What Apple's Latest Weapon Means for 2 Tablet Giants

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) recently unveiled its newest toy and latest weapon, the iPad mini. The new tablet sports a smaller form factor than the iPad 3 with a screen two-thirds the size and weighs just half that of the larger iPad. Many see the iPad mini as Apple's attempt to compete with Amazon's (NASDAQ: AMZN) Kindle Fire HD and Google's (NASDAQ: GOOG) Nexus 7.

Most analysts believe Apple made a faux pas with its choice in pricing. The low-end mini will cost $329. Comparatively, the Kindle Fire and Nexus 7 each cost just $199. Apple faces a tough task in convincing consumers that its tablet is worth jumping the price gap.

The iPad mini does sport a slightly larger screen than its competitors' products. At 7.9 inches diagonally, it covers 29.6 square inches compared to 21.9 on the 7-inch Kindle Fire and Nexus 7. Aside from an advantage in screen real estate, the mini also uses iOS 6, which may be a big draw for iPhone users for its familiarity. However, Google has had great success with its Android OS, of which both the Nexus and Fire use variants.

Is a bigger screen and friendly operating system enough to sway buyers to step up their price from $199? I do not think so. Yet, the way Apple is positioning the product looks more like an attempt to carve out a portion in the mid-level market for tablets, not an attempt to compete with Amazon and Google on the low-end.

The iPad mini has superior design to Google's and Amazon's offerings. True to Apple form, design is a priority in every detail. It is made of extremely lightweight metal and is pencil thin. It looks prettier than the low-end tablets and feels better in your hands.

The best chance Apple has of taking away sales from either competitor is in Amazon's high-end Kindle Fire HD. Priced at $299, it has a larger screen at 8.9 inches, but it does not have the Apple name behind it. Still, it has a higher resolution display and camera on top of a price tag that is still $30 lower than the mini.

In all likelihood, the effect of the iPad mini on sales of the larger Kindle Fire HD model will be minimal. The biggest effect the iPad mini will have on tablet sales is cannibalizing Apple's full size iPad. The iPad 2 currently sells for $399, the iPad 3 for $499. Consumers looking to purchase a tablet may decide to sacrifice screen size for an upgrade in specifications and a discount on price. At least this consumer decision is not one between Amazon, Google, or Apple, but rather a decision between Apple products - something I believe is good for Apple.

Self-cannibalization can be an effective marketing strategy - especially for premium products. For example, Starbucks (SBUX) grew to become the leader in its market by setting up a coffee shop on just about every corner. People looking for coffee are easily able to find a Starbucks. Similarly, with the iPad and iPad mini consumers looking for a mid to high-end tablet computer are easily able to find an Apple product that fits their needs in a range of prices. Yes, there are other tablet makers out there, just as there are other coffee shops out there, but Apple gives buyers that sense of premium quality that consumers desire when buying an expensive gadget.

Preliminary estimates of the iPad mini's bill of materials are around $195. At a retail price of $329, that represents a margin of 41%. The iPad 3 costs Apple $316 to make and it sells for a 37% gross margin at $499. Apple is actually making higher profits as the consumer moves down the product line. Margins will go up in time as material prices fall.

As the mini cannibalizes traditional iPad sales, Apple is going to show higher profit margins. I also believe the mini will capture a lot of new tablet buyers who are looking for a product less expensive than the iPad, but still want a premium product causing increased revenues on one of its highest margin products.

So how will the iPad mini affect Amazon and Google's product sales? In short, not so much. Amazon might give up sales on its high-end tablet, but will remain largely unaffected by the mini due to pricing. Moreover, Apple does not seem intent on competing with the low-end tablet offerings.

Amazon's margins on the entire Kindle line are minimal. The company makes its money on ebook sales. Cleverly, Amazon has an app for that! Regardless of what tablet consumers buy, they can download the Kindle app and read their entire Amazon ebook library. Margins on ebooks are huge for Amazon as there are no storage cost and no shipping cost on digital materials.

It will still have to compete with iBooks from Apple, but when Apple first released the iPad, Amazon saw a spike in ebook sales as well. While Amazon will not release details on sales to iPad users, it is clear the company is very successful marketing ebooks for use on devices aside from the Kindle product line. Therefore, if the mini draws more consumers to buy a tablet, Amazon will see increased revenue and margins.

For Apple, I see the mini as a big win. Apple's premium design and relative price should attract first time tablet purchasers. It is going to be a big seller as tablet computing is the fastest growing segment of the computer industry. Some mini sales may come at the expense of traditional iPad sales, but I believe the additional revenues generated by first time tablet purchasers that may have searched elsewhere and higher margins are going to make up for cannibalized sales.

Moreover, the timing of the mini could not have been better for Apple. With Microsoft (NASDAQ: MSFT) set to release the Surface, its entry into the tablet market, Apple is able to direct some of the limelight back on itself and remind consumers of the upcoming iPad 4. Microsoft will certainly take away some of Apple's customers, but the mini also serves as a hedge against the Surface as Microsoft priced the product at $499.

While many analysts believe Apple made a gaffe in pricing the iPad mini so high, I disagree. The analysts' mistake is that they believe Apple is attempting to compete with Google and Amazon's low-end tablet offerings. The mini is a mid-level product, it has superior design to any other tablet currently available and a price that fits nicely into Apple's product line. It will also work to keep Microsoft at bay, reminding consumers of Apple's upcoming full-size iPad upgrade and providing them with a less expensive tablet option.

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StockCroc1 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 Apple, Amazon.com, 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.

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