Price Control: Why The iPad Mini Is $329

Cover of the movie “Cannibal Holocaust,” via the blog Invasion Of the B-Movies

After Apple unveiled the iPad Mini, the immediate discussion around the Web centered not around the device’s 7.9-inch form factor or new features (or lack thereof) or look or feel or any of the chatter that usually accompanies an Apple product launch. Instead, the discussion was about price: $329 to start, 65 percent more than the most obvious competition, the Amazon Kindle Fire HD and the Google Nexus 7. Compared to these devices, many deemed the iPad Mini too expensive.

The disparity was in fact, so glaring, that Apple executives repeatedly defended the pricing during and following the product’s announcement event on October 23.

“Others have tried to make tablets smaller than the iPad and they’ve failed miserably,” said Apple SVP of worldwide marketing Phil Schiller before comparing the iPad Mini onstage to Google’s Nexus 7. “These are not great experiences.”

And as Schiller later told Reuters:

“The iPad is far and away the most successful product in its category. The most affordable product we’ve made so far was $399 and people were choosing that over those devices…And now you can get a device that’s even more affordable at $329 in this great new form, and I think a lot of customers are going to be very excited about that.”

Even Apple CEO Tim Cook had to defend the iPad Mini’s pricing in the company’s 2012 Q4 earnings call, brushing aside a question about the lower-priced Android competition by stating that consumers would still be willing to pay more to get an “iPad experience.”

But with teardowns revealing that the iPad Mini cost around $188 to build in terms of its components, and with iPad Mini opening day sales lines noticeably trimmed from other Apple product debuts, and finally with the iPad unmistakably losing market share to Android tablets in the U.S. over the past year, it’s worth asking just what Apple is trying to accomplish by pricing the iPad Mini so unusually. (Even the non-hundred denominational pricing, $329 as opposed to just $299, for example is curious.)

Apple is unlikely to ever satisfactorily answer this question head on, but I think the most logical answer is the one that’s been glancingly addressed by the company and other analysts and writers: Internal cannibalization. That is, Apple is worried that priced any lower, the iPad Mini would completely cannibalize sales of its higher-margin and so-far more iconic big brother.

As Vineet Madan, SVP at McGraw Hill Education and an ardent iPad 2 fan put it recently about the iPad Mini:

“On the one hand, you look at $329 and you think that’s better for schools and college students who weren’t able to afford the previous versions,” Madan said. “But it’s only $70 cheaper than the full size version. I don’t know why you wouldn’t just pay the extra $70 to get the full size version, which is going to provide a better, richer experience.”

Madan was speaking about the iPad 2 there, not the $499 new iPad fourth-generation, but his point raises a great question: Why is Apple continuing to sell the full-size iPad 2 at $399, when the iPad Mini offers the same experience in a more portable, comfortable, convenient – and, let’s face it, trendy– form factor? Gruber has a great explanation for this:

“I was confused by this at first. Why keep the iPad 2 around? Then the answer hit me: the iPad 2 must have continued to sell well over the last seven months. There can be no other explanation. If it weren’t selling well, Apple would have dropped it from the lineup. But because it is selling well, they’re keeping it in the lineup, because they don’t know why it’s selling well. If it’s only because of the lower price, the iPad Mini might obviate it. But perhaps it’s not that people want the least expensive iPad, but instead that they want the least expensive full-size iPad.”

Even in releasing the iPad Mini, Apple harped upon the fact that what it thinks consumers want isn’t just a tablet or a smaller tablet at that: They want the App Store and Apple’s ecosystem. That’s why the iPad Mini has the same 4:3 aspect ratio as its full-figured forebear, as Apple’s openly advertised, so it can run all of the same apps without much degradation in the quality and performance of the experience.

But because Apple’s entire tablet ecosystem has been built upon the full-size iPad’s 9.7-inch screen, the company feels it can’t and shouldn’t let it’s own new product make that platform obsolete. It’s an especially unlikely position for Apple to be in: The king of disruptive, post-PC innovation at the same time acting as the vanguard for one of its older products. Apple, which has no problem cutting out individual developers when it feels like it, still wants developers overall to build apps for the full-size iPad, and wants consumers to keep buying the full-size, more expensive device.

At the same time, Apple recognizes that the 7-to-8 inch form factor is definitely a threat to its market dominance, and wants to play in that field as well. They just want to make sure that when people think about purchasing an iPad Mini, they’re at least torn between that and a full-size iPad. The thought is that if you’re even thinking about buying an iPad Mini, you’ve already committed to Apple – the brand and the ecosystem – and so the only competition that Apple wants you to face is between one Apple product and another more authentically “Apple” one (given that Apple pioneered the tablet but is playing catchup in the 1-handed tablet market).

If Apple can convince even a sliver of iPad Mini buyers to trade up to the full-size iPad, the company has done itself a favor.

But the strategy is predicated on somewhat short-term thinking: The iPad Mini is already going to be cannibalizing some full-size iPad sales, Apple should just put it’s full muscle behind the new smaller product and make it truly price competitive with the Android 7-inchers. Only then could the iPad line as a whole – heck, iOS in general – stave off the Android invasion.

There’s been a few comparisons between the iPad Mini and the iPod Nano lately, but let’s be honest: There are huge differences between the mp3 player market of the early aughts and the tablet market of the millenium’s second decade. The Nexus 7 and the Kindle Fire are strong rivals. Even the Surface is no Zune. Apple has it’s work cut out for it to stay atop the tablet mountain. And launching its latest product without the full-force of a truly competitive price seems to be a minor mistake. But small errors add up.

TL;DR = Why the iPad Mini is $329, not cheaper: To limit full-size iPad cannibalization.