$329 - why it works

Last summer I wrote a post explaining why an iPad Mini made sense, and while that article had its detractors, I was happy to offer a forum for us "common-sense, less excitable Apple fans," ha, to talk about why we wanted that option.

Now we have the Mini, so the detractors need something new to gripe about. 'Cause, you know, if you really love Apple you need to balance praising them with screaming your head off about everything you dislike. Some will move on to complaining about Apple's apparent problem with anorexia, made evident by their thinness obsession on the new iMac. Others are still cradled in the fetal position, laughing deliriously with glee that the iPhone puts a purple tinge on direct photos of the sun. But I wager that most iPad Mini haters will go directly from hating the concept of the Mini to hating the device itself. Makes sense - they staked a lot of ego on this thing never being released, and like a US President who's haplessly waded into a war in Southeast Asia, they need to stay the course regardless of logic or reason.

The top complaint, at least until they discover that this device also produces sucky photos when you're a sucky photographer, is price. You can just picture all those Mac-fanatic faces going red when Apple announced that the Mini would start at $329. "But the GUI, and GPU, and K-RAM, and frazz-o-dialators! It's worth $250, tops! Apple's gonna burn! Argh, we're all gonna die!" We have to expect that replica Nero fiddle sales soared Tuesday afternoon.

Here in the real world, where consumers like decent products and shareholders like sales, $329 sounds about right. Three out of the four business analysts I follow agree, with the fourth saying he wanted something within $50 of the Kindle HD. As someone who's worked in marketing and finance for many years, and as an Apple shareholder, I'm happy with the pricing decision. Here are a few reasons why:

Gotta make the margin. The teardown on iPad gens 1-3 indicated an Apple profit margin of about $100 per device. To stay in line with this, the Mini had to be priced up in that $300 range. If Apple wanted a $200 device, they would have needed to do one of two things.

First, they could have sacrificed quality, using the sort of plastic casings and lower-end parts you find on the budget tablets. Is this really what we want? Imagine an Apple Store with these beautiful, high-end products...then this one el cheapo device sitting in the corner. Tell me the Apple community wouldn't be forming angry mobs and investing in torches if this had happened.

Secondly, they might have sold the thing at cost, like Amazon reportedly does. I'm sure a lot of the price-gripers will clamor for this, but it's not really an "Apple thing to do." Selling at cost means that you have to make your profit elsewhere, which means a company has to be pushy with upgrades and apps. Just glancing at a Kindle sets it to buying e-books in the Amazon store, or so I've heard. Seriously, though, consider this - If you currently have an iPad, how many paid apps do you have installed? What's the average for a casual user? An at-cost Mini would mean Apple needs to sell the average iPad owner $200 more in apps (to make back the margin and pay developers their share). So low software prices - something that has been a HUGE benefit in the iOS environment - would need to go up. And by a lot - spreading $200 in profits out over apps, books, movies and music would require a pretty noticeable price hike. Of course, anyone reading this would also probably wind up paying way more than most users. If you're on this site, you're likely a heavy user who invests in more apps. A price hike intended to offset cheap minis would affect you disproportionately. The average Mini user will now pay an extra $1 for their e-book of The Hunger Games - you're going to pay way more for the 100 games, tools and productivity apps you use your iPad for. And this is something about Apple that the complainers are maybe not appreciating enough. They like to call Apple "greedy," but they're really pretty laid back. If you buy an iPad, they've made their money, they don't have to upsell you. There's no pressure to spend money in the App Store, just a friendly reminder you have that option if you want to expand your experience. If you want to see pushy, open a $100 Chase checking account and get ready for 10,000 letters, emails and marketing calls over the next year.

The perceived value of an Apple product is higher. Apple is a luxury brand, and as such their products fetch a higher price. Louis Vutton cost more than Sears, it just does and always will. Call it a "coolness factor," the "neat-o effect," or whatever...Apple products are hip, so they're perceived as worth more. I have to ask - if you're reading this, are all your clothes from Ross and your food from the expired meat bin at the dollar store? (ha, expired meat) Or like most people, do you pay a little more, sometimes even when there's no rational reason to? That's what I thought. So when Apple decides to sell a $329 iPad Mini in their sleek, super-cool stores rather than a $200 Mini down at Uncle Lenny's Discount Electronic Emporium and Fish Tank Supply, I'm kinda glad about that. As a luxury brand, Apple works.

BMWs are better than Fords. I gotta be honest - I put the second point above just to stir up some controversy. A lot of people will gripe about the idea of paying more for Apple products just because they're hip (then, of course, they sign their post with a brag list of Apple they own). But what we sometimes forget is that there is also a direct value to owning Apple over others. Apple products aren't just cooler - they're better. They are the BMW of the computer industry, and the iPad Mini is their 3 Series. Like BMW, Apple is betting that the actual, quantifiable value will prompt consumers to spend a little more, opting for an iPad Mini or BMW 328i over a Kindle Fire or Ford Taurus.

This value comes in many forms, and sometimes this isn't a spendier retina display. The Apple Stores and their Genius Bars add MASSIVE value to owning Apple, especially for the consumers the iPad mini is aimed at. The first generation of tablet owners were mostly "computer literates," people who know about RAM and display resolution and device syncing. The next generation will be people who see how awesome these devices are and want to enjoy the benefits, but might not know how to proceed if they hit a stumbling block. This might be a wifi antenna going bad (the only Apple defect I've experienced personally amongst the 25+ devices I've owned...on a gen 1 iPod touch) or it might be something as simple as not knowing how to put your copy of The Hunger Games on your device (yes, I'm being paid to endorse The Hunger Games). What do you get with Kindle ownership? You can call India for tech support (maybe) or you can wade through online forums looking for answers. And hey...I'm personally good at wading. But my mom isn't, and when she encounters a question about her iPad, she's really going to appreciate that she can stop by the Genius Bar on her next visit to the mall to ask questions. For free, I might add. Happy, cute, friendly computer nerds at your disposal.

And that's just added value in the form of the Genius Bar. The devices themselves are made better, with lower failure rates than the competition. Apple products are worth more - but don't take my opinion as fact. Let's look at the market, the ultimate "value decider." If I take a look at amazon, my $499 gen 3 iPad would sell "like new" for $385. So I've lost about 23% of my initial cost over the last year. Keep in mind - today will represent a bottom for used iPad values, as the market is flooded with eager upgraders willing to take a loss. They'll bump up next month...I have a lot of experience selling used iPads. Regardless, let's look at last fall's Kindle HD. That sold for $200 and I can get a "like new" used one for...$82. That's a 61% decline in value over the same period. So here we have a good basis for making some estimates. A $329 Mini bought today will possibly sell used for $253 next year. A Kindle bought today will go for $82. These devices cost you $76 and $118 to own for one year, respectively. Still don't see the added value of Apple? Because the math is pretty clear.

One last thing: if you're reading this, and if you get the "one last thing" joke, Apple would love it if you bought an iPad Mini, but it's really not aimed at you. Let's face it, Macrumor readers are mostly going to want the latest and greatest. I do, and I'm checking the Apple Store every four hours to see if they've posted the cost of putting that neat-o fusion drive on a 27" iMac, ha. So you're probably going to want the big, beautiful retina display on the larger iPad, and you might even be thinking that you HAVE to ditch your perfectly good iPad 3 for that cool new iPad 4. Let's face it, Apple had us at "say hello to iPad 4."

The iPad Mini is aimed at a totally different market. Last Christmas, about 25% of total US tablet shares went to "budget" 7" tablets, largely the Kindle. The market data are pretty clear - this was due mostly to price. For many, many, many consumers, $500 is just too much - forget retina and genius and the cloud. Apple lost these sales - literally millions of units - because Apple products were too expensive. The Mini doesn't close the price gap, but it sure as heck bridges it, dropping it from $300 to $129 - and without sacrificing quality. That's Apple's message, loud and clear - the Mini is every bit an iPad, so much so that you're going to be willing to pay a little more for it than a plastic, generic tablet. Some customers won't, of course, but Apple's bet is that a huge number of people who in 2011 said, "sheesh...$300 to move up from a Kindle to an iPad? I wish I could...those iPads look so cool...but I just can't do it," are going to go shopping this Christmas and say, "okay...this new iPad is $129 more, but man they're cool...and I hear Apple stuff is the best. It has that Apple Care, and if I have questions I can just make an appointment with one of their Geniuses. You know what...that's totally worth it."

I tend to agree with Apple. I know many of you want Apple to give their stuff away for free, and you think that not doing so is somehow going to bankrupt the company. But I think $329 is a pretty fair price, and I think we're going to see Amazon and Samsung take a huge hit to their 7" tablet market share this Christmas. At $329, the iPad Mini is the right price - and the right size - to fit into a heck of a lot of Christmas stockings.

 

Fortunately, my statement takes so few risks that I'll look right no matter what the post-Xmas sales figures return. Amazon and Samsung have already seen a huge hit to their market share - Kindle HD did great last Christmas and then sales plummeted (I'm not saying anything about that device...those are just the sales figures). See Forbes, may 2012. 2011Q4 Kindle sales gave Amazon 17% US tablet marketshare. By end of 2012Q1, sales had declines 400%, dropping Amazon market share to under 4% So if Apple sells one Mini my statement will still be semi-accurate. Apple had dropped to 55% share, but rose back to 68% when Kindle sales dwindled.

But to make it totally accurate - what would we define as a "huge hit" going forward? Based on growth models, budget tablets should sell about 5 million units this Christmas. If Apple maintains 68% share for expensive tablets, I'd set the figures at:

Apple capture:
20% budget tablet sales (1.25 million units) - a pretty huge hit
33% - ouch, hurts to be Amazon/Samsung
50% - a bloodbath, Apple's release of iPad mini looks brilliant
68% - a bloodbath, with a subsequent thwomping. Apple set to continue dominating tablet markets worldwide for the next decade.