CCS Insight: Apple responds to tablet challengers with iPad mini
Since Apple launched the original iPad in April 2010 it has succeeded in redefining a nascent product category. In doing so it has irreversibly transformed the computing landscape. Apple has shipped over 100 million iPads, established a catalogue of over 275,000 iPad applications and claims to have shipped more tablets in the second quarter of 2012 than PC shipments from any single manufacturer during the same period.
The iPad's strengths lie in its suitability for content consumption and its tight integration with Apple's content and service offerings. Emulating these strengths has proved an exceptionally high barrier for traditional hardware manufacturers wanting to enter the tablet market; most of them have failed to make any significant dent in Apple's market share. However, the competitive landscape is changing.
Reinforcing Apple's assertion of the importance of content to the iPad, Amazon and Google have focussed on the tablet opportunity and specifically on the highly portable, low-cost 7-inch segment. More importantly, Amazon's Kindle Fire and Google's Nexus 7 are underpinned by an increasingly sizeable and integrated catalogue of content, applications and services.
These devices have not achieved sales to rival Apple's iPad. We believe the Nexus 7 sold about 1.1 million units in the third quarter of 2012, despite selling out in its first quarter of availability. Nonetheless, the quality of keenly priced hardware alongside an increasingly attractive set of content, applications and services represents the first significant threat to Apple's dominance on the tablet market.
This new source of competition, starting at $159 for the Kindle Fire and $199 for the Nexus 7 and Kindle Fire HD, is in sharp contrast to the initial barrage of iPad contenders. Initially priced above the iPad despite lacking the same supporting content, they predictably struggled to find favour with consumers.
Amazon and Google have two main advantages. Firstly, they have created a clear breathing space at $199, significantly below Apple's $399 for the iPad 2. Secondly, they offer a richer product than the majority of more-expensive Android alternatives. This is especially true of Amazon's offerings.
Apple's iPad mini is a direct response to this new wave of competition in the seven-inch tablet category. Some commentators have questioned Apple's entry-level price of $329 for a 16 GB Wi-Fi-only variant — a significant $130 premium over the Nexus 7 or Kindle Fire HD. However, we believe the prices of the iPad mini can be justified for several reasons.
Most importantly, Apple's products continue to carry a substantial premium thanks to the combined strength of brand, hardware and the supporting content. Although competition is increasing, Apple remains the undisputed leader in this field, with products that people are prepared to pay more for. This, and the iPad mini's superior metal finish and thinner, lighter design than the Nexus 7 and Kindle Fire HD means Apple has created a new premium segment in the 7-to-8-inch tablet market.
Conversely, a $249 entry-level price for the iPad mini would have proved disadvantageous. Apple makes its profit from hardware. Such a low price would have unduly weakened margins and left Apple little room for manoeuvre when competition intensified. Prices can always be lowered, but it is very difficult to raise them.
Furthermore, a low entry-level price would have created a gulf between the cheapest iPad mini and the iPad 2 at $399 (see Figure 1). This could have dented sales of the larger device as buyers opted for the iPad mini, unable to justify spending a further $150 for comparable hardware with a 9.7-inch display. As it is, with the iPad mini starting at $329, the iPad 2 at $399 and the fourth-generation iPad at $499, Apple is intentionally creating less of a gap between variants. This makes the purchase decision less about price and more about utility, mobility and features.
Figure 1. Retail price comparison: Google, Amazon and Apple tablets, October 2012
Source: CCS Insight
The decision to replace the third-generation iPad after just six months may be proving highly unpopular with customers, but we believe it is a logical move in terms of Apple's portfolio. It enhances the value of its premium iPad at a time when it has to highlight a clear distinction from a device with a new low price of $329.
Furthermore, the changes to components in the iPhone 5, such as the Lightning connector and A6X processor, meant the flagship iPad could not wait another six months for an update. Similarly, with LTE deployments gathering pace, Apple had to ensure it increased support for the majority of the leading LTE bands. A new model was inevitable, despite the displeasure it was likely to cause among owners. Apple probably concluded that both product and brand are strong enough to overcome such short-term dissatisfaction.
With $99 undoubtedly the next target for Amazon and Google, the tablet segment is poised for further disruption in the coming months. However, we believe Apple has delivered a product at a price that enables the iPad mini to defend itself against rival products from Amazon and Google in the near term and exacerbate an already daunting challenge for Windows RT licensees.
In this context Apple is beginning to look like one of very few players in the mass-market tablet space that can successfully extract profit from hardware sales. Apple's dominance and the subsidy models pursued by others are set to further raise the barriers to entry.
Geoff Blaber joined CCS Insight in 2007 from IDC, where he established a reputation for informed qualitative analysis on industry dynamics, company strategies, product positioning and market forecasts. He is a well-known member of the analyst community and provides regular commentary to leading organisations such as Reuters, the Financial Times and the BBC. A longer version of this article was published as part of CCS Insight's Hotline service. For more information please see www.ccsinsight.com.