Sunday, July 22, 2012

Apple watcher Ryan Jones, who blogs at IAmConcise, has an interesting graphical argument for a smaller, less expensive iPad. In his post today, The Reason for the iPad Mini, Jones refers to Tim Cook’s recent statement that Apple will “not leave a price umbrella for competitors” in the tablet space. A price umbrella is the cover that a market leader provides other companies by establishing a premium price for their products. Competitors can enter the market at lower price points and disrupt the leader’s dominance, in Jones words, “from the bottom up.”

Apple has effectively defended itself from bottom up competition twice before, Jones points out, with the iPod and iPhone. In the case of the iPod, it filled the bottom niche with the Nano and Shuffle. With the iPhone, Apple has been able to get the price down to $0 by continuing to sell the 3GS with its $400 price tag fully subsidized by the carriers.

So Jones has identified the three strategies that Apple has used to close the price umbrella in the past: 1) create a new product line 2) keep selling old hardware and 3) get someone else to subsidize the product. With the iPad, Apple has already played the old hardware card by selling the iPad 2 at $399. But the price umbrella is still open down to the $199 price of  the Google Nexus 7 and the Kindle Fire. It’s worth noting that Google makes exactly $0 on each Nexus 7 and Amazon loses money on each Fire.

The difference between the iPhone and the iPad, in terms of the third strategy, is that many iPads are sold WiFi only, without a data plan. In this way they more closely resemble the iPod Touch in terms of the price umbrella. So that really only leaves  Apple with the first strategy, creating a new product line.

Jones makes his point by charting every current model of iPhone, iPod, and iPad by price (see above). It’s a very compelling visualization because he lets the datamthe missing triangle in the iPad clustermmake his argument for him.

Beyond the questions of if and when is the question of what. In a post last week, I argued that the narrower 7″ form factor of the Nexus 7 and the Kindle Fire might be preferable in many use cases than the scaled down “iPad mini” that is being widely reported on. Apple wants to close the price umbrella while maintaining its dominant position. It may see the continuity with the larger iPad as important for brand identity and software compatibility.

But if the next iPhone is indeed an elongated version of the current 4S, then Apple could scale that form factor up like a super-sized iPod Touch and still maintain the connection to its existing product lines. If they go the way they are reported to be going and consumers turn out to want a $200 tablet they can grasp in one hand, Apple “iPad mini” may close the umbrella but get rained on by the more “handy” Android tablets.