Tuesday, October 23, 2012

Is Apple becoming a victim of its "reality distortion field?"

Earlier today, Apple announced a new 13" MacBook Pro, refreshed its Mac mini and iMac product lines, and introduced not one, but two new iPads: The 4th Generation 10" iPad, and the long-rumored iPad mini. The biggest news came from the iPads, and the financial markets are already reacting negatively.

The iPad mini has a 7.9" display and an A5 processor, but other than that, it's essentially an iPad 2 in a smaller package. Apple took pains to compare the iPad mini to Google's Nexus 7; Apple said that its tablet's display has 35% more area, and that it offers a "tablet experience" while the Nexus 7 offers a "scaled-up phone experience." Apple left a few things out of its comparison, however: The Nexus 7's display has higher resolution than the iPad mini, 1280 x 800 vs. 1024 x 768, which should be noticeable on the iPad mini's larger display. The Nexus 7's quad-core Tegra 3 processor should be faster than the iPad mini's Apple A5, and most importantly, the 16GB Nexus 7 sells for $199 (U.S.), while the 16GB iPad mini is priced at $329.

The Nexus 7 isn't Apple's only problem: Amazon's 16GB Kindle Fire HD also sells for $199, while Barnes & Noble's 16GB Nook HD is $229. In fact, Amazon's 32GB model is only $249 vs. $429 for the 32GB iPad mini, and the 32GB Nexus 7 is expected to be announced by Google next week for $249. Price isn't everything, of course, but it's very important, especially for 7" tablets. Apple's pricing raises an interesting question: Do people buy 7" tablets because they're seven inches, or because they're cheap? If they buy because they're seven inches, then Apple's in great shape, but if they buy because they're cheap, the iPad mini could spell trouble for the company in two ways.

The first issue is that price-conscious customers need to justify spending $130, almost twice the price, for a tablet with the Apple name on it. I'm far from convinced that the iPad mini is worth the premium that Apple is asking, and the financial community, which expected the 16GB model to be priced at $299, isn't convinced, either. Apple could justify a $100 premium and keep the iPad mini under the psychological $300 threshold with a $299 price. An additional $30 doesn't make a huge difference, but pricing the entry-level model over $300 does. The second issue is that a lot of consumers will look at the iPad mini and realize that it's all they need, for $170 less than a comparable 4th Gen iPad. That will result in the iPad mini cannibalizing sales of the more expensive and more profitable 10" iPad.

And, what about that new 4th Generation iPad? It replaces the 3rd Generation model, which had only been on the market for six months. It has a faster A6X processor, which Apple claims has twice the CPU and graphics speed of the A5 processor in the 3rd Generation model, and it also has a Lightning connector. Other than those two changes, the 3rd and 4th Generation models are essentially identical, which is leading some pundits to call the new model the "iPad 3S." The 4th Generation model, although not a complete surprise, will throw some uncertainty into consumers' future iPad purchase decisions. There's fairly reliably been a year between new iPad and iPhone models, but now we've gotten a new iPad just six months after the release of the previous model. Does this mean that Apple is speeding up its product replacement cycle, or is this a one-time event to get the Lightning connector into wider use?

I suspect that Apple may be believing some of its own hype--it can demand a premium price for the iPad mini just because it's an iPad. However, the 7" segment is by far the most competitive segment in the tablet market, and Apple is a late entrant. Apple will sell lots of iPad minis, but I doubt that they'll sell as many as they or analysts expect
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