Apple’s New iPad Mini Could Be a Game Changer

With the launch of the iPad Mini with Retina Display, Apple (NASDAQ: AAPL  ) finally made its iPad lineup whole. No more do customers have to choose between a large, high-end tablet and a small, low-end tablet. Apple customers can now have low and high-end versions of both screen sizes. Interestingly, Apple made the bold move to (apparently) stop sacrificing gross margin with the new iPad Mini with Retina Display and actually raised prices by about $70. Customers can still buy the older iPad Mini, but the real question is what the mix will look like going forward.

Apple's pricing power will soon become apparent
Apple's iPhone sales -- at least in the U.S. -- are helped significantly by the fact that cellular carriers subsidize sales of iPhones. Further, Apple is helping the process along by offering a trade-in program for users willing to make the trek to an Apple store (and, of course, in the interests of keeping carriers happy, it isn't selling unlocked phones under this trade-in program). This means that, while the average selling price for iPhones is significantly higher than phones from competitors like Samsung (NASDAQOTH: SSNLF  ) , this difference is largely masked (at least up front) as far as the consumer is concerned.

What's interesting is that Apple now has a chance to prove just how much pricing power it has in this market. While tablets that compete with Apple's iPad Mini, such as the Google (NASDAQ: GOOGL  ) Nexus 7 or the Amazon (NASDAQ: AMZN  ) Kindle Fire HDX, are priced at a significant discount to the iPad Mini, Apple's advantage lies in the build quality of its hardware and the depth and breadth of its software ecosystem. If consumers show an overwhelming preference to cough up a significant premium to get Apple's best, this will go a long way to proving the sustainability of Apple's highly lucrative device business. If not, then it may be time to start worrying.

The competitive landscape is fiercer than ever
Probably the biggest headwind to Apple's iPad efforts is simply the burgeoning competitive landscape. While the headline names like Samsung, Google, and Amazon spring to mind when considering competitive threats (Google and Amazon are particularly dangerous, as they don't need to make money on these devices -- they're trying to lock consumers into their own ecosystems and profit indirectly), a potentially bigger problem is the flood of white-box OEMs, particularly in Asia, rushing to release tablets. These won't be of the caliber of the iPad Mini with Retina, but the big fear is that as long as they're competitively priced, they'll stunt further unit growth for Apple.

Even with this flurry of competition, it is more likely that Apple's iPad business ends up, in many ways, like its Mac business. Apple controls the vast majority of profits in the PC business by essentially locking up the high-end market. Apple's iPad lineup is likely to be very similar. It's going to command most of the profitability in the space, although its market share won't be particularly high. This isn't a problem as long as Apple can continue to grow its top and bottom lines, but it becomes more problematic as the market (and in particular, the high-end segment) begins to mature.

Foolish bottom line
It will be very interesting to see just how much growth the new iPad Mini with Retina Display can drive and how the iPad mix, in general, looks by the end of the quarter. Apple doesn't explicitly break it down, but it seems likely that analysts on the upcoming call will probe for a "broad strokes" picture of what the mix looks like. If Apple can prove that, even with a $70 price bump at the high-end, it can sell as many (or more) of its flagship 7.9" iPad, then it will validate the bullish thesis that Apple has incredible pricing power -- even when carriers aren't footing the bill. 

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  • Report this Comment On November 17, 2013, at 4:47 PM, alexkhan2000 wrote:

    Can't you writers come up with something we don't know already?

  • Report this Comment On November 17, 2013, at 6:34 PM, fauxscot wrote:

    I just bought an iPad Air. We don't have Apple stores here, but I am close to a large Ivy League college and there's a good re-seller there that had a SMALL inventory. The things are flying off the shelves. Ditto the Mini.

    I have read a dozen reviews of both. Best in class from all reviewers. Cheaper solutions are out there,but not better.

    Apple can afford to charge a premium for best in class products, and this quarter will be a blow out. Cook wasn't kidding. There's stuff in the pipeline and good stuff.

    Next up.. Mac Pro. In an era where Dell cannot give away a machine for a profit without selling its soul to crapware, Apple will start its supercomputer product line at nearly $4,000 and will sell them all. How much is Lenovo making on its $99 tablet? I bet not what Apple will make on the $4000 Mac Pro.

    Game changed, folks. In many places, game significantly changed.

  • Report this Comment On November 17, 2013, at 6:47 PM, Mathman6577 wrote:

    I agree with you fauxscot. Apple goes after margins and not market share.

  • Report this Comment On November 18, 2013, at 10:53 AM, deuceswild22 wrote:

    Wow, No mention of Surface. Head to head, better tablet.

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