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Apple's Brilliant iPad Surrender

Recent rumblings suggest that Apple (NASDAQ: AAPL  ) has capitulated on the iPad, just as it did on the iPhone, and decided to release a cheaper version to meet growing demand. While the iPad Mini was meant to be Apple's response to cheaper tablets like Google's Nexus 7 and Amazon's Kindle Fire HD, each of which run the Android operating system and are priced starting at $200, the small Apple tablet is still significantly more costly. It starts at $329 for a Wi-Fi-only model with 16 GB of memory. Just as with the case with the cheaper iPhone, you must ask if the hit to Apple's premium image can be justified by the significantly greater emerging market penetration the product may generate.

Source: Apple.

Source of the buzz
The genesis of the cheaper iPad Mini story seems to be a research note from Ming-Chi Kuo of KGI Securities. The note was referenced by MacRumors and picked up by many others. The note suggests that the cost of the new device will likely be between $200 and $250. In order to lower costs, maintain margins, and still offer an Apple-quality product, Kuo offers several steps the company may take, including:

  • Squeeze suppliers on component costs.
  • Remove the rear camera.
  • Drop the memory to 8 GB.
  • Alter the fabrication of the A5 chips.
  • Switch from a metal to plastic shell.
  • Expand supplier options.

None of these are confirmed, nor is the product itself, but each seems like a reasonable solution given Apple's history. If the company is able to produce a new, low-cost iPad Mini, it remains to be seen how that step would affect other devices in the iPad family.

The iPad Mini Junior
The release of a new, cheaper iPad Mini is significant on two levels: First, what it means for the device itself, and second, what is signals for the company. On the device level, smaller tablets have come to represent about half of the tablets sold, according to research firm IDC. Jitesh Ubrani, an IDC research analyst, said: "Vendors are moving quickly to compete in this space as consumers realize that these small devices are often more ideal than larger tablets for their daily consumption habits." Apple is at a point at which it must either buy into the commoditization going on it tablets or choose to be the premium alternative. The decision to release a cheaper version suggests that the choice has been made.

Unlike in smartphones, where subsidies mean that the price differentials are relatively small, tablet prices vary significantly. What investors should watch is whether Apple offers an ultra-cheap iPad Mini and still sells those at current price points. If not, you will need to be aware of margins on the new devices and what impact the shift lower has on the bottom line. If available, the sales mix will be the figure to watch.

The bigger picture question is what a cheaper iPad Mini means for Apple. While the need to compete with Google and Amazon should not be underestimated, even looking out to 2017, IDC has Apple only a few percentage points behind on a global basis. Given the profit advantage Apple commands, conceding the premium cache here seems less sensible than in smartphones. Additionally, the move begs the question as to whether Apple has shifted focus or is just looking to new product categories instead. Either way, the ramifications for Apple are important and should be closely monitored.

There's a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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