Apple Inc. (AAPL) Chief Executive Officer Tim Cook unveiled a smaller, thinner iPad that carries a price high enough to shore up profit while leaving room for competitors to sell their tablets more cheaply.
Apple said yesterday that the 7.9-inch iPad mini will cost $329 to $659, depending on memory and wireless features. With that starting price, the company is sticking to its strategy of charging a premium to preserve industry-leading margins in a market that NPD DisplaySearch predicts will more than double to $162 billion in five years.
Cook is betting that a set of features that includes dual cameras, long battery life and access to iTunes and the company’s App Store with more than 275,000 iPad software applications will induce consumers to shun cheaper alternatives. Amazon.com Inc. (AMZN)’s Kindle Fire HD, Google Inc. (GOOG)’s Nexus 7 and tablets from Samsung Electronics Co. (005930) all start at around $200.
“Competitors are probably breathing a sigh of relief,” said Chris Jones, an analyst at Canalys. Even so, he said the device will be a popular holiday gift and predicted that Apple will sell more than 10 million iPad minis by the end of the year. The model with only Wi-Fi will go on sale Nov. 2, followed two weeks later by the version that connects to data networks from AT&T Inc. (T), Verizon Wireless and other carriers.
Shares in Cupertino, California-based Apple rose less than 1 percent to $616.83 at the close in New York. Apple’s stock has dropped 12 percent since reaching a record on Sept. 19, two days before the company released the iPhone 5.
Amazon declined 2.5 percent to $228.49, while Barnes & Noble Inc. (BKS), maker of the Nook tablet, fell less than 1 percent to $15.21.
The iPad mini’s size makes it lighter and thinner than the original iPad while providing more screen real-estate than the iPhone for browsing the Web, playing games or watching videos.
“We believe it will be a hit product given its lower price point” than the existing iPad line, Shaw Wu, an analyst at Sterne Agee & Leach Inc., wrote in an e-mail. “The pricing is in line with what we thought, but may be higher than some who were hoping for more aggressive pricing.”
Investors also may have been reacting to Apple’s announcement that it has sold more than 100 million iPads since co-Founder Steve Jobs introduced the device in January 2010. That indicates sales in the fourth-quarter were about 16 million, below the predictions of analysts including Ittai Kidron at Oppenheimer & Co. Apple will announce fourth-quarter results tomorrow.
Introducing a smaller iPad is a reversal for Apple. Before his death last year, Apple co-founder Steve Jobs had said customers wouldn’t like having less screen space.
“This size isn’t sufficient to create great tablet apps, in our opinion,” Jobs said in 2010 of 7-inch tablets.
Apple has a different business model from makers of other tablets. While Amazon and Google make money primarily from digital books, movies, music and advertising, Apple makes money from each product it sells. Were Apple to price the iPad mini as low as $249, as analysts at Barclays Plc had predicted, it would have harmed the company’s profit margins, according to Jones of Canalys.
“They had to strike a balance,” Jones said.
Before the iPad mini was introduced, Apple had taken note of the competition’s smaller devices. Documents released earlier this year as part of Apple’s patent lawsuit against Samsung Electronics included an e-mail from Apple Senior Vice President Eddy Cue discussing a positive review of a smaller tablet and his efforts to convince Jobs of the need to make one.
During yesterday’s event at a renovated movie theater in downtown San Jose, California, Phil Schiller, Apple’s senior vice president of worldwide marketing, criticized rivals for not having applications specifically tailored for a tablet.
“These are not great experiences,” Schiller said, adding they mainly offer enlarged smartphone apps that don’t take advantage of the bigger screen.
By broadening the iPad lineup, Apple aims to add to its 70 percent market share just as Microsoft prepares to introduce its Surface tablet this week, and after recent upgrades by Google and Amazon to their own handheld lines.
After the iPad was introduced in 2010, it quickly gained popularity with consumers, businesses and schools seeking a gadget that blends features of a laptop with the mobility of a handheld phone. By adding another model at a different price, Apple is mimicking the multigadget strategy it used to make iPod the top-selling media player.
With the debut of a smaller iPad, Apple will help double the size of the market for 7-inch tablets this year, to about 34 million units, according to a report from IHS ISuppli.
At yesterday’s event, Apple also updated the bigger iPad, giving it a faster chip, improved network connectivity and a slot that works with Apple’s new Lightning connector. While the iPad will have better features, pricing will remain the same.
Apple also introduced upgrades across its computer product line, adding a redesigned iMac desktop with a thinner profile and a starting price of $1,299 for a 21.5-inch model and $1,799 for a 27-inch screen. A new MacBook Pro with a 13-inch screen will start at $1,699.
Illustrating how mobile devices are now the center of Apple’s business, Mac computers accounted for just 14 percent of the company’s revenue in the third quarter, trailing sales of the iPhone and iPad. Cook has predicted that global tablet sales will eventually exceed those of all personal computers.
The smaller iPad model may attract customers who want a computing device that’s easier to use on the go, said Sarah Rotman Epps, an analyst at Forrester Research. (FORR) She estimates that about half of the time people spend with a tablet is in the living room or bedroom.
“It could be that a smaller, lighter iPad will be more portable and will appeal to a wider segment of customers,” Epps said in an interview.
Apple’s introduction of a smaller iPad is one of several events in the coming week as companies look to get new wares on store shelves before the holiday shopping season. Microsoft is introducing its newest Windows operating system, along with the Surface tablet, on Oct. 26, and Google is due to unveil a new version of its Android software for mobile devices before the end of the month.
“We know we are just getting started,” Cook told the audience. “We are not taking our foot off the gas.”
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