Apple Sizes Up its Options
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earlier this year market research firm Gartner reported that they expect tablet sales to nearly double in 2012, from 2011. Gartner projects tablet sales will hit nearly 119 million in 2012 up from 60 million in 2011. Tablet sales will hit 182 million in 2013 and by 2016 nearly 370 million tablets will be selling annually. Gartner further projects that even though iPads currently dominate the tablet market with over 60% market share by 2016 iPads will account for less than half of all tablets sold. It could be the multitude of smaller tablets launching that will bring the iPad's market share down, however the latest in a long line of rumors re-affirms that Apple (NASDAQ: AAPL) is not throwing in the towel on smaller tablets.
We have heard rumors of an ‘iPad mini’ since the launch of the original iPad in 2010. With this recent round of rumors from the New York Times, it appears nearly certain that a smaller version of the iPad will launch later this year. The New York Times along with others is reporting that this smaller iPad will feature a 7.85 inch screen, thus maintaining the aspect ratio of the current larger iPad.
Even with the seemingly imminent launch of an iPad mini, Apple’s market share in the tablet market will drop over the next year. This drop in market share will not so much come from the fact that Apple is not offering what consumers want, a smaller tablet, it will be because even the smaller iPad will be pricey. An early report about Amazon’s Kindle Fire, a $199 Android based tablet launched last year, from Ifixit estimated that it cost $201 to build. Thus at least in the beginning Amazon was selling every Kindle Fire tablet at a loss. When Google (NASDAQ: GOOG) recently announced its $199 seven inch Nexus 7 tablet. Google Exec Andy Rubin stated that they were breaking even on every Nexus 7 sold. IHS iSuppli did a tear down on the Nexus 7 and found that it probably costs Google about $152 to build every Nexus 7. The leader of the IHS teardown of the Nexus 7 said that it was reasonable to believe that Google is breaking even on every 8GB model of the Nexus 7 sold. Google is probably making a profit on the 16GB model which IHS estimates costs less than $10 more to make.
The larger point is that with these seven inch tablets the smaller form factor is only one of their selling points, the other is price. Apple recently made a small step toward making their iPads more affordable by selling one model of the iPad 2 for a discounted price after the iPad 3 launched. Apple is also one of the largest buyers of tablet components in the industry. When Apple buys components they get the best prices in the world and this could help them whittle down the cost of manufacturing a smaller iPad. However, even with this price advantage Apple has never been in a race to the bottom on price. Apple will never have a $199 seven inch tablet, $249 if not $299 will be the lowest a seven inch Apple iPad mini will go.
In addition to the Kindle Fire and Google Nexus 7, there are rumors that Amazon (NASDAQ: AMZN) is prepping a second generation of Fire tablets. This second generation could include not only a new seven inch Kindle Fire but a larger Kindle Fire to go head to head with the current iPad. Microsoft (NASDAQ: MSFT) is also going head to head with the iPad later this year or early 2013 with their Surface tablets. These ten inch tablets will be running Windows 8 and Windows RT and will be comparably priced to the iPad, though we do not know an exact price or launch date.
With Google leading the way for Android tablets, other manufacturers will no doubt build off of the Nexus 7 as a reference for better Android tablets. Up until now no single Android tablet has taken off. The Amazon Kindle Fire is based on a modified version of Android but the Google services are missing, replaced by Amazon’s own. Additionally Barnes & Noble has a popular Android based tablet in the Nook, but yet again it has a limited version of Android without many of the Android features. Samsung is now the second largest tablet maker internationally after Apple with their Galaxy Tab Android tablets. However Samsung has faced several rounds of legal hurdles in different countries including a current sales ban in the US on one of the models.
When Apple launches their smaller iPad it will not be launched into the same market as the original iPad was. This is especially true in the lower end where Amazon and Google are setting the bar. Apple needs to make sure that they do not bow too much to the pressure of launching a smaller iPad and fragment their offerings. Their current iPad has sold like hot cakes, 80 million plus hot cakes, and just because someone else is making a smaller cheaper iPad does not mean Apple needs to jump into that market.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.