The No. 1 Argument Against Apple's iPad Mini

The rumor mills are getting louder. Apple (Nasdaq: AAPL  ) -- if we're to believe Asian publications, stateside analysts, and countless bloggers -- is working on a smaller tablet.

The thesis is sound. Amazon.com's (Nasdaq: AMZN  ) Kindle Fire is no match for the iPad, but the leading online retailer managed to sell nearly 5 million of its portable gadgets over the holidays. Google's (Nasdaq: GOOG  ) Nexus 7 -- matching the Kindle Fire on both price and 7-inch screen size -- will begin shipping as early as next week.

The proliferation of 7-inch Android-fueled tablets is hard for Apple to dismiss. After all, this is the one niche where Apple actually commands the lion's share of a growing market. Yes, the iPhone is a bigger contributor to Apple's business at the moment, but roughly two Android smartphones sell for every iPhone that's picked up. Apple's desktops and laptops are still the devices that many consumers associate with the company that until recently was known as Apple Computer, but Apple isn't even one of the world's five largest PC makers by unit volume.

That leaves us with the iPod. Apple has had this market cornered for years, but sales of the portable-media player have been falling over the past two years.

The iPad is important to Apple, and it can't let the market get away.

But there's the rub
Bigger screens cost more money to make, and it's probably the biggest reason the more successful tablets outside the iPad, with its 9.7-inch screen, happen to be smaller devices with 7-inch touchscreens.

Introducing a 7-inch iPad would be great, but what would it sell for? This is the biggest sticking point in all of the "iPad Mini" chatter that's making the rounds. Teardown reports suggest that Amazon is selling its Kindle Fire at a loss. Google's Nexus 7 packs slightly better specs, so it wouldn't be a surprise if Big G is positioning its own tablet as a loss leader, too. Amazon and Google have ecosystems where they can make back the hardware subsidization.

Apple can, too -- but it won't. The company's thick margins would disappear. Have you seen what's been happening to Amazon's margins lately?

However, the main reason Apple wouldn't price its smaller iPad -- if it even comes out -- at the same $199 price point as the Kindle Fire or Nexus 7 is that it would destroy the sale of its 9.7-inch iPads that start at $499.

Even tacking on a slight premium to get to $249 or perhaps even $299 will cannibalize iPad sales more than it eats into what Amazon, Google, and any other low-cost tablet manufacturer is up to.

That's the product-line killer, folks. There is no appropriate price for an iPad Mini.

The price isn't right
When Apple decided to keep the iPad 2 around after its springtime rollout of the new iPad, the $399 price point was deliberate. It's priced at a point where most potential buyers will just fork over an extra $100 to get the latest tablet with all of the upgrades that Apple introduced earlier this year.

Would the same argument hold up if Apple's slightly smaller iPad was priced at $249? No. Most people would just buy two iPad Minis if they had enough to buy one new iPad.

One can argue that Apple could really scale back on the features. It can go with a crummy camera with low resolution (since going with no camera at all would be a FaceTime killjoy). It could cut corners on the display or other chips. Would it, though? This is Apple that we're talking about here.

"Some people aren't used to an environment where excellence is expected," Steve Jobs once said.

It's one thing to sell last year's model for $100 less the way Apple does with its iPad and iPhone gadgetry. It's another thing entirely to dumb down an Apple product so it can compete on price.

Playing crazy eights
This could be why the new rumor isn't talking about a 7-inch tablet anymore. The new chatter is about a smaller iPad that is simply smaller than 8 inches. Even if it's by a fractional inch, putting out a tablet that's bigger than the 7-inch standard championed by Research In Motion (Nasdaq: RIMM  ) , Amazon, Google, and Barnes & Noble (NYSE: BKS  ) opens the door for a $299 -- or more than likely a $349 or a full-featured $399 -- price point that may not interfere with sales of its flagship tablet.

Then again, who would buy that? It would be the worst of tech tweeners, and we know how Jobs felt about those.

There is no right price here, and because of that, we may never see the iPad Mini.

Apple jacks
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The Motley Fool owns shares of Amazon.com, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, and Google, creating a bull call spread position in Apple, and writing puts on Barnes & Noble. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (14)

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  • Report this Comment On July 07, 2012, at 7:23 PM, seandixon1 wrote:

    Ipad Mini makes perfect sense but it won't be called the iPad Mini but rather then New iTouch or New iPod. Apple needs to upgrade the touch because the current screen size is much too small. I believe they can easily make a 7" screen and sell it for $250-$300 and make 30-40% GMs. Think about all those kids out there who are tired of their iTouch's because the screen size is too small. They would go nuts for the 7" New iPod especially if it "mirrors". Would be a holiday home run. And, it won't cannibalize the New iPad or iPad 2. Or, they could drop the iPad 2 in exchange for this new device.

  • Report this Comment On July 07, 2012, at 8:27 PM, daveshouston wrote:

    I disagree with your premise that the iPad mini would cannibalize the iPad. Not going to happen.

    The mini will be aimed at a different, lower end, market.

    It will be a screaming success.

  • Report this Comment On July 07, 2012, at 10:39 PM, mfooljdg wrote:

    The notion that a smaller and cheaper iPad would destroy the sales of the current iPad implies that the current iPad doesn't make sense -- that is, it implies people are putting up with the current sized iPad simply because they can't get a just-as-good but smaller and cheaper iPad. I disagree vehemently. One reason people like the current iPad is because the screen is large enough to actually watch videos, enjoy pictures and a level of web browsing, etc. You can do those things on smaller tablet but not as well -- the reason you'd get something smaller is only for portability convenience. No doubt some people would prioritize portability so you might lose some sales of the current iPad but you'd also have people who want both for their respective strengths.

  • Report this Comment On July 08, 2012, at 11:47 AM, DeWinter21 wrote:

    Love the concept of it being the New ITouch. In my family everyone started with an Ipod, then Itouch, then Iphone and then Ipad. All the kids still have Itouch, and they are a little small.

    Also comment about bad front facing camera. I thought a camera on an Ipad was a bad idea. It's far to bulky to hold to film. I went to a school concert back in May. The auditorium went dark, and nearly a dozen Ipads were lifted up to film. Parents could clearly watch the concert, and the Ipad's recorded. And the screen being so big, the parents just glanced at the framing, and then turned their heads to watch the actual concert.

  • Report this Comment On July 08, 2012, at 1:09 PM, bhsguy wrote:

    I think mfooljdg nailed it and the New iTouch is a good call.

    My only concern from a margins standpoint is folks might get both low end iPad and a mini instead of the high end iPad and their monster profit margins. As a share holder that scares me but bringing more customers into the Apple ecosystem also encourages me.

  • Report this Comment On July 08, 2012, at 4:37 PM, demodave wrote:

    THERE IS NO iTouch. Anyone who talks about an iTouch is automatically intellectually disqualified from conversation on Apple products or Apple Inc.

    That said, I do think that Rick's comment on cannibalization has merit, and the potential gross margin could be difficult. But it would be better to sell at 10% GM than to let the competition sell at 10% GM.

  • Report this Comment On July 09, 2012, at 6:52 AM, mkstudio1 wrote:

    I can't wait to buy two iPad mini's.

    Love my iPad at home but want a small one for my purse.

    My husband, who has an iPad 3 and a Kindle Fire, still wants an iPad mini to carry in his pocket.

    We don't care what the price will be.

    This product will sell zillions.

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