Apple's (NASDAQ:AAPL) World Wide Developers Conference is just a month away, and the company has often used that event to launch new products. Accordingly, the Apple rumor mill is beginning to heat up. While Apple CEO Tim Cook recently dropped hints about new products coming in the fall, Apple followers are still trying to guess what the company has up its sleeve.
One of the biggest topics of interest is the future of the iPad Mini. The iPad Mini features less impressive technical specs than its larger cousin, but it still accounted for 55%-60% of total iPad sales last quarter, because of its lower starting price. A variety of analysts have opined that the next-generation iPad Mini will receive a "Retina" display, similar to the one used in the full-sized iPad. Is this a realistic expectation?
Rumor has it
An analyst at NPD DisplaySearch recently predicted that Apple will launch a new iPad Mini with a Retina display in September or October. Ming-Chi Kuo, an analyst at KGI Securities, agrees with that assessment but also expects a cheaper version of the iPad Mini to come out at around the same time, priced between $199 and $249.
Gross margin (the wholesale price minus the cost of materials, manufacturing, and shipping) is a critical factor to consider when assessing Apple's potential plans. Apple's management has frequently stated that the iPad Mini's gross margin is significantly below the corporate average. This means it's less profitable than other Apple products. The company is therefore unlikely to add features that raise the production cost, unless it also raises the price.
On the other hand, Apple could bolster its tablet market share by offering a cheaper iPad Mini, a more powerful iPad Mini, or both. Amazon.com (NASDAQ:AMZN) has heavily promoted the fact that its Kindle Fire HD models are cheaper than the iPad Mini while offering higher resolution "HD" displays. Many consumers are willing to pay a premium for an iPad because of its premium design and app ecosystem; but Amazon, Samsung, and Google are nevertheless chipping away with improving iPad alternatives.
IHS iSuppli estimated the combined display/touchscreen cost for the iPad Mini at $80 as of last November. However, the iPad Mini has a resolution of 1024 x 768, whereas the third- and-fourth generation iPads -- which have Retina displays -- offer 2048 x 1536 resolution.
For the iPad Mini to achieve that resolution, Apple would have to double the pixel density and quadruple the total number of pixels. This could be quite expensive. In March 2012, IHS iSuppli pegged the display/touchscreen cost for the third-generation iPad at $127, compared with $97 for the similarly sized iPad 2 (which has the same resolution as the iPad Mini).
That said, electronics component prices tend to decrease over time. The cost of the iPad 2 display/touchscreen declined by $30 between its introduction in March 2011 and its price cut in March 2012. If Retina display prices decrease just as quickly, then Apple might be able to upgrade the iPad Mini's screen while keeping the cost profile similar to that of the original iPad Mini.
However, if a Retina display would increase the iPad Mini's display/touchscreen cost beyond $80, Apple would have trouble keeping margins at an acceptable level at the current $329 price point. With four times as many pixels, an iPad Mini with a Retina display would need a significantly upgraded processor to run smoothly. It would also need a larger battery (the third-generation iPad has more than double the battery capacity of the iPad Mini). These upgrades would add costs that would damage the iPad Mini's gross margin.
The iPad Mini already appears to have cannibalized a significant number of full-sized iPad sales, despite having a lower-quality display. Upgrading the display while leaving a $170 price gap between the two seems likely to increase the rate of cannibalization. Since the full-size iPad earns more profit per device than the iPad Mini, Apple should be careful to maintain some differentiation between the two.
One way for Apple to square the circle would be by introducing the "iPad Mini with Retina Display" as a new product at a higher price point. For example, it could replace the iPad 2 at a $399 starting price. This approach would boost the product's gross margin while narrowing the price gap between the full-size iPad and the iPad Mini.
If Apple goes this route, I would expect the current iPad Mini to stay on the market, potentially at a lower $299 price point. As an alternative, Apple could make some cost-saving cuts, as analyst Ming-Chi Kuo has suggested. Nevertheless, I think it's unlikely that Apple will be able to bring the price below $299 this year. If costs continue to decline, a lower price may be feasible in the future.
If you've been thinking about buying an iPad Mini but want a Retina display, it might be wise to wait a few months and see what Apple's plans are. Cost considerations -- and the danger of increasing full-size iPad cannibalization -- make it unlikely that Apple will sell a $329 iPad Mini with a Retina display (but not impossible). However, the Retina display will probably be available later this year on a higher-priced version of the iPad Mini.
Fool contributor Adam Levine-Weinberg owns shares of Apple and is short shares of Amazon.com. The Motley Fool recommends and owns shares of Amazon.com and Apple. 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.