A cost/price analysis of iPad Mini (retina and non-retina)

Posted by jforbes on July 4, 2012 01:14 pm 22

This post contains assumptions piled on top of assumptions, and I do a lot of extrapolation. But it is realistic extrapolation. If you disagree with my numbers, replace them with your own, and do your own math, and you should be able to satiate your desires to hit price points/feature combinations that are logical. I provide the framework to do that here. If you disagree with my framework for analyzing this, you're going to find this very boring. If you spot a typo, I apologize, it was unintentional. If you have improvements to my simple model or bring more knowledge to the table, awesome!

I will note with an obligatory thing. I own no Apple products and am not interested in an iPad mini. But this was an interesting thought experiment/challenge.

How much does Apple want to sell for... and how much money do they want to make?

A look at semi-current iPad BOM costs - looking for evidence of desired profits:

The BOM of the 32GB iPad 3 with LTE is $364. The BOM cost of the iPad 2 3G 32GB on release was $326, and is now $262.55. Basically, the iPad 3 costs a bit more than the iPad 2 when it was new, however, is currently more profitable as they only sell the small memory iPad2 now, and the memory is where they push their margins higher.

http://www.isuppli.com/Teardowns/News/pages/New-iPad-32-GB-4G-Carries-364-35-Bill-of-Materials.aspx

Let's assume manufacturing and overhead costs for the different units are the same. It's like $10 or so for any iPad, so it will be close. And let's also assume that the BOM cost of the Nexus 7 is in the range of $175 or so. It is essentially being sold at cost, and Asus does need a little bit of the money, so that might leave them $10/unit.

Let's also assume the Apple's economies of scale save them another $10/unit at a similar technology level, so Apple would have a BOM of about $165 for the Nexus 7. So Apple would have a BOM of about $160-170 on similar hardware.

The 16GB iPad 3 Wifi costs $70 or so more than the 16GB iPad 2 Wifi. Well, in March it did - it's probably closer now. Let's say $50 higher.

Apple needs to make money on this thing.

We can slide the profit around, and non-BOM costs are probably pretty similar from unit to unit, so let's now look at the range of profitability on Apple's models. We can also guesstimate the cost of moving to a "retina" display based on the cost of the iPad 3. It requires a better screen and beefier processor, and a bigger battery, all of which add to the cost. Refer to the link to iSuppli above and you will see March 2012 gross profit over BOM at $163 for the iPad 2 16GB, $267 for the 3G version, $194 for the iPad 3 16GB Wifi, $278 for the 32GB Wifi, $344 for the 64GB Wifi, $282 for 16GB 4G, $365 for 32GB 4G, and $431 on the 64GB 4G. As you can see, Apple makes a lot more money on the models with more memory. Let's also bet that Apple wants to stop selling the iPad2 as soon as possible because it is less profitable.

To arrive at sale prices, just take the estimated BOM cost, add a healthy profit margin for Apple, and extrapolate away.

8/16GB iPad Mini 1024x768:

BOM $160? Probably $165 at 16GB.
Retail: This clearly points at $300 for a 1024x768 8 or maybe 16GB iPad Mini.

Apple has a choice here with the smaller amount of memory, and I think they will offer an 8GB unit. Not because it is cheaper to build, but because it makes the more expensive, higher profit margin units they offer appear to be a better deal. Who would ever want a tablet with only 8GB these days? Yeah. Thought so. But they could go with 16.

If they offered a non-retina, wifi only iPad Mini range, it might look like this:

8GB Mini: $300
16GB Mini: $350
32GB Mini $450

Now, see what I did there? This is what Apple does effectively. Apple has now taken the Mini, given it price points below the iPad, and given it good profit margins. Speaking of them, let's look:

8GB Mini Profit: $140
16GB Mini Profit: $185
32GB Mini Profit: $275

With the Mini, they'd kill the iPad 2. It would probably cannibalize the iPad 3 LESS, but also expand their market.

We can also extrapolate a "retina" Mini.

IMO the retina mini is less plausible because I think it would cannibalize their higher profit margin iPad 3s more. Unless they were to make a larger profit on them too! If that were the case, the BOM costs would probably be about $50-70 higher, and they would probably go to a 16GB base model too. In this case, they would be looking at a more premium market too, with prices that push closer to the big iPad models.

8GB Mini Retina BOM: $210???
16GB Mini Retina BOM: $215???
32GB Mini Retina BOM: $225???

If they made them "retina", they will probably want bigger margins out of them due to increased cannibalization of the iPad3. This points towards price points of $400 for a 16GB Mini Retina iPad. $350 is plausible but not likely given Apple's quest for profits. This $400 point would give a margin in the range of $185. Compare to $194 for iPad3 16GB. Bam. Exactly where they need it. The 32GB Mini Retina would naturally cost $500. And bring a higher profit margin too ($275).

My extrapolated/guessed costs are just that, but are based in reality. If you want to modify the numbers, it would be very easy for you to modify them and see what you get. But what I do see is two clear paths, and either of them could work significantly better than the current model of selling the iPad2 at $400.

Both are plausible. Which is more likely?

I don't know. Under Steve Jobs, I would say the Retina model at a higher price point. Under Tim Cook, it could go either way. The bare minimum prices for these models are likely about $50 under what I am claiming - but I think these will lead to profit margins that are smaller than Apple wishes to maintain. I think the more likely tack is a non-retina model, priced towards market expansion while pushing profit margins higher than iPad2s ever will. Apple could sell a $200 tablet at a profit, but I don't see them doing it.

TL;DR version

iPad 3s make Apple lots of money. iPad 2s make Apple some money. Apple wants to make money. They will do this by making the iPad 3 more attractive, or the iPad Mini more expensive. If you examine what likely profit margins may be, it is most plausible for Apple to release iPad Mini non-retinas at $300-450 (8GB $300, 32GB $450), or a Retina model range at $400-500 for 16/32GB respectively.