Just like the iPod mini
The rumors of 7 inch "iPad mini" began surfacing all over the web more than half year ago, with different sources claiming slightly different screen sizes, price points and shipping dates. As time went on, the rumors became more and more consistent, eventually settling on the 7.85 inch screen size and the 2012 fall release schedule. The recent reports from the WSJ and Bloomberg seem to confirm this rumors, so the probability of Apple releasing the product is now higher than it ever was.
John Gruber wrote an excellent post compiling many of different ideas, viewpoints and analysis on this subject, with which I agree almost word for word. The exception being the price point. While it's probably achievable for Apple to make an iPad mini for $199, I'm more than certain that it won't happen, at least in the first year of the iPad mini. There are three main reasons for the higher price point:
- The device will be more expensive to product. The iPad mini will probably have more components that the "Nexus 7" class of devices, while at the same time some of its components will be more expensive for the sake of the device having a more premium feel to it, which will increase the cost of the device. Consider that the Nexus 7 doesn't have a rear-facing camera — will Apple also release a tablet without it, thus decreasing the functionality of Facetime and eliminating the compatibility with all the Augmented Reality apps? Seams doubtful. Also the Nexus 7 doesn't have a metal enclosure — will Apple make a tablet with a non-metal enclosure? I don't really see it happening. The Nexus 7 doesn't even have a physical front button, which the iPad mini will certainly have — even such small and simple components make the whole device and its manufacturing more complex, which increases the overall cost. And lets not forget about storage: while it's possible for Apple to release the iPad mini with only 8 Gb of storage, I'll doubt they will do it.
- The device won't be sold without a margin. Apple is in the business of making money from the hardware. To make such a business sustainable and have the funds to push each iteration of hardware forward, the company charges healthy margins on their products. Considering this and the reason mentioned above it's more probable that the break-even price of the iPad mini will be something among the lines of $200 with another $99 being put on top as Apple's margin — at little more than 30%.
- The ability to meet demand. Lowering the entry price for the iPad by releasing a new cheaper iPad model will without a doubt result in a huge spike of demand. The lower the price of the iPad mini will be, the bigger the demand for it will become. And while huge demand for a product is great from a company because it's an indicator of how popular their devices are, in the end of the day only fulfilled demand makes the company money. The inability to fulfill demand is a real problem since not only does it leave potential customers without a purchase (and the company without a sold device), but also leaves them frustrated and pushes them into the direction of competing products. At least some consumers will buy competing products as a substitute for the device that they wanted, but weren't able to couldn't buy. More times than less the release of new Apple products is characterized by demand outpacing supply, so lowering the price too much will only increase such supply problems.
Because of all of the above I think that Apple will shoot for the $299 price point, if they will indeed release the iPad mini, and it will be more than successful at that price point — it will probably more than double the quarterly sales numbers of the iPad. And while some may say that this kind of an iPad will be still more expensive than the Nexus 7 or the Kindle Fire (and thus less popular on the market), I don't think that these devices matter from Apple's point of view — both are sold without a profit by non-hardware companies, which isn't a very sustainable business.
The real competition for Apple can only come in a form of multiple hardware players severely undercutting Apple in prices while still making a profit, unified by a common ecosystem, which rapidly happened in the PC space but still isn't happening in tablets. What most people don't get is that the real raison d'etre of the iPad mini isn't to compete with the Nexus 7 or the Kindle Fire, but to significantly expand the iPad market (and thus strengthen the iOS tablet ecosystem even more) by lowering the entry price for consumers. A huge part of the market where such a price drop will be noticed is education.
We've already saw Apple make this move back in 2004 with the iPod mini — I would like to quote myself from a post that I wrote in January:
In January 2004 Apple introduced the iPod mini — it was small, cool and came in colors. The new device had only 4 GB of storage and was priced at $249 — just $50 less than a full-blown iPod with 15 Gb of storage. The result? iPod mini’s sold like crazy, with demand outpacing supply for something like a half of the year.
Pundits like to forget that a large part of the mass-market is very price-sensitive and that such price reductions of an already popular product will result in even more sales. The iPod mini was a huge success and there is no reasons for the iPad mini not to be one. So why will the consumers choose the iPad mini for $299 instead of the cheaper Nexus 7 or the Kindle Fire? Because the iPad mini isn't "$100 more expensive than the Nexus 7", but a "$100 cheaper than the iPad 2". The price point is very important, but not the only thing that matters to consumers, even to price-sensitive ones. Also, if the iPad mini is indeed priced at $299 with 16 Gb of storage, then the price difference with the Nexus 7 is basically $50 for a device with the same amount of storage, but with more tablets apps. And lets not forget about distribution, retail availability and other factors that make Apple's product successful.