When Apple (NASDAQ:AAPL) announced that the iPad 4 will replace the iPad 2 as its cheapest large tablet, the immediate thought that came to mind was that Apple was either doing one of two things:

  • Clearing out old inventory of iPad 4 units that failed to sell during its run, due largely to the preference for the iPad Mini among tablet buyers
  • Attempting to capture more of the tablet market by playing hardball on offering compelling products at lower price points

Given that Apple's supply chain management is quite excellent, the second option is more likely than the first. Let's explore this in more detail. 

The iPad 4 is probably lower-margin than the iPad Air
The iPad Air sports a similar display to the iPad 4, a slightly beefier apps processor, and LPDDR3 instead of the older LPDDR2. From a mechanical assembly standpoint, the iPad Air is actually smaller -- thinner with a  a thinner bezel. This would suggest that while the research and development that went into the iPad Air was greater than what went into the iPad 4, the cost of goods sold for an iPad Air is perhaps meaningfully lower. Working under that assumption, the real question is why Apple would reintroduce this product, given that it could be more cannibalistic to the iPad Air than the iPad 2 was at the same $399 price.

The cannibalistic claim is questionable
At first, the idea that the iPad 4 would cannibalize sales of the iPad Air make sense. But the iPad 4 at $399 may be much more benign than one would initially think, for the following reasons:

  • The iPad Air's form-factor and performance is significantly better than the iPad 4's, so customers who can afford the Air probably will choose the Air over the 4.
  • Apple's customers are, in general, fairly affluent and are probably less sensitive to price as they are to the user experience and value obtained from the product. The reason people liked the iPad Mini was due to convenience, not price. In short, a good chunk of the iPad-buying population can probably spare the extra $100

The iPad 4 is a much more attractive product at $399 than the iPad 2 was. This product will probably serve to bring in more cost-conscious consumers who want in on the iPad ecosystem -- Apple products are still viewed as "aspirational" products -- but can't quite afford the $499-plus price tag. In short, while those who would buy an iPad Air likely won't be tempted by an iPad 4, but those who would not have been able to buy an iPad Air may be able to afford an iPad 4. That could increase Apple's market share, top line, and raw gross-margin dollars.

Foolish bottom line
This is an interesting, albeit not entirely unexpected, move from Apple. While the high-end tablet share on Apple's part is pretty safe at the iPad Air's $500-plus price points, the low end of the market is more competitive. As a result, the iPad 4 taking the place of the iPad 2 could serve to help Apple's overall iPad business. Of course, one could point out that there are competitive designs at that $399 price point from the Android camp. But remember that Apple's differentiating feature is ultimately iOS and the ecosystem that comes with it, and not necessarily the hardware. Time will tell how next quarter's iPad sales will go as a result of this move.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.