While it won't rake in iPhone-style profits that could drive Apple Inc. (Nasdaq: AAPL) stock to new heights, a smaller iPad – the iPad Mini – is a smart and necessary strategic move.
The Apple iPad Mini does not yet exist, but recent reports say its arrival is imminent.
According to Fortune, invitations to an Oct. 17 iPad Mini introduction event are expected to go out Oct. 10, with the product likely available to buy in early November.
That was buttressed by a The Wall Street Journal story two days later that reported Asian suppliers had "started mass production" of an iPad Mini with a 7.85-inch screen.
Instead of celebrating a fresh source of Apple profit, however, some on Wall Street aren't thrilled by a smaller iPad.
They're worried that iPad Mini will hurt AAPL's margins, which have risen steadily along with sales of the high-margin iPhone.
But this theory just shows how The Street is missing the big picture.
It's All About the AAPL Ecosystem
Keeping margins high is important, but it's not Apple's only consideration.
For one thing, Apple needs to fight a rear guard action to protect its iOS ecosystem from losing too much ground (that, is, market share) to low-priced products from rivals based on Google Inc.'s (Nasdaq: GOOG) Android system or Microsoft Corp.'s (Nasdaq: MSFT) Windows 8 platform.
Although late Apple CEO Steve Jobs disliked 7-inch tablets, the segment is proving increasingly popular. Products like the Amazon.com (Nasdaq: AMZN) Kindle Fire, the Google Nexus 7 and Samsung's Galaxy Tab are all gaining market share.
"If Apple was missing a key device that a lot of people wanted, especially at a price point a lot of people wanted, that could hurt them over the long haul in terms of market share. So it's definitely smart for them to play there," Business Insider CEO Henry Blodgett told CNBC.
While the 9.7-inch iPad dominates the market with a share of about 60%, the untapped tablet market figures to be increasingly price-sensitive.
Consumers looking for a cheaper point of entry naturally will gravitate to the 7-inch tablets, with that segment taking a bigger and bigger share of the overall tablet market.
Research firm IHS iSuppli says the 7-inch tablet segment will essentially double from 20.8 million units in 2011 to 41.1 million units this year.
"We have seen very strong growth in the 7-inch-sized tablet, and it is a trend that we think is very important to the industry," IDC analyst Bob O'Donnell told the E-Commerce Times.
"It is still smaller as a percentage of the total market, but it is clearly the fastest-growing segment."
In fact, 7-inch devices already make up nearly a third of the tablet market. O'Donnell predicted sales eventually will rival those of 9-inch devices.
Apple can't afford to write off that big a chunk of the mobile computing market. Losing too much share to competitors would devalue its iOS ecosystem – the secret sauce that drives sales of not just iPads, but iPhones and iPod Touches.
Maintaining share in the mobile computing space needs to be Apple's No. 1 priority, because the health of any platform ecosystem rests on the numbers of devices using it.
The more people that use iOS, the more potential customers it offers app developers. And the more apps in the iOS ecosystem, the more attractive it is to smartphone and tablet buyers.
IDC predicted back in July that an iPad Mini would jolt Apple's tablet sales in 2013 by 12.6 percentage points, putting its share at 63.1% instead of 50.5%.
Getting those users under the iOS umbrella is far more important to Apple's bottom line than the impact of the iPad Mini's slimmer margins.
The Truth About the iPad Mini's Margins
And by the way, the iPad Mini's gross margins are only bad compared to the iPhone.
We won't have an idea of the iPad Mini's margins for months, but we can make a ballpark guess based on the margins of the 9.7-inch iPad.
According to information made public in Apple's California patent case against Samsung, the 9.7-inch iPad's gross margins ranged from 23% to 32% (the iPhone's ranged from 49% to 58%).
The big iPad starts at $399 for the old version and $499 for the new version. A competitive starting price of $249 for the iPad Mini, even with lower production costs, would indeed generate margins lower than its big brother, probably in the 20% range.
But a smaller margin is better than no margin. The iPad Mini will still make a profit, far more than its two biggest competitors. Both the Nexus 7 and Kindle Fire, priced at $199, are believed to be break-even products.
If Apple sells 20.7 million iPad Minis in 2013 — as IDC's numbers suggest — the product will earn a profit of about $1 billion.
That may not be much to a company expected to earn a total profit of $41 billion in its current fiscal year, but it would double the profits of a company like Facebook Inc. (Nasdaq: FB).
When you think about, it would be crazy for Apple not to build an iPad Mini.
"[A 'Mini'] will be pretty big…, huge," Brian White, an analyst with Topeka Capital Markets, told Computerworld. "Eventually, it will be bigger than the [traditional] iPad market."
Apple (Nasdaq: AAPL) stock was trading just under $660 Friday. It pushed above $700 in late September after record-breaking order numbers for the iPhone 5.
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