apple will still dominate tablets two years from now.