Apple Inc is expected to make its biggest product move on Tuesday since debuting
the iPad two
years ago, launching a smaller, cheaper tablet into a market staked out by
Amazon.com Inc and Google Inc.
Apple hopes to beat back their charge onto its home turf of consumer
electronics hardware, while safeguarding its lead in the larger 10-inch tablet
space that even deep-pocketed rivals like Samsung Electronics have found tough
to penetrate.
Amazon’s Kindle and Google’s Nexus 7 have grabbed a chunk of the lower end of
the tablet market and proved demand for a pocket-sized slate exists, helping
force Apple into a space it has avoided and at times derided, analysts
say.
A smaller tablet would mark the first device to be added to Apple’s compact
portfolio under chief executive Tim Cook, who took over from co-founder Steve
Jobs just before his death.
“Apple sensed early that they had a real winner with the iPad and that has
proven to be correct,” said Lars Albright, co-founder of mobile advertising
startup SessionM and a former Apple ad executive.
“They have a large market share, and to protect that market share they have
got to be innovative,” he said.
Wall Street analysts have said for months that Apple was planning a less
expensive version of the iPad to take on cheaper competing devices, a move they
say might hurt its margins, but prevent its rivals from dominating an
increasingly important segment.
The chief rival is Amazon, which proved a 7-inch tablet at around $200 has
consumer appeal. The Kindle Fire, released last year for $199, was one of the
hottest-selling holiday gadgets. It pressured Amazon’s margins but gave it
potentially millions of new high-spending customers.
Amazon sold more than a million Kindles a week during December, paving the
way for others like Google with its Nexus 7 to try and beat Apple in a market
the company created.
The Internet retailer has now put its second-generation Kindle Fire HD in the
market, which it says is the “best-selling product across all of Amazon
worldwide”, based on undisclosed US sales figures and international
preorders.
Google’s Nexus 7 tablet, built by Asian manufacturer Asustek, quickly ran out
of stock after its July launch.
All three companies will be vying to get their devices on shopping lists
during the US holiday season, which traditionally starts next month.
“It’s going to be the go-to holiday gift,” said Michael Yoshikami, founder of
Destination Wealth Management, which owns Apple shares.
Apple now has just one 9.7-inch iPad, starting at $499. The previous version,
or iPad 2, is available for $399.
Jobs famously derided the 7-inch screen, saying such a device should come
with sandpaper so users can file down their fingers. But an internal email
revealed during a patent trial showed he turned more favorable to the idea by
early 2011.
Apple has sold over 84 million iPads so far, with the device accounting for
26 percent of Apple’s fiscal third quarter revenue. Most Wall Street analysts
expect Apple’s new tablet to fall between 7 inches and 8 inches in size, saying
its price will be crucial to its success.
The “starting sweet spot” for the tablet would be in the $249-$299 range,
according to a survey of over a thousand consumers by Baird Equity
Research.
“When asked what the most they would pay for a smaller iPad was, our
respondents on average said that they would pay $242 for a 7-inch iPad and $268
for an 8-inch iPad,” William Power, Baird Equity Research analyst,
said.
Any erosion in Apple’s industry leading margins also hinges on the price tag.
It earned gross margins of 23 percent to 32 percent on US iPad sales between
October 2010 and the end of March 2012, according to a July court filing by
Apple.
Rivals haven’t fared as well. Amazon’s first Kindle Fire just about breaks
even, according to IHS iSuppli estimates, and Google has said its Nexus 7 is
being sold at cost.
Topeka Capital’s Brian White argued a smaller tablet could overtake sales of
the iPad in a few years. He is forecasting sales of 5-7 million in
the December quarter.
Apple shares rose 4 percent on Monday, buoying the benchmark S&P 500
index. While the stock is up 56 percent this year, it is currently down 10
percent from its record high of $705 on September 21, struck by concerns about
iPhone-supply disruption at contract manufacturer, Foxconn Technology. Sharp
criticism about errors in its Maps service also hurt.
“Apple’s stock is up a ton and it is only logical that it will take a
breather after a while,” Yoshikami said. “I don’t think there is any fundamental
issue beyond that.”
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