No iPad Mini? No Problem!


Tech enthusiasts have expected for many months that Apple would announce new versions of its full-sized iPad and iPad Mini sometime in October. The rumor mill heated up this week, as AllThingsD -- usually a reliable source -- reported that Apple will unveil the new iPads on Oct. 22.

The original iPad Mini was released almost a year ago. Photo: Apple.

However, while most observers agree that the fifth-generation iPad will feature Apple's new A7 processor, a thinner bezel, and a design closer to the iPad Mini, there is much less certainty about what to expect in the iPad Mini 2. The AllThingsD story claims that the new iPad Mini will have a Retina display. On the other hand, several other recent reports have stated that Apple doesn't have enough supply of 7.9-inch Retina displays to meet the likely holiday quarter demand.

The good news is that I don't see much danger to Apple even if the new iPad Mini is delayed or in short supply this fall. The iPad Mini already has subpar margins by Apple's standards, and a version with a Retina display will be even costlier to produce. The continued rollout of Apple's new iPhones and the updated full-size iPad are far more important for driving higher profits at Apple this quarter.

Mixed supply-chain reports
The emerging consensus is that Apple will introduce an iPad Mini with a Retina display on Oct. 22. However, a Reuters report earlier this month stated that Apple wouldn't be able to build a Retina iPad Mini this quarter because of supply constraints for the screens. This report was corroborated by several other supply-chain sources.

It's hard to know whom to believe. Given the number of reports emerging this week about an imminent iPad Mini launch, the most likely scenario is that Apple will release a Retina iPad Mini, but it will be in short supply during the holiday season. That would essentially be a repeat of what happened last year.

iPad Mini blues
The iPad Mini came with great fanfare last year. Its smaller size and $329 price point were expected to help Apple win market share back from Google ,, Samsung, and other Android vendors.

In its first few months on the market, the iPad Mini was a big hit. It helped drive an impressive 48% increase in iPad unit shipments last fall, despite significant supply constraints, followed by a 65% increase in the March quarter. However, it went stale very quickly.

In fact, this spring, Apple experienced its first year-over-year decline in iPad shipments. (This was also due in part to launch timing.) According to IDC calculations, Apple's global tablet market share plummeted from more than 60% in Q2 2012 to 32.5% in Q2 2013, while Android's market share soared from 38% to 62.6%. The launch of Google's new Nexus 7 tablet this summer means that Apple probably lost even more market share in Q3.

However, these figures don't fully capture the disappointment the iPad Mini caused. Apple executives have repeatedly stated that the iPad Mini carries a gross margin significantly below the corporate average. It also carries a much lower average selling price than the full-sized iPad. When you factor in cannibalization of the more profitable full-sized iPad, it seems quite likely that the iPad Mini has been a primary cause of Apple's profit decline this year.

The good news
The good news for Apple investors is that because the iPad Mini isn't a significant contributor to the company's profit, it's not a big deal if the new iPad Mini is delayed or available only in limited quantities. A lot more is riding on the expected fifth-generation iPad.

The fourth-generation iPad is very similar to its predecessor. Photo: Apple.

Apple essentially punted on the design of the fourth-generation iPad. It included fairly modest improvements to the previous version, such as a faster processor, a better Wi-Fi chip, and an upgraded camera. As a result, Apple's top-of-the-line iPad today is not too different from the one it was selling 19 months ago. That's simply ages in technology time!

By contrast, the iPad 5 will probably boast significant design changes to make it thinner and lighter, and it will also have upgraded hardware. These design improvements may help the full-size iPad hold its own against the iPad Mini, which would benefit Apple's margins. It would also give Apple something to sell in case the iPad Mini is in short supply throughout the holiday season.

Foolish bottom line
While many customers are looking forward to getting an iPad Mini with a Retina display, the iPad Mini's relatively low gross margin means that this product may not add much to Apple's profit. In fact, if Apple can't make enough new iPad Minis to meet holiday demand, the company might be better off releasing the fifth-generation iPad by itself. That would allow it to make up for the likely lower sales volume with higher margins.

In any case, Apple derives most of its profit from the iPhone, and the early demand for that product has been very strong. Thus, investors shouldn't worry too much no matter what happens with the iPad Mini later this month.

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Fool contributor Adam Levine-Weinberg owns shares of Apple, is long January 2015 $390 calls on Apple, and is short shares of The Motley Fool recommends and owns shares of, Apple, 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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