TECHNOLOGY SPECTATOR: Apple's mini prospects

Technology Spectator

With the iPad Mini now out of the bag Apple has completed all of the likely size permutations of phones and tablets. As with all things Apple post-Steve Jobs, the market reaction has been mixed as to whether the latest addition to the Apple family is a cleverly conceived and aggressive strategy aimed at Google and Amazon, or just simply Apple producing another device to sell.
Clearly, Apple could have priced the new device to completely decimate sales of Google's Nexus 7 and Amazon's Kindle Fire HD. However, a lower price would have also had a much bigger impact on sales of its own iPad 2 and the so-called iPad with Retina display. As many analysts have observed, Apple is driven above all else to protect its profit margins.

Premium pricing misstep

Apple's senior vice president of marketing, Phil Schiller might claim that the iPad Mini is reasonably priced and that people would pay the premium over other similarly sized products. But this confidence might be misplaced. Most 7-inch devices are primarily aimed at consumption. They are an ideal size for eBook readers, playing games and watching the odd movie. People who also want to use a tablet for notes in meetings or email are going to stick to the larger 10-inch form factor.

Because the use of the device is more limited, the price people are likely to want to pay for a 7-inch tablet will be limited as well. So it is really uncertain at this stage who exactly would buy the iPad Mini. For the price, consumers would still be better off buying the larger iPad 2 and paying the extra $70.

The difficulty for Apple is that its market is predominantly in a demographic of older and wealthier people. In an analysis of US tablet users, the bulk of users (almost 56 per cent) were from households with incomes above $75,000 per year. This parallels another survey of iPhone users which reported that 61.5 per cent came from households with income of more than $75,000.

In contrast, the same survey showed that 64 per cent of Android phone users had household incomes of less than $75,000. Since 87 per cent of the US population come from households earning less than $75,000, cheaper Android devices are always going to be in the majority. This picture is also replicated around the world.

Tipping point for Apple?

This situation resembles the early days of the PC market where Apple's computers, initially dominant, became less so as the price premium between an Apple PC and an IBM or Windows PC got larger. As long as Apple continues to try and defend its profit margins and fails to justify the premium by producing products that are clearly more innovative than the competition, they will continue to lose market share.

There was nothing innovative about the iPad Mini nor, for that matter, the other product refreshes announced at the same time. We are now entering a phase of the product life-cycle for all of Apple's products in which each new version will be "slightly” more or less than the previous version. Correspondingly, there will be fewer reasons to upgrade. In Apple's favour is the fact that its customers are more loyal than Android users and so while it might not lose many users to the competition, it will struggle to convince them to continuously upgrade their devices.

In many ways, the release of the iPad Mini may come to symbolise Apple's break with the mythology of Steve Jobs. He famously dismissed the smaller size device as being unusable and by releasing the device, Tim Cook is clearly signalling that he has moved on and is no longer influenced by the ideals of the former chief executive. This may also be what everyone is scared of, with this break marking the tipping point for Apple and marking its descent from glory.

Apple's share price is down 12 per cent on its high of above $700 last month. Some analysts are suggesting that the company has much further to fall. The decline that started with the disappointment concerning sales of the iPhone 5 is set to accelerate after the release of the iPad Mini.