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Apple has big ambitions for tablet sales with iPad Mini

Apple is counting on the $249 iPad Mini to draw you into its stores. But it's hoping you end up buying a $499 iPad Air instead.

Phil Schiller, Apple's head of marketing, briefly talked about the iPad Mini 3 on Thursday. Screenshot by CNET

Apple usually looks to its next new thing to drive sales. In the case of the iPad, it's counting on the 2-year-old iPad Mini, now selling for just $249, to draw you into its stores -- and convince you to buy a more expensive iPad instead.

The Cupertino, Calif.-based consumer-electronics giant unveiled on Thursday new designs of its tablets -- the iPad Air 2 and the iPad Mini 3 . But the company also said it would continue to sell its first iPad Mini for $50 less than before. The 7.9-inch device, introduced in late 2012, now becomes the cheapest tablet Apple has ever offered, at $249 with 16 gigabytes of storage. The 9.7-inch iPad Air 2 starts at $499 for the same amount of storage, while the iPad Mini 3, the latest design in the 7.9-inch line, is $399.

Apple has never been the low-cost player. Its devices, from the iPhone to the iMac desktop computer, carry premium price tags. And the company has long vowed to remain that way, putting its focus on protecting profitability rather than expanding its market share. But Apple is facing sales slowdowns in the tablet market that have caused it to expand its iPad line by offering an older product at a lower price.

Apple still may not be the "value" provider, but it's sure getting closer.

"For somebody that is looking for something very affordable, there's something," Apple CEO Tim Cook told CNET News after Thursday's product debut in Cupertino. "For somebody who's going to spend a bit more, you can get an iMac with a beautiful Retina display [for $2,500]."

For the past several years, Apple kept its year-old mobile devices on the market and sold them for about $100 less than the newer versions. The iPad Air, released a year ago, now starts at $399, for instance. The iPhone 5S,released in 2013, starts at $99 while this year's iPhone 6 is priced starting at $199.

Apple continued selling the iPad 2 for three years after it was unveiled in March 2011. But keeping the original iPad Mini is the first time Apple has offered five different iPad variants in its lineup instead of four.

Apple jumping into the low-cost battle

Apple's iPads remain the world's best-selling tablets, but people just aren't buying as many tablets anymore. Large-screen smartphones -- including the 4.7-inch iPhone 6 and 5.5-inch iPhone 6 Plus -- are eating away at the need for a tablet. And the iPad's design hasn't radically changed since former Apple CEO Steve Jobs introduced the device in 2010.

Unlike smartphones, which get replaced every two years or less, consumers are happy holding on to their iPads for much longer or passing their older devices to family members.

As if that weren't enough, almost everyone who wants a tablet in mature markets such as North America already has one. Kantar Worldpanel, which conducted a survey of 20,000 consumers in the US, found that only 3 percent of non-tablet owners said they definitely plan to buy a tablet in the next 12 months. Another 10 percent said they would probably buy one. But 43 percent said no.

And many people seeking out new tablets are opting for cheaper ones, such as Amazon's $200 devices and similarly priced Google Android devices.

Apple's solution? Drop the price of the Mini to get more people interested. It may be easier to talk yourself into spending $250 on a tablet than $300 or $500. That's part of the reason Amazon's Kindle Fire tablets, initially priced at $199, were popular when they hit the market. Apple can now get people in the door with its $249 iPad Mini, but analysts expect that many people will consider dropping $50 or $100 more for a better iPad.

"There is a psychology in how the consumer moves up that staircase," IHS analyst Rhoda Alexander said. "'If I'm going to get this, why don't I get this?' As long as you have enough steps there, you have a much more complete series line."

Apple saw the same thing happen when it introduced the iPhone 5S and iPhone 5C last year. The iPhone 5S, with high-end specs and a TouchID fingerprint sensor, started at $199, while the 5C -- essentially 2012's iPhone 5 in a colorful, plastic casing -- was priced $100 less. Unfortunately, few people actually bought the 5C, Cook admitted during Apple's earnings call in January. At the time, he attributed that to people being interested in TouchID and other features unique to the 5S.

Consumers looking for better iPad features undoubtedly will have to shell out for pricier devices. The original iPad Mini is the only tablet in Apple's current mobile lineup that doesn't have a high-definition Retina display. And if consumers want to use services such as Apple Pay, they'll need to pony up for the latest iPad Air 2 or the iPad Mini 3, the only tablets that support the new payment technology.

The $249 price-point also may appeal to people in developing markets, but many in places such as China typically aren't happy buying outdated devices. If they're buying a smartphone or tablet, they want the newest products available.

35 seconds on the iPad Mini 3

The iPad Mini 3 seemed little more than a footnote at Thursday's product launch. Phil Schiller, Apple's head of worldwide marketing, spent about 35 seconds talking about the new device. In terms of features, nothing changed between the iPad Mini 2 (formerly known as the iPad Mini with Retina) and the iPad Mini 3 except the addition of a gold model and the TouchID fingerprint sensor.

"Having effectively achieved parity between the iPad Mini and iPad Air last year, Apple has again opened up a gap between the two in terms of performance," Jackdaw Research chief analyst Jan Dawson said. "The iPad Mini is now again clearly the poorer of the two devices, and the $100 price difference between the iPad Mini 3 and iPad Mini 2 is somewhat hard to justify."

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The iPad Mini was a popular device when it was introduced, but the larger, 9.7-inch tablet dominates iPad sales. Only 17 percent of iPads in use today in the US are iPad Minis, according to Kantar Worldpanel. That percentage will likely continue to fall as more consumers opt for the new bigger screen iPhones.

"If you have two devices that are close to one another [in size], you're not going to buy both of them," Forrester analyst J.P. Gownder said. "Someone will not buy an iPhone 6 Plus and an iPad Mini 3."

It's still too early to tell just how much Apple's tablet business will be affected by its larger iPhones. The company has long said if anyone is going to hurt sales of its products, it wants to do that itself. As Cook noted during Apple's fiscal fourth quarter 2012 earnings conference call, "We've learned over the years to not fear cannibalization. We'd rather do it ourselves than let someone else do it."

But there's evidence from competitors that bigger smartphones do eat into tablets. Samsung -- Apple's biggest rival in mobile devices and the second-biggest tablet vendor after Apple -- said in July that its tablet sales were ," with customers opting for 5- to 6-inch phablets over 7- to 8-inch tablets. Samsung pioneered the phablet category with its Galaxy Note line, and the devices have become popular with buyers.

That realization is likely what caused Apple to focus its efforts on the 9.7-inch iPad and update the iPad Mini only minimally. If people aren't buying the device anyway, why devote energy to including big updates?

"They're realizing [iPad Mini is] challenged in a market when you have people who absolutely love and swear by [iPhone 6]," Technalysis Research chief analyst Bob O'Donnell said. "This is the challenge any company has when it broadens its line."