Why the iPad Mini Is a Great Idea

Apple  (Nasdaq: AAPL  )  has the tech world abuzz again, as its newest device, the iPad Mini, is set to be unveiled on Oct. 23. Naturally, many investors have to wonder if the 7.85-inch device can really be a game-changer; longtime Fool Rick Munarriz went so far as to say the "Mini won't matter." But it will. Here's why.

Donner, party of iPad 3
Rick's argument boils down to this: If the Mini is priced too low, it will cannibalize sales of the other, larger iPad models. But if it's too expensive, no one will buy it because there are simply too many cheap alternatives. I hear you Rick, but I disagree.

The truth is that Apple cannibalizes itself all the time -- and it's proven to be a nutritious diet. Introducing a newer, smaller, more mobile, and possibly more colorful model at a lower price point has been done before -- by Apple -- and with remarkable success. Anyone recall the iPod mini, iPod nano, and iPod shuffle? Apple doesn't break down revenue for each of those products, but in 2004, when the iPod mini debuted, the sales in the all-inclusive iPod category surged 279%. In 2005 the iPod shuffle and nano were introduced, offering consumers differently sized products, varying amounts of memory, and more styles for different tastes and needs. The result? A 248% jump in iPod category sales.

By 2006, Apple was touting "new scroll features" as innovative breakthroughs in its lines, and iPod family sales still jumped nearly 70%. It wasn't until 2009 that iPod sales started to fall, and the fall was more than made up for by the massive success of the iPhone, which generated more than three times the revenue it had the year before.

Analysts are predicting some cannibalization. One even estimated that for every 5 million Minis sold, 1 million fewer regular iPads would sell. That's not a bad thing; margins would have to be a fraction of what they currently are for it not to be worth Apple's time. 

As for the second claim -- if the Mini is priced too high, then no one will buy it -- since when do Apple consumers complain about price? I agree with Rick that the Mini won't be revolutionary. But I believe it's necessary. 

Amazon is gunning for the throne
"Better late than never" has never been truer than it is right now, for Apple, in the small tablet market. Uncharacteristically, the company is a late-mover, and Amazon.com  (Nasdaq: AMZN  )  makes a living on late-movers. The e-tailer's Kindle Fire HD is the latest 7-inch model from Amazon, and it's (surprise!) fiercely competitive on price, offering 16 GB of storage for $199 and 32 GB for $249.

After all, Amazon CEO Jeff Bezos is (notoriously) willing to cut prices till the cows come home, all just to gobble up market share. Take Amazon's last quarter, for example: on sales of nearly $13 billion, net income was just $7 million. With news on Monday that Amazon is close to reaching a deal with Texas Instruments  (Nasdaq: TXN  ) for its mobile chip division, Bezos might as well have turned the Apple logo into a bull's eye. Amazon already uses TI chips in the Kindle, and acquiring the chip maker outright would help Amazon achieve greater cost advantages.

Apple, on the other hand, can sell its products at a premium because of its style, its innovation, its culture, and its branding. Customers pay good money for that Apple logo, and there's no point in not squeezing that advantage for all it's worth. Apple does this very well. We saw huge lines just weeks ago for the iPhone 5, even though there are tons of smartphones on the market that aren't much different and won't get you lost on your way to the bakery.

The alpha male must assert his dominance
The date of the Mini announcement, Oct. 23, is in itself somewhat provocative, falling only three days before rival Microsoft's  (Nasdaq: MSFT  )  scheduled release of the Surface tablet and its much-anticipated new operating system, Windows 8. It was gutsy to pre-emptively steal the spotlight from its old nemesis -- gutsy, but assertive.

On top of that, the iPad Mini still has to grapple with competition from Google's  (Nasdaq: GOOG  )  Nexus and Barnes and Noble's  (NYSE: BKS  )  Nook. No one said it was going to be easy. What Apple can't afford to do is sit around and twiddle its thumbs while its adversaries go after customers in the 7-inch space. Because (gasp!) what happens if consumers actually like their Nooks and Nexuses (and Kindles)? Then they're more likely to buy future versions of them, too. Who knows, maybe they'll buy them for their friends and family come holiday season. It's not far-fetched; B&N designed the newest Nook HD with families specifically in mind. It's a slippery slope!

The iPad is Apple's fastest-selling product ever. The iPhone franchise continues to be a cash cow, accounting for more than half of the company's sales. But the iPad is the future. And with Apple's grip on the tablet market (a 70% market share) being threatened, there's simply too much to lose from sitting on the sidelines. 

Though the iPad Mini announcement is a big deal, investors still haven't fully seen the results from Apple's last landmark event -- the release of the iPhone 5 -- play out fully. The stakes are high and the opportunity continues to be huge, so to help you understand this epic Apple event, we've just released an exclusive update dedicated to the iPhone 5 launch. By picking up a copy of our premium research report on Apple, you'll learn everything you need to know about the launch, and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.

John Divine owns shares of Apple stock. You can follow him on Twitter @divinebizkid and on Motley Fool CAPS @TMFDivine. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 19, 2012, at 12:45 AM, christophe68 wrote:

    When will you stop saying that apple = innovation? Apple has stop innovation few years ago. Ho yes, a real innovation in Iphone5: a new line of icons. No, it’s a joke. Ho yes, another innovation in ipad mini: a ipad with a smaller screen. Joke again. iOS6 is horrible with lot of bug everywhere even in email synchronization. IOS6 is the worst release of iOS. No, honestly, look somewhere else for innovation now and forget to thing that Apple is the best company in the world. This is the end of Apple because they create nothing. Ipad, Iphone is just a list af icons on a screen, nothing else. Innovation is somewhere else: Microsoft. Yes, Windows 8 is a real innovation. Surface is a real innovation with dynamic screen.

  • Report this Comment On October 19, 2012, at 8:25 AM, investorak wrote:

    "Amazon already uses TI chips in the Kindle, and acquiring the chip MAKER outright would help Amazon achieve greater cost advantages."

    who lets these morons write articles..now I see why they call it fool.com.

    Apple innovation my ass.. majority of the innovation is done by the semiconductor companies who design majority of the chips inside anything ishit.

    And I agree apple has peaked.

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