In the brief period between the weekend and the July 4 holiday, rumors swirled on Wall Street that Apple Inc. (AAPL) will release a smaller and lower priced iPad option around the end of the year, and probably in time to order for Christmas. In particular, the rumors and expectations indicate that the new model will be around seven inches, which is where most Google (GOOG) Android OS tablets are sized, compared to the current 9.7-inch iPad.
A smaller, cheaper iPad would be a sensible move, given the relative popularity of seven-inch Android OS tablets, including the Fire by Amazon.com (AMZN) and the numerous Galaxy tablet incarnations released by Samsung. Google also recently announced its own tablet, the Nexus 7, which will also have a seven-inch screen. At $199, both the Fire and the Nexus 7 are being priced well below the iPad. The current version of the iPad ranges in price from $499 to $829.
Apple still has a majority of the global tablet market, but competition is spreading, and especially at a lower price point. Not only are Android options growing, but Microsoft (MSFT) based tablets will also soon be on the market, including its own tablet called the Surface. While the Surface is sized similarly to the present iPad, other Windows-based tablets will likely follow, with some being sized at or near the seven-inch size.
Though Apple has found success in offering iPods in multiple sizes, it has remained reluctant to offer a smaller iPad. In October of 2010, as part of an earnings report conference call, Steve Jobs stated Apple's testing indicated that screens smaller than their 9.7-inch design would not be sufficient. In particular, Mr. Jobs noted:
The reason we wouldn't make a seven-inch tablet isn't because we don't want to hit a price point, it's because we don't think you can make a great tablet with a seven- inch screen. We think it's too small to express the software that people want to put on these things. And we think as a software driven company, we think about the software strategies first.
Touch-screens and screens generally are different from most other computer components. Most computer components become more expensive as they are miniaturized. The touch-screen is one of the costliest components in a tablet, if not the single most expensive, with the screen's price usually increasing in proportion to its size. Other factors will certainly affect the price of the touch-screen, including the image quality.
Since Apple's present iPad 3 offers both a larger screen and a higher resolution, with its Retina display branding, a smaller and possibly lower resolution display would likely be a much lower priced component for a smaller tablet. This would also allow Apple to then upgrade such a smaller tablet to a Retina display in a second model, or as a slightly more expensive option.
Even if Apple does offer a cheaper and smaller iPad, it may choose to price it above the Fire and Nexus 7. Apple likes to make a profit on its sales, and has a profit margin of between 30 and 40 percent on its iPads, depending upon the model. In contrast, Amazon.com's Fire is sold at a loss, with the company hoping to later make money on software and content sales as the company does via its less capable but popular Kindle e-reader. It is still unclear whether Google will make a profit, take a loss, or break even on sales of the Nexus 7. Google, too, is attempting to lock users into future content sales, through its Google Play site, as well as generating revenue through advertisements.
Beyond maintaining a healthy profit margin on its tablets, Apple also benefits from content sales after many hardware purchases, through their iTunes store. The rumor-mill believes that Apple will release the iPad mini around the end of the third quarter of 2012, or in about three to four months. If recent history is any indicator of the potential timetable, Apple launched pre-sales of the iPhone 4S model on October 4 of 2011.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.