Apple’s latest tablet, the much-anticipated iPad mini, is out and reactions are all over the web. The big news from the Apple presser is threefold: the iPad mini will retail starting at $329, the MacBook Pro line gets a retina display model, and the Mac Mini gets an update as well. Below are some thoughts on the strategic implications of the announcement.
First, the iPad news, while widely anticipated is the big news here. Tech Crunch ran an article on Sunday in which the price point of $329 was predicted by MGI Securities analyst Ming-Chi Kuo. His logic shows Apple protecting margin. The iPhone 5 has gross margins of 68% to 72% according to Kuo. These high margins are a big driver of Apple’s profits and something I have said are going to be threatened going forward. According to Kuo, the existing iPad that was just released has a gross margin of 37 to 51%, much lower than the iPhone 5. But, an iPad mini selling starting at $329 means gross margins of 41% to 61%, a tad higher. What’s notable here is that the comparable devices from Google and Amazon sell for $199, making the iPad mini 65% more expensive. That’s a huge price markup.
What the pricing tells us is two-fold. First, Apple wants to protect margin. Why else would they carry a price so much higher than competing brands and that has an estimated margin even higher than existing iPads? Second, that tells me that Apple is very afraid of margin erosion and is willing to cede share in order to protect them. In my view, this gives Google and Amazon a license to undercut Apple at will. And we know that Google is coming out with a 32GB version of its Nexus 7 later this month. So, it will be interesting to see how Google positions this.
The announcement today also highlighted Apple’s notebook and computer line-up. The retina display MacBook Pro is much anticipated and will sell well. Apple is taking share in the computer market. And it is smart of them to highlight the iPad along with its latest computer upgrades to solidly in buyers’ minds that they have a suite of products to choose from based on individual needs.
Overall, however, the Apple iPad mini presentation has to leave Apple watchers disappointed. The Apple Angst that has caused share price erosion is all about the cannibalization, market share, margin issue. Apple has decided to protect margin and that issue has gone away. It’s notable that Apple’s margins are higher here than on the iPad. Moreover, there are good markups for more storage and 3g/4G connectivity. But the iPad mini’s specs may force many potential iPad buyers over to a cheaper model and that means less profit per model sold. So cannibalization would still be a problem.
More importantly, the decision to protect margin opens Apple, with its limited upgrade cycle, to attack from Android manufacturers anchored at the $199 price point. I guarantee you this price point will decline in the coming months as Apple works on its next lineup upgrade. And by the time Apple comes back to market, its market share in the tablet market will be significantly eroded by Android, likely with less opportunity to sue for patent infringement.
So where does that leave Apple? In my view, it leaves us right where I said before: with a good holiday quarter and strong sales, maybe even better margins due to product mix. But when the holiday season is over, the Android onslaught will begin.