The name game: What Apple could call the 7-inch iPad

Lately on iMore, and other websites, there has been a lot of discussion around the idea of Apple selling a lower cost tablet. So I thought it would be worth writing about this topic from the perspective of an Apple investor. Is a cheaper tablet a good idea? Is it necessary?

Absent an official Apple press release, we don’t actually know with 100% certainty that this will happen, but for the sake of argument let’s say it does. To me, the idea of a smaller iPad makes a lot of sense. I have an iPad and two BlackBerry PlayBooks in my house. Every one of these three tablets gets plenty of use, and I can see the use cases for large and small.

Besides that, Apple has a long history of successfully carrying multiple sizes. Just look at the MacBook Pro and Macbook Air lines. You have 11-, 13-, and 15-inches options (and until a couple of months ago, 17-inches as well). I’ve always said that tablets can come in multiple sizes. Once you pick an aspect ratio (whether it be 16:9 or 4:3, or something else), the size should just be an option. It has been this way in the TV industry forever. Why are tablets any different?

If you buy my argument that size is simply an option, why would a slightly smaller iPad deserve a significantly smaller price? How can Apple price a 7-inch iPad at $199 or $249 while asking the much larger price of $499 for the regular (new) iPad?

It’s probably not fair to compare the new iPad to an iPad mini either. If Apple uses the same resolution of the iPad 2 and similar spec’d components, then we should compare an iPad mini against a $399 iPad 2. But still, half the price for slightly smaller? What will this do to the company?

Let’s take a look at current iPad gross margins. Reuters reported on evidence coming out of the Apple vs. Samsung court case, saying:

Between October 2010 and the end of March 2012, Apple had gross margins of 23 to 32 percent on its U.S. iPad sales, which generated revenue of more than $13 billion for Apple, the filing said. Apple does not typically disclose profit margins on individual products.

Is this data actually accurate? I’m not convinced. Even at the 32% level, I have a hard time believing a $499 iPad costs Apple as much as $378 to manufacture, which is what the cost needs to be for a 32% margin. iSupply pegs the bill of materials + manufacturing on an iPad 3 16GB at $316.05, and an iPad 2 16GB at $240.10. Who knows how Apple defines gross margin in court statements. Separately, UBM TechInsights says Apple actually earns a margin of about 53% on the iPad 2.

That sure sounds more like the Apple I know. Premium prices, premium margins. But still, they do sell lower end products such as the iPod touch. Currently an 8 GB model of the iPod Touch sells for $199, and production cost is estimated to be around $150. That makes for a +30% margin on Apple’s lowest cost iOS device.

A $200 iPad Mini, to me, seems completely out of the question. Why in the world would Apple launch an iPad 2 quality product at an iPod touch price? Normally, within Apple, portability has been marketed as a feature, not a cost-saver.

If Apple was to sell an iPad at sub 30% margins, I think the stock would take a deep nosedive. There’s just no good reason for Apple to make such a move right now.

Perhaps months ago, when the Amazon Kindle Fire was released (sold at essentially zero margin, for $199) and the Google Nexus 7 was on the horizon (also sold at essentially zero margin for $199), Apple may have considered defensive moves to capture market share and keep the competitors out. But today? It doesn’t seem necessary at all. Even in China, Apple has institutional investors who would sell en masse. Wall Street would start puking out the stock. It’s really as simple as that.

Wall Street already understands perfectly well that the iPad has much lower margins than the iPhone. But Apple is still a company with 72.7% market share for tablets in China. Price is not limiting Apple’s market share, clearly.

My take is, we will see a smaller iPad. Reporting by iMore and others has pretty much confirmed this. But nobody seems to be as sure about the price point. I think Apple has already established market share leadership with the iPad and doesn’t need to cut prices significantly. I would be shocked if an iPad Mini hits the market at $299 or below. But at the $299 or above price point I think Apple can still earn reasonable margins, while opening up the market to much larger volume, and further cementing its market share lead.