Apple whiffs on iPad Mini price, choosing profits over share

Apple just missed a big opportunity when it came to the pricing on its new iPad Mini.

The Cupertino, Calif., company on Tuesday unveiled its newest tablets, the iPad Air and iPad Mini with Retina Display, both with improved specs and features. It also will offer the older versions of those devices at lower prices, continuing its trend from the tablets' early days. However, this time around, Apple actually increased the price of one of its new devices, selling the iPad Mini with Retina for $399 instead of its predecessor's starting price of $329. And it dropped the original Mini's price by only $30.

What gives?

It's pretty simple, actually. Apple doesn't care about the low end. It has voiced that fact time and time again, and its iPad pricing firmly cements the company in the upper range of the tablet market. Rival tablets -- particularly those running Android -- typically retail for less than $250, but Apple doesn't even come close to their level. While there's little doubt that Apple's new tablets will sell well, it's missing out on a big opportunity to shake up the tablet market and regain some of the market share it has lost.

"This is the clearest statement Apple could have made that it is only interested in competing in the premium tablet space," Ovum analyst Jan Dawson said. "This leaves a huge chunk of the tablet market unserved by Apple while others such as Google, Amazon, and a raft of others aggressively target the sub-$400 market. This reinforces our view that Apple's share in tablets will continue to fall as Android's share rises over the coming years."

And fall it has. Apple essentially invented the modern touch-screen tablet with the first iPad in 2010. By the end of that year, it sold more than three-fourths of all tablets in the market, according to IDC. By the end of 2012, however, it sold 46 percent of tablets, and its share will drop further to 36 percent this year, the tech research firm estimates. Android, by comparison, will make up about 60 percent of all tablets in the market by the end of 2013, up dramatically from its share of 22 percent in 2010.

For a while it wasn't clear whether Android would have success in tablets at all. The operating system, while gaining traction in smartphones, struggled to attract buyers for the bigger devices. A key reason for that was apps. Few developers made software for Android tablets, and the apps for phones didn't scale well to the larger screens.

But when the Amazon Kindle Fire and other Android tablets such as the Nexus 7 hit the market, they quickly caught on with buyers looking for devices at more reasonable prices. Phone apps didn't appear as wonky on the 7-inch screens, and more developers built tablet-specific software. As Android took over the smartphone market, more people sought out its tablets, as well. Now, smaller tablet sizes make up the majority of sales. That's even true for the iPad, with about two-thirds of unit sales estimated to come from the Mini.

"The whole market shifted from 10-inch tablets to sub 8-inch in the span of a few quarters," IDC analyst Tom Mainelli said.

The iPad still has many more dedicated apps than Android tablets -- 475,000, according to Apple CEO Tim Cook, versus estimates of tens of thousands for Android. And Apple spends a lot of time talking about how much people use their iPads; Cook boasted Tuesday that people spend more than four times as long on the iPad than all other tablets combined. Apple may care about that figure more than market share, but usage stats don't directly equate to sales. In that department, Android clearly is winning.

Apple may not mind that right now, but it should. After all, the average selling price for tablets just keeps falling, and analysts say that it's the low end, sub 8-inch devices that should see the most demand in the coming months and years. And with sub 8-inch tablets, pricing may matter more than whiz-bang features. It's pretty tone deaf for Apple to boost its own pricing by more than 20 percent while competitors either cut their prices or implement small increases. As Android tablet specs and features improve, it's tougher to justify the "Apple tax."

The Google Nexus 7, for example, features a high-resolution screen but only costs $229. CNET in July called it the "best tablet value on the market." And the Amazon Kindle Fire HDX 7, which CNET dubbed a "performance monster," retails for $229.

There are many people out there who believe Apple chose the right strategy by sticking to the high end of the market. After all, it helps boost margins, which always makes Wall Street happy. Apple and its chief rivals, such as Samsung, don't want to compete simply on price when it comes to devices. Why help make your bread and butter a mere commodity?

Apple's new pricing also should buoy iPad average selling prices, as well as prevent sales of the Mini from eating into the higher end iPad Air. Most buyers have favored the smaller, less expensive device, but it's not as big as a price jump anymore to choose the bigger iPad over the 7.9-inch device. If someone is willing to pay $399 for a smaller iPad, they may find it easy to justify shelling out $100 more for the even higher end device. That exact thing has happened with Apple's newest iPhones, with sales of the $199 5S outpacing the $99 5C. And if they're willing to pay $100 more for a bigger iPad, they might fork out that much for the Mini over an Android device.

"You will see a lot of $199, 7-inch Android tablets with decent specs, but that extra $100 is the Apple premium," said Patrick Moorhead, principal analyst at Moor Insights & Strategy. "I think there will be a lot of people who will pay that premium."

Sure, Apple could pick up some Android customers with its older products, particularly those who bought early Android devices that didn't work very well. But Apple's pricing strategy -- evident with the iPhone and iPad -- will continue to alienate a big chunk of the market. It may not care right now, but it will someday. The high end of the tablet market, like the smartphone sector, can't keep growing forever, and emerging markets will become even more important for sales.

Android has gone on to dominate the market for smartphones by hitting every segment. If Apple isn't careful, history will repeat itself with tablets.