Forget the high margins, Apple -- cut iPad Mini prices

Wake up, say analysts, the gravy train days are over; lower iPad prices are necessary to stay in the game

Apple sold 14% fewer iPads in the quarter that ended June 30 than during the same stretch in 2012, while the revenue it earned from those sales plummeted by 27%.

Analysts tied the decline in revenue to the iPad Mini, Apple's smaller, lower-priced tablet that has significantly cannibalized sales of the pricier, 9.7-in. original. But ironically, they urged Apple to reduce prices of the Mini even more.

"Tablets may not have fully saturated the market, but it's getting pretty cramped," Ezra Gottheil, an analyst with Technology Business Research, said in a Tuesday interview. "There's real competition for the iPad, real alternatives, and Apple has to deal with that."

To keep selling large numbers of iPads, keep the competition at bay and protect its ecosystem, Apple has to recognize that the gravy train days of outrageous margins are over, Gottheil added. Once it figures that out -- that there is a "new normal" -- it has to compete, if not head-to-head on price, at least in the same neighborhood.

"This is real life, you have to work for your sales, margins are tighter and there's lots of competition," said Gottheil. "If they would bring down the Mini to $249, they could do some really big numbers. That would be a really sweet tablet."

The iPad Mini now starts at $329 for a 16GB model, with prices climbing in $100 increments as the storage space doubles to 32GB, then again to 64GB.

Van Baker of Gartner seconded Gottheil on the price problem, but also noted that the surprisingly-sluggish sales were largely due to the lack of new products in Apple's line-up. Apple last updated the iPad in early November 2012, when it also began selling the iPad Mini.

"Their numbers [for the second quarter] show that Apple's model is driven by new stuff," said Baker. "There's always this thirst for something new."

Without that "new," Apple's sales inevitably stall, a trend seen not only in the iPad, but also in the iPhone -- where historically sales slip as the annual refresh approaches -- and on the Mac. Even Apple CEO Tim Cook acknowledged as much in Tuesday's call with Wall Street analysts.

But Apple has provided no hint, as is its practice, about when it will refresh the iPad family. The most recent rumors have pegged a new iPad for this fall, and a new Mini, perhaps one with a Retina-quality display, in early 2014.

Because Apple would probably retain the original iPad Mini, but drop its price, a tactic it already uses with the full-sized iPad as well as the iPhone, the natural moment for a price cut would be at the launch of a new model. Gottheil and Baker thought that would be too late.

"I don't think they can afford to not [cut prices]," Baker said.

The iPad's average selling price, or ASP, has been declining for two years as customers opt for less-expensive 9.7-in. models or, increasingly, the $329 iPad Mini. (Data: Apple.)

There's no question that dropping the Mini's price would reduce per-tablet revenue, accelerating the current decline.

Over the last 12 months, the iPad ASP, or "average selling price," has dropped 19%, from $538 a year ago to $436 in the most recent quarter. The largest quarter-over-quarter ASP slide since the iPad's 2010 introduction was an 8.1% plunge in the first quarter of this year, less than two months after the Mini reached retail.

That wasn't a coincidence.

"The consistent drop in ASP since the iPad Mini launch suggests that the sales mix has been shifting towards the iPad Mini, in other words that the sales of the full-size iPad have seen consistent sequential declines thanks to cannibalization," said Sameer Singh, an analyst who covers smartphones and tablets on his Tech-Thoughts blog.

That mix was recently analyzed by Consumer Intelligence Research Partners (CIRP), a Chicago-based firm that conducted a survey with Apple customers in the U.S. earlier this month. According to CIRP, the iPad Mini accounted for 33% of all iPads purchased between April and June. The rest were evenly split between the aged iPad 2, which Apple sells for $399, and the current-generation Retina-equipped 9.7-in. tablet that starts at $499.

With the exception of the iPad 2, the most popular models were the least-expensive, said CIRP, implying that Apple customers are no different than any other tablet maker's: They're sensitive to price.

Cutting the price may be a risk -- it would further depress ASPs and result in lower margins for Apple -- but the analysts agreed that it's a move the Cupertino, Calif. company should make if it wants to stay in the game as it faces ever-fiercer competition.

"They need to take big steps to show there's a difference between an iPad Mini and a Nexus 7," said Gottheil, referring to Google's flagship 7-in. tablet. Earlier today, Google unveiled the newest Nexus 7, and said the high-resolution tablet -- it uses a 1920 x 1200-pixel display, almost triple the pixel count of the Mini's 1024 X 768 screen -- would sell for $229 (16GB) and $269 (32GB).

"If Apple can come up with a Retina iPad Mini at $329, and can lower the price of the existing Mini to $249, and do that profitably, that's a killer," said Gottheil.

"Apple's margin declines are permanent," said Baker, echoing Gottheil in arguing that Apple must first acknowledge as much, then realize that cutting prices won't be its doom. "After all, they're so much better than anyone else in hardware, even now."

This article, Forget the high margins, Apple -- cut iPad Mini prices, was originally published at Computerworld.com.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

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This story, "Forget the high margins, Apple -- cut iPad Mini prices" was originally published by Computerworld.

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