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Analyst: Half of iPad Mini sales will be cannibalizations

October 30, 2012 04:20 PM ET

The importance of cannibalization is that by selling more iPad Minis at lower prices than full-fledged iPads, Apple may be gaining users but it's losing revenue. The assumption, of course, is that buyers of the iPad Mini, sans such a tablet, would have instead purchased a higher-priced iPad, which generates both more revenue for Apple and more profit.

Singh came up with a rough estimate of a fourth-quarter ASP, making several assumptions along the way, including total iPad sales during the period of 22 million.

"The net average ASP could come down near ~$500-$510, possibly lower," said Singh, also noting that his back-of-the-envelope forecast pegged the iPad Mini-only ASP at between $400 and $410, with that higher-than-$329 number resulting from some buyers choosing the more expensive storage configurations or the Wi-Fi + cellular models.

In an earnings call with Wall Street analysts last week, Apple hinted that it expects a large number of customers to pick the iPad Mini over the full-priced iPad, saying that it anticipates gross margins to slip in the fourth quarter.

"At a starting price of $329, the iPad Mini's gross margins should be safely above 30%, although lower than other iPads," said Singh.

Singh saw the move as part of Apple's strategy to cut off sales of smaller, cheaper tablets sold by Amazon and Google, even though to do so it's accepting lower margins and some serious cannibalization. "[But] it seems like a defensive strategy, in response to the heightened competition in the 7-in. space," said Singh.

The numbers, Singh argued, don't lie: Apple may portray itself as a premium brand, with customers willing to pay whatever the company charges, but the fact is that they're price sensitive, too.

"iPad buyers in general are quite brand conscious.... It would be fair to say that they're more concerned with the brand/ecosystem as opposed to the product specifications/features," Singh said. "[But] with the iPad 2 and iPad Mini, the brand and ecosystem cease to be a factor. What the data seems to suggest is that iPad buyers are quite price sensitive, as long as brand or ecosystem is not a factor."

covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at Twitter @gkeizer, on Google+ or subscribe to Gregg's RSS feed Keizer RSS. His email address is gkeizer@computerworld.com.

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