Does Size Matter?

By David Danna - July 12, 2012 | Tickers: AMZN, AAPL, GOOG, MSFT | 0 Comments

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Since its debut in 2010 Apple’s (NASDAQ: AAPL) iPad has dominated the tablet market with 73% market share in 2011 and 15.4 million units sold in just the last quarter of 2011. Though the iPad has undergone two revisions since its launch, the general form factor has not changed. It has a 9.7 inch screen even though most of the tablets grabbing the headlines now are smaller, the Google Nexus 7 and Amazon Kindle Fire being prime examples. This is ostensibly because Steve Jobs didn’t think a smaller form factor tablet could work. Speaking about smaller tablets Jobs said "This size isn't sufficient to create great tablet apps in our opinion," and that after extensive testing Apple had come to the conclusion that “the 10-inch screen size is the minimum size required to create great tablet apps." However, this may be about to change. For a long time rumors of a smaller iPad have been simmering just below the surface, and they have reemerged stronger than ever before. A Chinese site (amongst others) is reporting that an iPad ‘mini’ is in the works for a release by the holidays.

With Mr. Jobs no longer at the helm of Apple they could be feeling pressure from competitors like Google (NASDAQ: GOOG), Amazon (NASDAQ: AMZN) and Samsung. Even if Steve Jobs were still running Apple, he was famous for writing something off as a poor idea and then launching it a year later, as he did with the Video iPod.  Last year Amazon made waves with its $199 seven inch tablet the Kindle Fire. However the Kindle Fire’s sales have fizzled and in the first quarter of 2012 Amazon shipped only 700,000 according to IDC, giving Amazon a 4% market share down from 17%. Apple, on the other hand shipped nearly 12 million iPads in the same quarter.

Another aspect of the Amazon Kindle Fire’s low $199 price is that Amazon is not making any money from selling the Fire. A teardown from iFixit showed that by their estimates it costs a total of $201 to manufacture each Fire. Amazon’s goal is to make money off of the content and services they sell with the Kindle Fire. The Google app store, music service, and content is stripped from the modified version of the Android operating system that the Fire runs, replaced with Amazon’s competing offerings.

Selling content to turn a profit is also the goal of the recently announced seven inch Google Nexus 7 tablet. Google exec Andy Rubin said after the announcement of Nexus 7 that there was no profit margin on selling the Nexus 7 at $199. With the $25 dollar credit you get to the Google Play store when you buy Nexus 7 right now Google is definitely losing money on every Nexus 7 they sell. When Google stops the $25 credit and the components get a little cheaper, Google will be able to make a little money off of the Nexus 7 hardware. Additional money will be made by selling content and applications but for now the Nexus 7, like the Kindle Fire is breaking even at best.

This razor thin margin, highly competitive and low priced market is not a normal one for Apple. Apple makes their money from hardware sales and they are known for charging a premium for their hardware. Apple also recently took the small step of continuing to sell one model of the iPad 2 when the iPad 3 was released. This remaining iPad 2 is now on sale for $399, $100 cheaper than it used to be and $100 cheaper than the intro iPad 3. This means that a smaller iPad would have to be lower than $399, probably $299 if not lower to differentiate itself enough in price to catch on. This is definitely possible as the Nexus 7 and Kindle Fire are $199; however the current iPads at least have features that these two tablets do not. If Apple wants to keep its retina display, front and rear facing cameras and cellular data options, the cost of manufacturing the smaller iPad would be higher than the Fire and Nexus 7.

The razor thin margins and increased cost of manufacturing makes the $200 price that the Nexus 7 and Kindle Fire have impossible. The question then becomes whether it is worth it to design and release a whole new iOS device with a new smaller form factor just to get something $100 cheaper than the current offering. There is also the possibility that the smaller iPad could hurt sales of the existing iPad and the iPod touch.

Microsoft (NASDAQ: MSFT) is set to release their Surface tablets at the end of 2012, or potentially early 2013, creating added competition for the higher end tablets as well as lower end with the Fire and Nexus. Microsoft has not announced a specific price for their Surface tablets, or a specific release date. They did say that they would be comparably priced with existing ultra-books and tablets; speculation is that this will manifest itself in a $500-800 price tag. The first Surface tablet will be launching alongside Windows 8 and the second model will come 3 months after that.

The Surface tablets, Nexus 7, Kindle Fire and the rumor that Amazon is prepping a new generation of Fire’s including a larger one, creates a huge amount of uncertainty in the tablet market going into 2013. Though Apple will remain the dominant player in the tablet space, with more than 60% market share, they would only be adding to the uncertainty by releasing a new smaller iPad into the fray. 

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