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Will iPad Mini Cannibalize Regular iPad Sales?

Henry Blodget

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The reviews for Apple's new "iPad Mini" are out, and they're generally very good.

Most reviewers like the form factor (light and small) and are bummed about the screen resolution—because they've gotten used to the super-precise "retina" screens on Apple's latest iPhones and high-end iPads. Normal people who haven't gotten used to the retina screens will likely be perfectly happy with the Mini's screen. And, for many people, the size and weight may actually be an improvement over the bigger iPads.

Related: iPad Mini Is Pricey But That Won't Deter Fans: TechCrunch's John Biggs

One of the smartest and most influential Apple analysts, John Gruber of Daring Fireball, predicts that the iPad Mini will become the best-selling iPad.

Gruber prefers the smaller size and weight of the Mini because he uses his iPad primarily for reading. He also observes that the size is much better for traveling and for kids, for whom the full-size iPad is particularly heavy. Gruber says his "ideal" iPad would be a Mini with a retina screen, and it seems reasonable to think that Apple will release one of those next year.

In the accompanying interview, I discuss the launch of the iPad Mini with John Biggs, East Coast editor of TechCrunch, who says the Apple event lacked the shock and awe of previous product announcements.

So, how is the Mini likely to impact Apple's financial performance?

A few thoughts:

  • The Mini will cannibalize some sales of the full-size iPads. Although some Apple fanatics will no doubt buy a Mini to go with the Mac, MacBook, iPhone, iPad, and iPod they already have, most will choose either the Mini OR the full-size iPad.
  • The "Average Selling Price" (ASP) of Apple's iPads will decline. Because the Mini costs considerably less than the full-size iPad, this will lead to more declines in ASPs for the iPad product line as a whole.
  • The Mini will increase the total number of iPads sold, perhaps significantly. A $329 price point is easier to stomach than a $499 price point, especially when you're buying a tablet for kids. It's not nearly as easy to stomach as a $199 price point (Amazon's Kindle Fire and Google's Nexus 7), but it's still easier. The lower price will therefore likely increase the number of iPads sold.
  • Apple's profit margin on iPads will likely decline even further. The full-size iPad is already a considerably less-profitable product than the iPhone, according to numbers Apple released in the Samsung trial. The iPad Mini will likely have an even lower margin than the full-size iPad. (The screen apparently costs almost as much as the screen for the full-size iPad, and the components inside aren't likely to be so much cheaper that they completely offset the difference in price. We'll have a better sense of this after a tear-down analysis).
  • The iPad product line will continue to put pressure on Apple's overall profit margin. One of the biggest risks to Apple's stock, in my opinion, is the risk that the company's extraordinarily high profit margin has hit a peak and will now begin to decline. The bigger iPads become as a percent of overall sales at the company, the more Apple's margin is likely to decline. This doesn't mean Apple will be any less healthy a company--it will be in great shape. But stock traders generally don't like declining profit margins, which is likely one big reasons Apple's stock price has recently declined.

Overall, Apple was still very smart to release the iPad Mini. The smaller, lower-price-point tablets released by Amazon and Google clearly struck a chord with consumers, and Apple would have been crazy not to play there.

Related: Ignore Apple's Quarter, Analyst Says—The Stock's Still A 'Buy'

The Mini will almost certainly cannibalize some sales of the full-size iPads, but if Apple weren't cannibalizing these sales itself, Amazon or Google would have. And because tablets and smartphones have become a development platform, this game is now about much more than near-term "profit." It's about grabbing and holding enough market share that developers are eager to develop apps for your platform.

It remains to be seen how much new market share Apple can grab with the Mini—for many people, $329 will still be too big a ticket to, say, rush out and buy everyone in the house their own iPad--but Apple's "ecosystem" gives it a big advantage over both Google and Amazon, so it will likely always be able to command a modestly higher price point.

SEE ALSO: Finally, Here's One Unabashedly Positive iPad Mini Review

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