Why Is the iPad Mini So Expensive?

Apple (Nasdaq: AAPL  ) just introduced the iPad Mini. It's essentially an 8-inch version of the 10-inch iPad 2, built around the same Apple A5 processor and sporting exactly the same number of pixels on a smaller screen.

The Mini is also 18% cheaper than the iPad 2, which Apple still sells as an affordable alternative to the premium-priced iPad 3. So is the iPad Mini priced to move? After all, you can get a Google (Nasdaq: GOOG  ) Nexus 7 tablet or an Amazon.com (Nasdaq: AMZN  ) Kindle Fire HD for just $199 -- a 40% discount to the Mini's $329 starting price. That kind of price difference seems hard to justify if the devices are comparable at all.

Apple's top brass would certainly argue that the Mini deserves a premium price tag. Marketing chief Phil Schiller highlighted the discount you'd get when comparing the Mini with other iPads: "The most affordable product we've made so far was $399 and people were choosing that" over cheaper products from other companies, he said. This model is cheaper than other iPads, but it's still a gosh-darn iPad, and "I think a lot of customers are going to be very excited about that," Schiller said.

CEO Tim Cook sticks to the same script. The Mini combines "the full iPad experience" with a lower price point and should be a guaranteed home run.

They may be right, and the iPad Mini could turn out to be the latest money-printing machine in Cupertino's growing garage. It would certainly be a shame if Cook and Schiller didn't think the product was brilliant, since it's their job to make you feel that way, too.

The upside
So what would it take to prove the Apple executives right? I've come up with a few factors that may have influenced the pricing decision and that would make a ton of sense once all the facts are in hand.

Rumor has it that Apple is having trouble securing enough parts to build the customary untold millions of units. In particular, AU Optronics (NYSE: AUO  ) , LG Display (NYSE: LPL  ) , and Sharp are struggling to make enough Mini screens to feed launch-day demands.

If so, it makes perfect sense to set the price so high that only the most devoted of Apple fans would consider it: The company can surely sell through a limited supply of this long-rumored product very quickly and then let the supply side hang-ups keep retail-level demand artificially high for a while.

When the parts people sort through their issues a few months later, Apple can introduce an updated version with premium features to match the $329 price tag -- and drop the suddenly not-so-luxurious original model into direct price competition with the Nexuses and Kindle Fires out there.

Keep the early adopters happy, feed the Apple mystique with constant sell-outs, and collect inflated sales all along. And then you drop the hammer down when a better model is ready for action. The best of both worlds!

The downside
But the strategy could backfire, too.

Schiller already admitted that profit margins on the Mini are low by Apple's standards. If the company settled on this price only because it couldn't stand the thought of going any lower, I think Mssrs. Schiller and Cook are in for a rude surprise. The iPad Mini may (or may not) be better than the competition and objectively worth a little bit more -- but probably not 65% more.

And as PCMag's John Dvorak puts it, Apple could be making a huge mistake by inviting apples-to-apples comparisons with the competition:

Apple will not win all of these showdowns. And worse, there are some appealing programs that only work on the Android. These would only be discovered during a comparison.
This is a loser of a situation for Apple. To make matters worse, once people start comparing the iPad Mini to other 7-inch tablets rather than just buying from Apple, no matter what, they will continue to compare other products such as the iPhone.

Red alert! What if Apple just gave its loyal fans reason to find out that the competition's products might not be all that bad -- and that Apple's goods just might be a tad overpriced?

Apple could have basically killed all other medium-sized tablets and grabbed the whole market for itself, but it decided to skip that step and just proceed as if it had won already. And by doing so, it may have undermined the iPhone and full-sized iPad cash cows as well. That would be a steep price to pay for protecting the profit margins on a low-volume product at the lower end of Apple's price and profitability range.

Tim Cook likes to say that the iPad owns the tablet market today, but then he's ignoring the fact that he's losing market share to the Android army. According to a brand-new report from research firm Strategy Analytics, Android tablets now account for 41% of the global tablet market. That's not something you can ignore.

Apple will either come out looking brilliant or batty when history fills in the holes in the iPad Mini saga. To stay relevant, Apple is going to need to remain vigilant and adjust its designs to meet consumers' needs. In our latest premium research report, our analysts have dissected the tech giant from every angle, giving you the opportunities and pitfalls that Apple will face. For less than a week's worth of coffee, you, too, can gain an investing edge. Click here to get this premium report on Apple.

Fool contributor Anders Bylund owns shares of Google. Check out Anders' bio and holdings, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (9) | Recommend This Article (5)

Comments from our Foolish Readers

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 28, 2012, at 7:45 PM, H3D wrote:

    "Red alert! What if Apple just gave its loyal fans reason to find out that the competition's products might not be all that bad"

    That presupposes that they're not all that bad.

    The fact is they are the price they are because any more expensive and they wouldn't sell. And that's because they're trash.

    The iPad mini is not engineered down to "how cheap does it need to be to get people to want it".

    People do want it as they have always wanted iPads. That's why it's sold out.

    So if the mandate of this article is to spread FUDS re a price drop or spec boost in the near future, then forget it.

    This is the product and the price. Neither will change for at least 6 months and almost certainly 12 months. Apple simply don't do that.

  • Report this Comment On October 28, 2012, at 7:58 PM, jdmeck wrote:

    Make up your F^&*@*( mind, people what you want. First it's to expensive, then the stock crashes because the margins are not good enough. There is no logic on Wall Street.

  • Report this Comment On October 28, 2012, at 8:00 PM, jdmeck wrote:

    "According to a brand-new report from research firm Strategy Analytics, Android tablets now account for 41% of the global tablet market. That's not something you can ignore." That's 1 or maybe 3 against many more than 3. If you think that's a fair comparison, you should be fired. Try a one to one comparison.

  • Report this Comment On October 28, 2012, at 8:45 PM, kthor wrote:

    thanks but no thanks Apple!

  • Report this Comment On October 28, 2012, at 10:24 PM, 0gre wrote:

    Apple can't compete with zero margin, unlike Amazon they make their money on selling tablets. Driving the price down on the low end iPad will just further cannibalize sales of their higher end tablets and do little to lure over the customers who are in a race to the bottom.

    I'm a bit skeptical about any statistics about how many tablets Amazon ships out because they don't publicly provide any numbers. It's easy for analysts to pull numbers out their hind-side, but I suspect if Amazon had really captured 20% of the tablet market, they'd be trumpeting the numbers. Similarly for Google. If you have numbers that blow people away, you shout them from the rooftops.

  • Report this Comment On October 28, 2012, at 10:56 PM, Nomadder wrote:

    The problem with this article is how it describes the act of comparison, as though it is a simple matter of looking at one product versus another.

    Its really not that simple.

    It's more like looking at one car, which may be better, and then looking at another, lesser car, but which has hundreds (or even thousands) of dollars worth of the buyers belongings held hostage in the trunk.

    Let me reiterate that; even if the latter car is inferior on its own merits, it still has hundreds or thousands of dollars of value added due to the fact that it's carrying years worth of the crap the potential buyer been accumulating.

    If she buys the better car, she has to repurchase everything she lost, some of which won't even "fit" into the new car (as in, Apple does have some nice games/apps that are not available on Android).

    That matters quite a bit to quite a few.

    To not even mention or acknowledge it, reduces the credibility of this article, which is otherwise well thought out.

  • Report this Comment On October 28, 2012, at 11:29 PM, deasystems wrote:

    The iPad mini is not "so expensive." Compared with the Nexus 7 tablet, the iPad mini provides a display 35% larger even though the device is much thinner, lighter, and smaller in volume. The iPad mini also includes a high quality rear camera, dual band 802.11n WiFi, and the advanced Bluetooth 4.0, none of which are available on its would-be rival.

    Given those things along with Apple's incomparable ecosystem, the mere $80 price differential between the iPad mini and the Nexus 7 seems inconsequential.

  • Report this Comment On October 29, 2012, at 5:37 AM, TMFZahrim wrote:

    @deasystems, the price difference between $199 and $329 is $130. Just sayin'.

    Anders

  • Report this Comment On October 29, 2012, at 9:43 AM, lucasmonger wrote:

    I've played with the Kindle Fire, and although it is a tablet and can do most things that you'd use an iPad for (angry birds, surf the web, read/send email) the experience was utterly painful. Maybe the Fire HD will be better, but there are just many little things that the iPad does so well (just the smooth scrolling and pinch to zoom are a pleasure to use).

    So at $329 a whole lot of people are going to find this more affordable than $499. Although the media and consumers would love to pay $199 or $149 for the experience, Apple just isn't going to race to the bottom and try to make it up with other services.

    Eventually Google, Amazon, and Barnes and Noble will be giving away free tablets and subsidizing with ads, shopping/prime accounts, and media sales (books, tv shows, movies). The real question is who will land the landmark content deals with cellular support (Googlerola + Youtube + Sprint, Amazon + Hulu + Verizon, Microsoft + Nokia + T-Mobile + Netflix, Apple + iTunes + AT&T... or any permutation of the above) where you just pay for a monthly data/content plan and all the profit is buried what you consume.

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