The Apple @ The Fool

Honey, Apple Shrank the iPad!

By Evan Niu, CFA | More Articles 
October 23, 2012 | Comments (16)

Where's Rick Moranis when you need him?

As expected, Apple (Nasdaq: AAPL  ) has indeed shrunk the iPad, officially unveiling the iPad mini today. This comes after months of speculation that Apple would enter the small-tablet market, after rivals like Amazon.com (Nasdaq: AMZN  ) and Google (Nasdaq: GOOG  )were enjoying early success with their respective Kindle Fire and Nexus 7 devices.

Look out below!The iPad mini is slightly larger than its rivals, featuring a 7.9-inch display. That was mostly in-line with expectations. The new device carries a dual-core A5 processor, likely the exact same one powering the older iPad 2. It also takes design cues from the newly released iPod touch.

Source: Apple.

In order to preserve app compatibility and alleviate fears of fragmentation, the iPad mini carries the same resolution as the iPad 2 of 1,024 x 768, meaning all existing apps will work immediately with no developer effort required to reoptimize their apps.

The biggest unknown up until now has been where Apple would price the device. It will start at $329 for a 16 GB model, and in characteristic Apple pricing fashion, adding $100 increments doubles storage up to a maximum of 64 GB. Consumers looking for 4G LTE connectivity will have to fork over another $130 premium. That means a fully loaded iPad mini will set buyers back by $659, which is almost exactly at the middle of the full-size model's pricing spectrum ($664).

Investors are clearly disappointed with the competitiveness of this pricing strategy, as shares promptly dipped upon this news. For comparison, a 16 GB Kindle Fire HD costs $199 and a 16 GB Nexus 7 costs $249, so Apple's premium over comparable tablets ranges from $80 to $130.

The "new iPad" ain't so new anymoreApple also departed from its annual product cycle and even updated the 9.7-inch iPad to a fourth-generation model. At the same time, the company has now rebranded the device, which is no longer called the "new iPad" and simply the "iPad with Retina display." The updated model carries a faster A6X chip that boasts double the performance in both the CPU and GPU.

Considering the custom-built A6 found in the iPhone 5, it's highly likely that this A6X chip has increased in sophistication and the "X" refers to additional GPU cores to power the Retina display. It also now sports the new Lightning connector, and expanded support for international 4G LTE frequency bands. The fourth-generation iPad is also getting more LTE support stateside, as Sprint Nextel (NYSE: S  ) is now a carrier partner for both the fourth-generation iPad and the iPad mini, joining its larger rivals AT&T (NYSE: T  ) and Verizon(NYSE: VZ  ) .

This may be particularly frustrating for early adopters of the third-generation model, who probably expected an update wouldn't occur until next spring, even though the upgrades were relatively incremental.

Raining on Mr. SoftyPre-orders for the device begin on Oct. 26, which happens to be the same day that Microsoft(Nasdaq: MSFT  ) officially launches Windows 8 and its own Surface RT tablet to the masses. That could put potentially dampen Mr. Softy's party, which is its biggest product launch in years.

The fourth-generation iPad will also put more pressure on Surface RT in the full-size tablet market. The iPad mini officially launches on Nov. 2.

It's alive!Contrary to popular belief, Apple chose not to kill off the iPad 2, keeping it on tap at the $399 price point. By pricing at $329, the iPad mini sits between the smaller iPod touch and the larger iPads. That leaves a slew of configurations that consumers will have to wade through, potentially a daunting task. This is now Apple's iOS lineup in the $300 to $500 range.

Product	Display Size	Storage	Price
iPod touch	4-inch	32 GB	$299
iPad mini	7.9-inch	16 GB	$329
iPod touch	4-inch	64 GB	$399
iPad 2	9.7-inch	16 GB	$399
iPad mini	7.9-inch	32 GB	$429
iPad with Retina display	9.7-inch	16 GB	$499
iPad mini	7.9-inch	64 GB	$529

Source: Apple.

That's a strong lineup heading into the holiday shopping season, even if it's a little intimidating to sift through.

Back to the MacApple also unveiled new Macs, bringing the latest Intel (Nasdaq: INTC  ) Ivy Bridge andNVIDIA (Nasdaq: NVDA  ) Kepler chips to the rest of its lineup. The Mac mini saw incremental internal improvements, while the iMac saw a dramatic redesign that slims down Apple's popular all-in-one.

The Mac maker also unveiled a new 13-inch MacBook Pro with Retina display. Ivy Bridge chips are now present throughout all Macs except the neglected Mac Pro, and any models that utilize discrete GPUs use Kepler GPUs.

Dilemma solvedPreliminary estimates put the entry-level iPad mini's bill of materials, or BOM, at around $195, representing a solid gross margin of 41% at its $329 retail price. Unlike its e-tail and search giant rivals, we knew Apple would seek a healthy margin on the hardware. That's an even higher gross margin than Apple earns on the third-generation model, which carries an entry-level BOM of $316 for a 37% gross margin.

While the iPad mini tells us a lot about how Apple approaches the Innovator's Dilemma with its propensity for self-disruption, it sure helps when you're moving down-market to a product withhigher gross margins.

If Apple was scared of Amazon's aggressive lineup before, then the tables should now be turned and the e-tail giant should be downright terrified.