Pricing rumors swirl for iPad mini

iPad mini pricing still up for debate

On the eve of Apple's expected announcement tomorrow of a smaller iPad, there's still a lot of uncertainty and intense debate over its price.

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Analysts have projected prices starting prices for the "iPad mini" or "iPad Air" to range from $250 to just over $349 or even more, depending on the storage and connectivity options offered by Apple. The debate is over how Apple will "fit" the small iPad, which is thought to have a 7.8-inch screen, into the pricing structure of its current iPod touch, iPhone 5, new iPad and iPad 2.

A price tag of $329 was named over the weekend by Mark Gurman, writing for 9to5Mac and citing unidentified sources for that price. That number would position the smaller tablet between the new base-model iPod touch at $299 and the low end of the full-size iPad line, the Wi-Fi-only, 16GB iPad 2 at $399. Apple will offer two higher-capacity versions, both Wi-Fi only, "likely" priced at $429 and $529, according to Gurman.

That's more expensive than some, such as Apple watcher John Gruber, expected. "Curious too that none of the prices, for Wi-Fi-only or cellular models, land on "even" $X99 or $X49 numbers -- these prices would look a lot nicer if they were each $30 less," he writes in his DaringFireball blog.

Apple has a lot of options to play around with to control its manufacturing costs, or the "bill of materials" (BOM) and hence, both the final retail price and its all-important margins. The small iPad could start with just 8GB of storage; or opt for a less expensive touch screen that doesn't offer the high pixel density, and image quality, of its Retina display technology, as Gruber has speculated. Others have said that Apple won't offer cellular as an option.

Here's how Apple's current product pricing breaks down:

new iPod touch: Wi-Fi only 32 GB, $299; 64 GB, $399

iPhone 5 (with 2-year contract): 16 GB, $199; 32 GB, $299; 64 GB $399

new iPad: Wi-Fi only: 16 GB, $499; 32 GB, $599; 64 GB, $699; with cellular: 16 GB, $629; 32 GB, $729; 64 GB, $829

iPad 2: Wi-Fi 16 GB, $399; with cellular 16 GB, $529

Some have argued that this product matrix leaves no room for a small iPad, which "ideally" has to be priced at $299, given the pricing for iPad 2 and the new iPad.

But the key issue is how potential buyers see a small iPad in relationship to other Apple products, or possibly to rival products.

"Since the use cases of 7-inch tablets and media players [like iPod touch] are different, we're essentially looking at two different markets," says Sameer Singh, founder of Tech-Thoughts, and an analyst with Finvista Advisors, a mergers and acquisitions consulting firm based in India.

Singh predicted in August an iPad mini starting price of $299 based on his estimates of a bill of materials for the smaller tablet, based on what we know about the current full-size iPad.

[Another recent BOM analysis, by Ming-Chi Kuo of KGI Securities as reported by AppleInsider, had a very similar BOM total starting at $195 and a starting retail price matching Singh's at $299. Both see Apple continuing to accept lower margins on its tablet line compared to the iPhone.]

"I really doubt an iPad mini buyer would consider substituting it with an iPod touch or vice versa," Singh says. "My guess is that when consumers are making a buying decision, the natural impulse is to compare products competing in the same category.

"For example, I haven't seen anyone question why most tablets are cheaper than unsubsidized high end smartphones," Singh says. "It's because consumers are comparing prices of, say the [Samsung] Galaxy S III versus an iPhone and not an iPad versus an iPhone."

Looking only at the range of all Apple price points is misleading he suggests because the key is how the pricing of each product category is structured.

Singh is sticking by his prediction that the small iPad will have a starting price of $299, though he now says he's somewhat less certain about that. Apple could be more aggressive with a price closer to $250.

DaringFireball's Gruber has followed a similar argument: The iPod touch pricing, at $299, is not Apple's frame of reference for pricing a small iPad. "Don't worry about comparing the price of the new smaller iPad to the iPod Touch," he writes in a blog post last week. "It's a different category. Compare it to the price of competing tablets and to the regular iPad. That's all that matters."

The key difference is between the iPod touch and the small iPad is the former is miniaturized. "It's true that smaller generally implies cheaper, but miniature carries a premium," Gruber argues. "The 13-inch MacBook Pro is smaller than the 15, and thus cheaper. ... But the iPod Touch isn't just smaller than the iPad -- it's miniature. Gadget prices tend to follow a U-shaped curve: big is expensive, small is cheap, miniature is expensive."

If you include Apple's fourth-generation iPod touch into the product matrix, you can see a clear, almost precise progression in price across the touch, iPhone, iPad and possible small iPad product lines, as in this chart prepared by Horace Dediu, founder of Asymco. [At this writing, the Asymco site was offline, and the link is to an Apple 2.0 blog post at Fortune, by Philip Elmer-DeWitt. His full post is online.] 

John Cox covers wireless networking and mobile computing for Network World. Twitter: http://twitter.com/johnwcoxnwwEmail: john_cox@nww.com

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