Forget the high margins, Apple -- cut iPad Mini prices

Wake up, say analysts, the gravy train days are over; lower iPad prices are necessary to stay in the game

Apple sold 14% fewer iPads in the quarter that ended June 30 than during the same stretch in 2012, while the revenue it earned from those sales plummeted by 27%.

Analysts tied the decline in revenue to the iPad Mini, Apple's smaller, lower-priced tablet that has significantly cannibalized sales of the pricier, 9.7-in. original. But ironically, they urged Apple to reduce prices of the Mini even more.

"Tablets may not have fully saturated the market, but it's getting pretty cramped," Ezra Gottheil, an analyst with Technology Business Research, said in a Tuesday interview. "There's real competition for the iPad, real alternatives, and Apple has to deal with that."

To keep selling large numbers of iPads, keep the competition at bay and protect its ecosystem, Apple has to recognize that the gravy train days of outrageous margins are over, Gottheil added. Once it figures that out -- that there is a "new normal" -- it has to compete, if not head-to-head on price, at least in the same neighborhood.

"This is real life, you have to work for your sales, margins are tighter and there's lots of competition," said Gottheil. "If they would bring down the Mini to $249, they could do some really big numbers. That would be a really sweet tablet."

The iPad Mini now starts at $329 for a 16GB model, with prices climbing in $100 increments as the storage space doubles to 32GB, then again to 64GB.

Van Baker of Gartner seconded Gottheil on the price problem, but also noted that the surprisingly-sluggish sales were largely due to the lack of new products in Apple's line-up. Apple last updated the iPad in early November 2012, when it also began selling the iPad Mini.

"Their numbers [for the second quarter] show that Apple's model is driven by new stuff," said Baker. "There's always this thirst for something new."

Without that "new," Apple's sales inevitably stall, a trend seen not only in the iPad, but also in the iPhone -- where historically sales slip as the annual refresh approaches -- and on the Mac. Even Apple CEO Tim Cook acknowledged as much in Tuesday's call with Wall Street analysts.

But Apple has provided no hint, as is its practice, about when it will refresh the iPad family. The most recent rumors have pegged a new iPad for this fall, and a new Mini, perhaps one with a Retina-quality display, in early 2014.

Because Apple would probably retain the original iPad Mini, but drop its price, a tactic it already uses with the full-sized iPad as well as the iPhone, the natural moment for a price cut would be at the launch of a new model. Gottheil and Baker thought that would be too late.

"I don't think they can afford to not [cut prices]," Baker said.

iPad ASPs chart
The iPad's average selling price, or ASP, has been declining for two years as customers opt for less-expensive 9.7-in. models or, increasingly, the $329 iPad Mini. (Data: Apple.)
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