As soon as Apple’s iPad Mini was announced with a price tag of $329, many journalists and bloggers started criticizing the price of this new, smaller iPad. They did so because there were rumors that it might be as low as $249 — they also hoped that it would at least be $299 or less. They believed that at a lower price it could take on tablets that are $199 or less, and that an all-out tablet war would erupt.
When it was finally known that Apple came in a bit higher in price, it actually started clearing up a lot of confusion with consumers. In fact, Amazon said that immediately its orders increased for the Kindle Fire HD, which is priced at $199. Now consumers know that they have one class of mini tablets under $200 and a more upscale version from Apple at $329.
Personally, I was not surprised by Apple’s pricing. In fact, if you have followed much of Apple’s history, you know that Apple often prices its first generation of a product at somewhat of a premium, and over time rides the pricing curve down. When the iPod first came out, the five-gigabyte model cost $399. Now look at iPod prices.
It seems that a lot of the media don’t really understand the economics of Apple products, which almost always has them expecting Apple’s products to be priced closer to its competition. But while Apple is very aware of its competition, the company’s goal is to create the best product in its class, even if it has to be priced higher at first.
The higher starting price for new Apple products is really an economic one. Apple is quite unique from most vendors since to manufacture its products, it sometimes has to actually invent the machines and manufacturing processes itself. This is in stark contrast to almost all competitors, who either take products from an ODM (original design manufacturer) that uses existing manufacturing equipment to make them, or use off-the-shelf products and rebrand them as their own.
If you look closely at Apple’s product designs, you will always see sleek lines, beautiful curves and no space between seams. That delivers seamless integration in the hardware itself. In many instances, Apple has to actually invent the manufacturing methods to deliver such precisely designed products. That means added cost to the product at first. In essence, Apple has to build these extra manufacturing costs into first generation devices. Then over time, Apple either adds more features for the same price, or like the iPod, it eventually gets to an economy of scale, which brings the prices down.
Apple knows full well that at first, the iPad Mini will attract what we call early adopters. But this time, Apple expects to see more first time tablet buyers purchasing iPad Minis, too. And the number of iPad Minis Apple sells in the first 6-12 months will determine how fast it can drive the prices down on this product. Given what Apple did with the iPad 2 as well as iPods, I would not be surprised to see this same product priced around $$270-$299 when the next generation comes out.
Of course, competitors will use a similar model. A company like Amazon will most likely price the next Kindle Fire around $149-$159 if it, too, can drive down the costs of manufacturing and bill of materials (BOM). Amazon basically sells the Kindle Fire HD at cost and makes money on the services purchased through their tablet, so the company especially has some wiggle room with its pricing.
So how important is the iPad Mini to Apple’s tablet strategy? And even at this price, will it be successful?
At the strategic level, it is quite important for a couple of reasons. The most obvious one is that it gives Apple a competitive product in the 7-inch tablet space – a space that is getting a lot of interest from consumers. And it allows Apple to emphasize that the iPad Mini is a great consumption device that is an ideal size for reading books, watching movies and TV and listening to music. It works really well as a highly mobile web browsing device, too.
But I see it as being strategic for another reason. I believe that the iPad Mini is a core building block in Apple’s future TV plans. In fact, if you have an iPad Mini or get to see it in a store, you are probably holding the eventual remote control for Apple’s future TV products. If you already have an iPad, you kind of know that it’s a great mobile device for accessing TV Guide and program guides for Comcast, AT&T or Time Warner cable while sitting on the couch. Or using IMDb to check out the history of the movie you are watching, or to search Google or Wikipedia for that actor you’re interested in at that moment.
Interestingly, a recent survey shows that well over 70% of iPad owners use them when sitting in front of the TV. But in the future, besides being a TV controller, Apple could do deals with Hollywood that also tie in key info about the show you are watching. Or when watching a commercial, you could be sent a coupon for that product with the touch of a button. My point is that today’s remotes are worthless in an interactive TV environment, and an iPad Mini tied intricately to Apple’s TV product, what ever it ends up being, could be quite compelling.
I believe the iPad Mini is also strategic because with it, Apple adds another key screen to its line of products. It is my belief that in the future, all of us will have many screens in our lives that we use to access all of our “stuff” that’s in the cloud. And the screen we have closest to us at the time we need our stuff becomes the most important to us. With the iPad Mini, Apple adds a most portable, but highly readable screen to its line up. And Apple has the broadest range of screens available to users, from the iPod Nano to the iPod Touch to iPhones, iPads and iMacs, giving the company more available interconnected screens than any of its competitors.
Although the iPad Mini is priced higher than competitors, it is the gold standard in mini tablets today. And while a lot of people will want lower priced tablets, there is a very large group of people who can afford these prices today — as well as many others who will scrape enough money together to buy them, too. These are folks that want to tap into the rich ecosystem Apple already has, as well as the design aesthetics that make Apple products “cool.” We at Creative Strategies believe that Apple will sell at least five million iPad Minis in November and five million in December, which, along with record iPhone sales, will help Apple have its best quarter ever.
Bajarin is the president of Creative Strategies Inc., a technology industry analysis and market-intelligence firm in Silicon Valley. He contributes to Big Picture, an opinion column that appears every Monday on TIME Tech.