When the iPad Mini first arrived on the scene, even with its far-inferior specifications to the larger iPad 4, it sold like hotcakes. The market loved the thin and light form factor of the 7.85-inch iPad, despite its shortcomings. For a while, many had simply written off the larger tablet form factor in general -- that is, until Apple ( AAPL 3.16% ) introduced the iPad Air.
The iPad Air changed the game
The Air brought with it all of the design goodness of the iPad Mini, as well as the convenience of a larger screen. In addition, Apple updated the iPad Mini to be thoroughly modern, including the same high-resolution Retina display, the same fast processor, and all at a higher price point commensurate with the steep upgrade. While many found value in the iPad mini with Retina display, it seems that Apple has been successful in pushing customers back to the larger iPad with the iPad Air.
How do we know this? Well according to Ming-Chi Kuo, an analyst with an excellent track record in forecasting Apple's upcoming products, the iPad Mini with Retina display simply hasn't been selling all that well. With iPad shipments hitting record highs, one can only assume that the iPad Air has helped Apple shift its tablet mix from the 7.85-inch models to the 9.7-inch models. Given the $100 price delta between the iPad Mini with Retina display and the iPad Air, it's likely that the Air is significantly more profitable on both raw gross margin dollars per unit and gross margin percentage. This is an unequivocal win for Apple.
Each year, Apple will be able to crank up the processing power on these devices, and as display technologies advance, Apple will be able to put even higher-resolution panels on there without sacrificing battery life. Further, Apple will continue to make strides in software on the iPad, and these advancements will drive the need for more processing power, creating a positive feedback loop that keeps the upgrade cycle going.
The tablet market is likely to continue to grow quite nicely, and even with its products positioned at the higher end of the market, Apple should benefit nicely from the secular trends. It is also likely that Apple will defend its high-end share here among consumers while potentially facing difficulties from larger Windows 8.1 devices in corporate/enterprise environments. In short, the iPad is in a good position today for Apple, but the question is whether Apple can drive another jump in revenues with a new product or sub-category, or if it is subject to a more continuous, slower growth curve.
Foolish bottom line
Apple has done a superb job with its tablet offerings and is likely to defend share at the high end of the 7-inch and 8-inch categories, as well as in the 10-inch class devices. While the high end likely will not grow in line with the broader market, the higher end should continue to grow. As Apple owns both the hardware and the software ecosystem, it should be able to continue to compel users to upgrade to the latest, greatest hardware with more demanding and powerful software and services.