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A little bit about me: I hold two US issued software patents and one issued internationally. I have 3+ decades experience as a software architect, and 14 years as an intellectual property researcher. I've delivered 1/2 a dozen shrink-wrap retail software packages to market. I spent 3 years at... More
  • Is Apple Cannibalizing Itself With The Mini? 11 comments
    Oct 10, 2012 1:53 PM | about stocks: AAPL

    I have to say that if Jaded is right and Apple is building mini iPads that "target aggressive price points difficult for competitors to profitably match", than Apple's making the most unimaginably bad move possible and at the worst possible time. http://seekingalpha.com/article/913761-apple-after-the-riot-shortage-strike-etc-still-a-buy#comment-10355231

    Let me explain. Jaded's "aggressive price points" I believe can be fairly interpreted as low margin devices. This a critical point.

    It is likely assumed that iPad mini sales will be in addition to existing iPad sales therefore adding to sales numbers and consequently growing margin.

    Wrong - it must be assumed that some percentage of low margin iPad minis will cannibalize the high margin iPad sales -- an Apple disaster.

    This is easy to imagine. Many people purchase Apple products for the name "Apple". What if I could get an "Apple iPad" for 1/2 the price? 1/3 the price? Would people still be lining up pay the premium high margin units? I think no, not all of the them anyway. If Jaded is right here I could see Apple cannibalizing anywhere from 15%-40% of iPad sales

    I walk into a store and see an New iPad for $459 and a mini for $199, then guess what. If it reads my books (it will), plays my music and movies (it will) lets me read my email and surf the web (it will,) then I'm buying the mini and Apple just lost a big margin sale.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: But if Apple does start cannibalizing iPad sales with a low margin iPad mini, I'm going short AAPL.

    Themes: iPad Mimi Stocks: AAPL
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Comments (11)
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  • pocohonta
    , contributor
    Comments (584) | Send Message
     
    The lowest priced new iPad 2 costs $399 while the new iPad costs $499. I'm pretty sure that the mini iPad will be priced above $200, but below $300 (ie. $249 or $299). I'm thinking it will start at $299 for higher margin.

     

    Most people won't ditch their iPad2 or new iPad3 just to get an iPad mini, but if someone is shopping for a smaller tablet and had to choose between the many sub-8" tablet, then these buyers won't buy the larger iPad2/3 anyway.

     

    So instead of Apple cannibalizing itself, it's cannibalizing its competitors. In fact, it is 'leaving money at the table' if it doesn't enter the mini tablet market.
    10 Oct 2012, 02:11 PM Reply Like
  • KIA Investment Research
    , contributor
    Comments (9021) | Send Message
     
    Author’s reply » Pocohonta,

     

    I didn't say people would ditch their iPad, I suggested new buyers would chose the lost cost mini over the higher cost new iPad.

     

    This choice will hurt Apple's bottom line.
    10 Oct 2012, 02:19 PM Reply Like
  • pocohonta
    , contributor
    Comments (584) | Send Message
     
    I agree that a buyer of the Apple iPad product will have to choose between mini and new iPad... but as long as they are 'brain-washed' enough to buy only Apple product (and not the Amazon/Samsung junk) then I'd say "let the cannibals choose" because either way, Apple makes money.
    Giving consumer choices will not hurt its bottom line and captures more consumer base.
    PS: people will buy the mini but when they realize that their eye sight is not as good as it were 40 years ago, they'll switch up : )
    10 Oct 2012, 06:20 PM Reply Like
  • Dialectical Materialist
    , contributor
    Comments (4458) | Send Message
     
    Luke, your argument appears sound on the surface, though it is predicated on two factors.

     

    1) To what extent will folks substitute the purchase of an iPad for an iPad mini?

     

    2) How low will the margin be?

     

    And I think you err on both of your assumptions. I think the percentage of folks who forgo the purchase of an iPad for an iPad mini is likely to be smaller than you think. This is for two reasons. The first is that some folks who already own an iPad will also be getting a mini. These sales would represent additional sales Apple would not otherwise see. There is a second group of folks who would never seriously consider an iPad but will buy a mini because of its attractive price point. These folks represent new sales that Apple would not otherwise see. In addition, some of the folks will get the bug and go on to buy additional Apple products they would not have bought otherwise, representing a further enhancement of Apple sales by some small percentage of iPad mini buyers.

     

    The third group fits into the category you describe -- lost sale of iPad for iPad mini. This group is not only just a fraction of total mini sales, but is offset by the two groups mentioned above.

     

    Point 2. Profit Margin.

     

    I think you underestimate the extent to which Apple will make this product affordable by making it affordable to produce. In other words design decisions such as low resolution screen, low memory, wi-fi only, may all factor in to make a device that is cheaper to mass produce than you suspect. The fact that Apple locks up huge supplies of components to drive costs down will help here as well. I have no doubt that the absolute profit on a mini will be less per device than an iPad and way less than the insanely profitable iPhone. But if they sell the mini at $240, to get a 30% profit margin they'd need to make it for $160. This would be similar to the new iPad. Even if it is a bit lower, I think you can see that the sales of the device could be way more profitable than you assume.

     

    The proof will be in the earnings reports over the next couple quarters.
    13 Oct 2012, 03:02 PM Reply Like
  • Dialectical Materialist
    , contributor
    Comments (4458) | Send Message
     
    Of course I meant buy a mini instead of an iPad, not the other way around.
    13 Oct 2012, 03:40 PM Reply Like
  • KIA Investment Research
    , contributor
    Comments (9021) | Send Message
     
    Author’s reply » Thanks DM, nice post.
    I have to believe Apple thought of this but I wanted to "say it out loud" just the same.
    13 Oct 2012, 10:17 PM Reply Like
  • Dialectical Materialist
    , contributor
    Comments (4458) | Send Message
     
    Luke, I was going to crunch some numbers in a comment just to drive the point home, but I was surprised that the numbers were not as convincing as I thought. If you assume 10 million people buy an iPad mini that might have bought an iPad and that their choice costs apple 100 dollars in profit per device, that's 1 billion in profit they'd need to recover. If the mini costs 300 and they have a 30% margin, they would make 100 per unit. In other words, they'd have to sell another 10 million mini's just to break even with what they would have had from the iPad sales.

     

    So I still don't think it will be a negative but it will be interesting to see how the numbers turn out to gage how much of a positive it is.

     

    Of course preventing a sale lost to kindle or nexus has a value all it's own as well. But I expected the numbers to be far more lopsided in favor of my opinion.
    13 Oct 2012, 11:12 PM Reply Like
  • KIA Investment Research
    , contributor
    Comments (9021) | Send Message
     
    Author’s reply » Thank you for your honesty and yes, this was my intuition.
    14 Oct 2012, 06:50 PM Reply Like
  • Dialectical Materialist
    , contributor
    Comments (4458) | Send Message
     
    As much as I like to root root root for the home team, I do try to view the financials in objective terms. It is what I think is an objective view of their near future financials that makes me such a bull (objective but with unavoidable assumptions of course).

     

    I think what we need to see here is exactly what function these mini's will serve. If they are not very good iPad substitutes than that will mitigate the lost sale problem. If they are just an enormous hit, then that will mitigate the lost sale problem, and if they are higher margin than people suspect, that will mitigate the lost sale problem.

     

    It is really just a situation that bears watching. There are two things that need to be considered, though. This product may allow them to go in a different direction with iPads than would otherwise be the case. In other words, the mini may become the "Air" common man's model and the iPad may become the "MB Pro" level high expense specialty item. This would allow them to get pretty aggressive with iPad specs and profit margin (i.e. higher prices) without losing the mass market.

     

    The second thing to consider is the extent to which iPods served as a gateway drug into the world of Apple. If they are positioning the mini to do this as well, then "lost sales" are perhaps only temporarily lost.

     

    The product, its margin, and its appeal will be very important to my take on whether Apple remains the money making machine I think it is now. If they appear to be botching this, it will say legions about what future they are headed to. But also if they seem to have a handle on it, it will provide evidence that they have the ship under control.
    14 Oct 2012, 08:18 PM Reply Like
  • Steve_S
    , contributor
    Comments (87) | Send Message
     
    Another way to look at this is to look at the iPod market. Did Apple cannibalize the iPod when they came out with the iPod mini/nano, etc.? Yes, of course they did, at least so some degree. Did Apple again cannibalize the iPod when they came out with the iPhone? Yes, of course they did. Apple reflects upon this proudly.

     

    Simply put, some companies are afraid to cannibalize their existing product lines. These companies are open (and in fact inviting) disruption. When you're not afraid to cannibalize your own product line, you end up competing much better in the long run. Crunching the numbers on the effects for the short term is meaningless. If the majority of the tablet market swings in another direction and you refuse to compete, you lose in a much bigger way.

     

    Apple has addressed the small tablet market in a reasonable way. No, they are not really cost competitive on a strictly hardware basis. However, I believe Apple knows they will sell a ton of minis, even at the $329 price. They keep the margin and will still lead in volume because of the greater iOS ecosystem.

     

    Anecdotally, my daughter wants an iPad. I wasn't going to buy her an iPad for the holidays. My wife asked her if she wanted a Kindle instead. She was considering it, but it's not what she really wanted. With the price of the mini, she'll end up getting one of those (as that's now her first choice). Had the mini not been introduced, her next choice was either going to be a newer iPod touch or possibly a kindle. In this particular case, there would not have been cannibalization on the iPad, but possibly cannibalization on the iPod Touch or potentially taking business away from Amazon.
    31 Oct 2012, 03:30 PM Reply Like
  • KIA Investment Research
    , contributor
    Comments (9021) | Send Message
     
    Author’s reply » Excellent post Steve, thank you.
    31 Oct 2012, 03:57 PM Reply Like
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