Understanding Apple: The iPad & the Mini – Which is the Cannibal?

By Jaan Seunnasepp - October 18, 2012 | Tickers: AMZN, AAPL, GOOG | 0 Comments

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Apple (NASDAQ: AAPL) is about to announce the release its new iPad Mini. (At least everybody believes that this is the point of the Oct. 23 event.) Analysts generally think it will be a hit and a significant boost to the company’s bottom line. But the question is to what extent will it cannibalize sales of the original iPad? I will address that here, with what I think is a radical answer.

Some background

Steve Jobs went on record to emphatically state that he felt that the 7” tablet did not provide the experience the consumer wanted. He believed it to be a tweener – neither large enough to be a realistic tablet, nor small enough to be pocketable.

But Amazon (NASDAQ: AMZN) has proven him wrong. With the original Kindle that was only for reading, there was not really an issue here; but the popularity of the Kindle Fire, which runs a flavor of Google’s (NASDAQ: GOOG) Android operating system, and other Android tablets has shown that there most definitely is a market for these tweener tablets. Now an increasing market share by these “upstarts” puts pressure on the iPad’s dominance, so the ever-pragmatic Apple is addressing the threat.

Clearly, Apple does not want to lose a large segment of the product category. I imagine that they are thinking that for many, a purchase into the small-sized category is the first step to eventually buying a full-sized model, and they do not want to miss the opportunity to get customers early.

Also, perhaps we should keep in mind that the problem is less that of the size than that of the price point. Surely, many people want the smaller size. If your main objective is to read eBooks, then a small size is less an issue, and weight is a significant factor. The Kindle E-Reader family has a 6” screen, and that is deemed adequate by the community of users. However, for those who want a tablet for the multiple uses of which it is capable, I think most would probably prefer the larger screen, but the price may be a significant factor.

A few things should be kept in mind regarding size: due to the mathematics of areas, a 10” screen has roughly twice the real estate of  a 7” screen. This is good for displaying content, but bad for two reasons. At the same resolution, it requires twice as much memory and a faster graphics processor to run it. Plus the screen itself weighs more, and (this is the big one) it and the faster processor require more juice, so the battery must be larger. All this adds up to significant extra weight for the unit. Weight, particularly for readers of eBooks, can be a real issue.

General consensus is that the new iPad Mini will have a screen of about 7.8 inches. Otherwise, it will most likely resemble its “bigger brother” in most respects. Whether the screen resolution is “retina” or not remains to be seen, as does which processor is used. Finally, the price is up in the air as of now.

Sales Projections

Sales projections for the new Mini vary between 5 million to 10 million for the new Mini. The sales would add to the overall iPad unit count for the quarter. In all, projections range up to almost 30 million total units (both sizes). So, overall, the mini could add anywhere from $1.2 to as much as $2.5 billion to revenue for the quarter ending in December.

I have also read that analyst Gene Munster with Piper Jaffray believes that every 5 Minis cannibalizing the sale of 1 regular iPad. In other words, for every 5 purchases of a Mini, one would have bought a regular iPad. This seems like a reasonable number, although I am not sure how he came up with it. It has been suggested that there would be a 15% cannibalization rate.

To me, the smaller rate seems more accurate because I think that Mr. Munster may have overlooked another possibility: The iPad (large) may cannibalize sales of the Mini!

Just imagine this scenario. A couple walks into an Apple store holiday shopping, looking for an iPad Mini for their child, a relative, or even for themselves. They see it next to the New iPad, They compare. They envision all the uses. They decide “Sure. Why not? We can spring the extra dollars for the big one.” So they buy the New iPad instead of the Mini.

I doubt this will happen in 1 out of 5 cases, but I can see it happening a significant number of times.

Conclusion

The new iPad Mini, if priced right, will assuredly take a big slice of the lower-end tablet market and add significant revenue to Apple’s bottom line. More importantly, it will bring a whole new set of customers into the iEcosystem, adding them to the list of customers. The upside is exceptional. Apple is running on all cylinders, and now it has one more.

You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, their products are trend setters, and currently they are trading at rather low multiples, especially regarding forward earnings.

Warren Buffet has the maxim: “Invest in what you know!” So, for those who want a unique perspective on Apple’s success, I have a series of articles entitled Understanding Apple. I hope you will find them helpful and provocative.

Let me know what you think.

Previous Article: Understanding Apple: Of Cults and Cool...

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