The New iPad Lineup Pursues Both Profit and Market Share

Apple (AAPL 1.27%) unveiled a variety of new hardware and software on Tuesday, but for many casual Apple fans, the final announcements were the most important. That's because Apple closed the event by retooling the iPad product lineup. It launched a fifth-generation full-sized iPad, which it calls iPad Air, as well as a new iPad Mini with a Retina display.

The new iPad Air. Photo: Apple.

Apple's new iPad lineup is clearly aimed at a dual goal: improving the iPad product line's profit margin, while also maintaining -- or even growing -- its strong market share position. Android tablets such as Google's (GOOGL 0.55%) Nexus 7 and Amazon.com's (AMZN -1.64%) Kindle Fire lineup have been gaining ground over the past year through lower prices and higher performance. This has affected revenue and margins for Apple's iPad segment.

Apple is fighting back by reducing the price of the original iPad Mini while also making radical improvements to both the full-size iPad and the iPad Mini. Apple is thereby correcting the iPad blunder it made last year, when the new but barely profitable iPad Mini severely cannibalized sales of full-size iPads. The new iPads (along with the new iPhones) should help Apple return to profit growth this fall.

The new lineup
After Tuesday's announcement, Apple has 4 products in the iPad line. Apple opted to keep the iPad 2 around at the same $399 price it has had since early 2012. Apple is also continuing to sell the original iPad Mini, but it has dropped the price by $30 to $299.

Apple is pricing the original iPad Mini around at a lower starting price: $299. Photo: Apple.

The first new tablet introduced on Tuesday was the new full-size iPad, called iPad Air. It is significantly thinner and lighter than previous full-size iPads, and it is also much more powerful. Like its predecessors, it will retail starting at $499.

The second new tablet was the iPad Mini with Retina display. It is very similar to the iPad Air in terms of technical specifications and has the same 2,048 x 1,536 display resolution, but it has a 7.9-inch screen as opposed to the iPad Air's 9.7-inch screen. The iPad Mini with Retina will have a starting price of $399.

Going for market share
Dropping the price of the original iPad Mini to $299 is hardly a ground-breaking move, but it should help Apple maintain market share in the face of strong competition from Google and Amazon. Amazon recently dropped the price of its entry-level tablet (which is now the 7-inch Kindle Fire HD) to $139, and so this change narrows the price gap a bit for value-minded consumers.

Even more important, the price drop puts the base iPad mini closer to the price of Google and Amazon's top-of-the-line tablets. The second-generation Nexus 7 and the Kindle Fire HDX both have starting prices of $229. These rival tablets have more impressive hardware than the original iPad Mini, but with the small price difference, many customers may be drawn to the iPad's superior user ecosystem.

Boosting profitability
On the other hand, the rest of the iPad product line has been revamped in a way that should lead to higher profit margins for Apple. First, whereas the iPad Mini was the star of the show last fall, on Tuesday, Apple executives spent far more time on the iPad Air than the new iPad Mini. (It's absolutely wrong to suppose that Apple is shifting emphasis to the smaller iPads.) With its $499 starting price, the iPad Air will generate the highest profit per device of any iPad, so it makes sense to try to maximize its share of the product mix.

Second, whereas a few analysts expected that Apple would price the new iPad Mini with Retina display at the same $329 price point the iPad Mini previously occupied, Apple wisely chose to price it more conservatively at $399.

Apple is finally putting a Retina display on the iPad Mini. Photo: Apple.

Given the product's similarity to the iPad Air, at $329 it would have cannibalized a lot of sales from the iPad Air while earning a very low gross margin. Moreover, it has been widely reported that Apple will not have enough supply of 7.9-inch Retina screens to manufacture many units of the iPad Mini with Retina this quarter. Apple's announcement that the iPad Mini with Retina display will not go on sale until later in November confirms this tight supply picture.

Apple will have no trouble selling as many as it can make for the next several months, so the company would just be giving money away by opting for a lower price point.

Foolish bottom line
As an Apple shareholder, I couldn't be happier about the company's announcements on Tuesday. The iPad Mini price drop will help keep Apple in the market share battle with Amazon, Google, and other Android vendors without sacrificing too much profitability.

Meanwhile, the new iPad Air and iPad Mini with Retina display should reinvigorate sales in the higher-price/higher-margin portion of the iPad product line. This should help Apple return to solid profit growth this quarter. We will learn more on just how much this new lineup will benefit Apple on Monday, when the company will release its earnings report and guidance.