SAN JOSE, (Reuters) – Apple Inc took the wraps off an 8-inch tablet today in its biggest product move since the debut of the iPad two years ago, launching a smaller version of the gadget into a market staked out by Amazon.com Inc and Google Inc.
The 7.9 inch “iPad mini” marks Apple’s first foray into the smaller-tablet segment. Apple hopes to beat back a charge onto its home turf of consumer electronics hardware, while safeguarding its lead in a larger tablet space that even deep-pocketed rivals like Samsung Electronics have found tough to penetrate.
But at $329, the iPad mini costs more than some analysts had expected. Wall Street fears the gadget will lure buyers away from the $499, flagship 10-inch iPad, while proving ineffective in countering the threat of Amazon’s $199 Kindle Fire and Google’s Nexus 7, which have wafer-thin margins or no margins.
“It’s coming in the range that most were grumbling about and that, quite frankly, we’re a little bit concerned about,” said JMP Securities analyst Alex Gauna. “It’s a little confusing at this juncture to try and figure out how it fits into the line-up. Is it going to cannibalize the more expensive iPad?”
“It is worth noting that there are zero-margin products out there competing with them now…, and that is presenting some challenges to Apple, which at least at this juncture, Wall Street has some concerns about.”
Wall Street analysts have said for months Apple was planning a less expensive version of the iPad to take on cheaper rival devices, a move they say might hurt its margins but prevent its rivals from dominating an increasingly important segment.
The stock was down 2.5 percent at $618.42 in afternoon trade, after gaining 4 percent on Monday in the run-up to the event.
Apple also announced a fourth-generation full-sized iPad with improvements in graphics and processing speeds, just two days before Microsoft is due to show off its own “Surface” tablet. The new iPad starts at $499, its usual entry point.
A smaller tablet is the first device to be added to Apple’s compact portfolio under Chief Executive Tim Cook, who took over from co-founder Steve Jobs just before his death.
Amazon’s Kindle and Google’s Nexus 7 have grabbed a chunk of the lower end of the tablet market and proved demand for a pocket-sized slate exists. That has forced Apple into a space it has avoided and at times derided, analysts say.
The “starting sweet spot” for the tablet would be in the $249-$299 range, according to a survey of more than a thousand consumers by Baird Equity Research.
“When asked what the most they would pay for a smaller iPad was, our respondents on average said that they would pay $242 for a 7-inch iPad and $268 for an 8-inch iPad,” said William Power, Baird Equity Research analyst.
SIGHTS ON AMAZON
Cook kicked off Tuesday’s event, held at the opulent California Theater in San Jose. In a rarity for a company that tightly controls events, Apple live-streamed its invitation-only presentation to Apple devices such as the iPad and Macintosh computers.
Apple’s chief rival in the smaller-tablet arena is Amazon, which proved a 7-inch tablet at around $200 has consumer appeal. The Kindle Fire, released last year for $199, was one of the hottest-selling holiday gadgets. It pressured Amazon’s margins but gave it potentially millions of new high-spending customers.
Amazon sold more than a million Kindles a week during December, paving the way for others like Google with its Nexus 7 to try and beat Apple in a market the company created.
The Internet retailer has now put its second-generation Kindle Fire HD in the market, which it says is the “best-selling product across all of Amazon worldwide,” based on undisclosed U.S. sales figures and international preorders.
Google’s Nexus 7 tablet, built by Asian manufacturer Asustek , quickly ran out of stock after its July launch.
All three companies will be vying to get their devices on shopping lists during the U.S. holiday season, which traditionally starts next month.
“It’s going to be the go-to holiday gift,” said Michael Yoshikami, founder of Destination Wealth Management, which owns Apple shares.
PRICE IS KEY
Jobs famously derided the 7-inch screen, saying such a device should come with sandpaper so users can file down their fingers. But an internal email revealed during a patent trial showed he turned more favorable to the idea by early 2011.
Apple has sold 100 million iPads so far, with the device accounting for 26 percent of Apple’s fiscal third-quarter revenue.
But analysts are concerned now about erosion of Apple’s industry leading margins as it takes on the Kindle Fire. It earned gross margins of 23 percent to 32 percent on U.S. iPad sales between October 2010 and the end of March 2012, according to a July court filing by Apple.
Rivals haven’t fared as well. Amazon’s first Kindle Fire just about breaks even, according to IHS iSuppli estimates, and Google has said its Nexus 7 is being sold at cost.
Topeka Capital’s Brian White argued a smaller tablet could overtake sales of the iPad in a few years. He is forecasting sales of 5 million to 7 million in the December quarter.
