Apple's mini tab weighs down iPad Air

New iPads reveal much about Apple's current and long-term device dilemmas. Full-size iPad cannibalizes Mac sales, while mini does the same to the larger tablet. Those are the clear takeaways from yesterday's product launches.

CEO Tim Cook is no Steve Jobs, and perhaps that's a good thing. Where Jobs championed grammatically incorrect "think different" -- as a marketing and product development strategy -- Cook thinks differently, making fundamentally difficult branding and pricing decisions to preserve current and future Apple crops. There's great risk in the strategy and greater by doing nothing.

Too Many Apples

Every established company's worst nightmare isn't what most people expect -- the aggressive and successful competitor. Self-competition is much more damaging. Microsoft is classic tech example. Once Office and Windows reached sales saturation -- and monopoly positions in process -- upgrades slowed. Then the products also reached the so-called "good enough" threshold where what customers have satisfies such that new versions aren't better enough to justify purchasing. Windows XP, and businesses' slow migration away from the software, is clear example.

Apple's iPad Air branding strategy confirms tablets cannibalize PC sales and foreshadows a future where the two devices meet. Next week's earnings report will spotlight how rapidly cannibalization increases. Meanwhile, the company raises iPad mini pricing, a sure act to preserve margins in the category, where the smaller tab takes sales away from the larger one. The two connected cannibalizations present problems another CEO might ignore.

With Microsoft, success slowed sales among established customers. Apple's dilemma is different: Competition among products, where lower-priced ones take away from those generating more profits.

During calendar second quarter, iPad accounted for 18 percent of Apple revenue, generating $6.4 billion in sales. That's up from 14 percent of revenue and $2.167 billion in sales three years earlier. The company ships more units, but margins are down about $100 since iPad mini's release. Next week's earnings could reveal steeper declines.

Air Pressure

Yesterday, Apple rebranded its flagship tablet as iPad Air. The slate is slimmer and lighter than its predecessor, close to Sony Xperia Tablet Z. The Sony is 23 grams heavier but about a millimeter thinner. Tablet Z is so light and easy to handle one-handed, I prefer it to smaller tabs. Similarities shouldn't be ignored, nor a striking difference: Apple subtly, by branding and marketing material, positions iPad Air as a PC alternative, acknowledging what analysts have said for a year (and I for three) -- tablets cannibalize computer sales.

Richard Shim, NPD DisplaySearch senior analyst, says that tablets, for example, "are gaining share at the expense of standard notebooks in key emerging regions where PC penetration rates are low. Parts of China and Asia Pacific, such as Indonesia and Thailand, are the new battlegrounds for PC shipment growth, and low-cost tablets are compelling alternatives to traditional standard notebooks in those regions".

The "Air" does more than emphasize lightness. Apple ties iPad to MacBook Air branding, creating continuity and foreshadowing a future major product strategy shift. But one buyers can get in 2013. At what point is a tablet good enough to replace a PC? iPad Air, with that 64-bit processor, might just be it for Apple. Hell, Google believes ARM Chromebook can replace a PC, with the codesigned HP Chromebook 11 as evidence. Why not iPad Air with a keyboard?

By units, Apple shipped about 3.5 times more iPads than Macs during calendar second quarter. Functional overlap is obvious, and by the Air pressure, something the company acknowledges with the new branding. No longer is the cheapest Mac you can buy $999. Five hundred dollars is the new thousand. It's no coincidence that with the new iPads Apple now offers free creative and productivity iOS apps that people previously paid for.

Maxi mini

Apple's iPad mini pricing reveals a troubling trend and risks marginalizing the tablet for the sake of margins.

Each of the WiFi or LTE models adds $70 to the selling price. Where last year $170 separated the entry mini and larger iPad model, it's just $100 now. So $399 instead of $329 set against $499. The increases deliberately make choosing more difficult on price, at a time when the macro trend is more device for less money.

This wanker pricing is Apple self-exhibition. Cover your eyes! Quick!

Such pricing move strongly suggests that Apple suffers serious cannibalization -- mini of larger iPad sales. So the company seeks to shore up margins. The new pricing then is all about Apple rather than response to competitors offering much more bang for fewer bucks.

  • iPad mini 16GB: $299
  • iPad mini RD 16GB WiFi: $399
  • iPad 2 16GB WiFi: $399
  • iPad mini 16GB WiFi/LTE: $429
  • iPad mini RD 32GB WiFi: $499
  • iPad Air 16GB WiFi :$499
  • iPad 2 16GB WiFi/3G: $529
  • iPad mini RD 16GB WiFi/LTE: $529
  • iPad Air 16GB WiFi/3G: $529
  • iPad mini RD 64GB WiFi: $599
  • iPad Air 32GB WiFi: $599
  • iPad mini RD 32GB WiFi/LTE: $629
  • iPad Air 16GB WiFi/LTE: $629
  • iPad mini RD 128GB WiFi: $699
  • iPad Air 64GB WiFi: $699
  • iPad mini RD 64GB WiFi/LTE: $729
  • iPad Air 32GB WiFi/LTE: $729
  • iPad mini RD 128GB WiFi/LTE: $829
  • iPad Air 64GB WiFi/LTE: $829
  • iPad Air 128GB WiFi/LTE: $929

I count 20 configurations, and the LTE models are times for cellular carriers, just in the United States. One way to diminish cannibalization is to make choosing harder, which is how I read the pricing list above.

Then there is mini's $70 increase. If you thought Apple over-priced mini last year, as I did, the successor is more excessive. Take your pick of reasons, or combination thereof:

  • Cook (and Company) believes consumers will pay more.
  • Apple executives are scared witless that mini will yank down iPad margins this holiday.
  • Android at any price just isn't competitor enough, even when selling for considerably less.

Crop Killers

Apple fanboys will droll on about how much more buyers get with mini's higher-resolution screen. Larger iPad went Retina Display without price increase. Apple put lower-resolution at iPad 2 then and -- gasp -- still now at $399, which isn't so different from the original mini reduced to $299.

Apple also defies larger pricing trends that forebode lost sales, particularly in critical growth markets. China tops the list.

Let's start with branded pricing. Google sells a 7-inch 32GB HD tablet with LTE for $50 less than iPad mini RD 16GB with WiFi. Amazon's Kindle Fire HDX 8.9" is a great Tweener value separating the Apple's 7.9" and 9.7" tablets: $379 (with ads) for higher resolution and greater pixel density than either.

But it's the macro trend that Apple's iPad mini pricing ignores. Today NPD DisplaySearch lowers its tablet shipment forecast through 2017, citing a large increase in "white box" models coming out of China. While with iPad Air, Apple prepares for the massive switch from PC sales to tablets, mini puts the whole strategy at risk.

Citing China and Asia Pacific, DisplaySearch sees average selling prices of $285 this year -- or $114 less than the cheapest iPad mini with Retina Display but arguably just a little more than the older 7.9-inch tab still for sale. The analyst firm predicts tablet ASP of $240 in 2017 but with nearly half of slates selling for less than $100. DisplaySearch predicts that major brands will lower pricing, although Apple does just the opposite with iPad mini.

Unquestionably, Apple prices new tabs with respect to its own products, rather than responding to competition. Is that a winning strategy? It works for Mac. But iPad?

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