Why Is the iPad Mini So Expensive?


Apple (NAS: AAPL) just introduced the iPad Mini. It's essentially an 8-inch version of the 10-inch iPad 2, built around the same Apple A5 processor and sporting exactly the same number of pixels on a smaller screen.

The Mini is also 18% cheaper than the iPad 2, which Apple still sells as an affordable alternative to the premium-priced iPad 3. So is the iPad Mini priced to move? After all, you can get a Google (NAS: GOOG) Nexus 7 tablet or an Amazon.com (NAS: AMZN) Kindle Fire HD for just $199 -- a 40% discount to the Mini's $329 starting price. That kind of price difference seems hard to justify if the devices are comparable at all.

Apple's top brass would certainly argue that the Mini deserves a premium price tag. Marketing chief Phil Schiller highlighted the discount you'd get when comparing the Mini with other iPads: "The most affordable product we've made so far was $399 and people were choosing that" over cheaper products from other companies, he said. This model is cheaper than other iPads, but it's still a gosh-darn iPad, and "I think a lot of customers are going to be very excited about that," Schiller said.

CEO Tim Cook sticks to the same script. The Mini combines "the full iPad experience" with a lower price point and should be a guaranteed home run.

They may be right, and the iPad Mini could turn out to be the latest money-printing machine in Cupertino's growing garage. It would certainly be a shame if Cook and Schiller didn't think the product was brilliant, since it's their job to make you feel that way, too.

The upside
So what would it take to prove the Apple executives right? I've come up with a few factors that may have influenced the pricing decision and that would make a ton of sense once all the facts are in hand.

Rumor has it that Apple is having trouble securing enough parts to build the customary untold millions of units. In particular, AU Optronics (NYS: AUO) , LG Display (NYS: LPL) , and Sharp are struggling to make enough Mini screens to feed launch-day demands.

If so, it makes perfect sense to set the price so high that only the most devoted of Apple fans would consider it: The company can surely sell through a limited supply of this long-rumored product very quickly and then let the supply side hang-ups keep retail-level demand artificially high for a while.

When the parts people sort through their issues a few months later, Apple can introduce an updated version with premium features to match the $329 price tag -- and drop the suddenly not-so-luxurious original model into direct price competition with the Nexuses and Kindle Fires out there.

Keep the early adopters happy, feed the Apple mystique with constant sell-outs, and collect inflated sales all along. And then you drop the hammer down when a better model is ready for action. The best of both worlds!

The downside
But the strategy could backfire, too.

Schiller already admitted that profit margins on the Mini are low by Apple's standards. If the company settled on this price only because it couldn't stand the thought of going any lower, I think Mssrs. Schiller and Cook are in for a rude surprise. The iPad Mini may (or may not) be better than the competition and objectively worth a little bit more -- but probably not 65% more.

And as PCMag's John Dvorak puts it, Apple could be making a huge mistake by inviting apples-to-apples comparisons with the competition:

Apple will not win all of these showdowns. And worse, there are some appealing programs that only work on the Android. These would only be discovered during a comparison.

This is a loser of a situation for Apple. To make matters worse, once people start comparing the iPad Mini to other 7-inch tablets rather than just buying from Apple, no matter what, they will continue to compare other products such as the iPhone.

Red alert! What if Apple just gave its loyal fans reason to find out that the competition's products might not be all that bad -- and that Apple's goods just might be a tad overpriced?

Apple could have basically killed all other medium-sized tablets and grabbed the whole market for itself, but it decided to skip that step and just proceed as if it had won already. And by doing so, it may have undermined the iPhone and full-sized iPad cash cows as well. That would be a steep price to pay for protecting the profit margins on a low-volume product at the lower end of Apple's price and profitability range.

Tim Cook likes to say that the iPad owns the tablet market today, but then he's ignoring the fact that he's losing market share to the Android army. According to a brand-new report from research firm Strategy Analytics, Android tablets now account for 41% of the global tablet market. That's not something you can ignore.

Apple will either come out looking brilliant or batty when history fills in the holes in the iPad Mini saga. To stay relevant, Apple is going to need to remain vigilant and adjust its designs to meet consumers' needs. In our latest premium research report, our analysts have dissected the tech giant from every angle, giving you the opportunities and pitfalls that Apple will face. For less than a week's worth of coffee, you, too, can gain an investing edge. Click here to get this premium report on Apple.

The article Why Is the iPad Mini So Expensive? originally appeared on Fool.com.

Fool contributor Anders Bylund owns shares of Google. Check out Anders' bio and holdings, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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