Why Is It Bad News That Apple Expects To Make Huge Profits Off The iPad Mini?

Moneybox
A blog about business and economics.
Oct. 24 2012 4:52 PM

Why Is It Bad News That Apple Expects To Make Huge Profits Off The iPad Mini?

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SAN JOSE, CA - OCTOBER 23: Apple Senior Vice President of Worldwide product marketing Phil Schiller does a side-by-side comparison of the new iPad versus the leading Android tablet during Apple special event at the historic California Theater on October 23, 2012 in San Jose, California.

Photo by Kevork Djansezian/Getty Images

I thought "Apple iPad Mini Pricing Worries Investors" was a strange headline to read in the FT.

As a consumer, I wouldn't say I'm "worried" that the iPad Mini costs $329 but I was certainly hoping it'd cost less than that because then I'd be able to buy one for cheap. But as the proud owner of 19 shares of Apple stock, why would high prices worry me? After all, consider the iPad with Retina Display. According to iSupply it costs $316 to build the low-end model suggesting that Apple could hit the $329 price point and turn a profit while doing so, without shrinking the size of the device or offering a non-retina screen. So why didn't they just do that? Certainly as a consumer who's still using an iPad 2 I'd have been thrilled by that kind of dramatic price cut in the best tablet on the market. But as an investor, that would have worried me enormously. It'd have been a clear sign that growing competition from Google and Amazon are seriously cutting Apple's profit margins.

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The relatively high price of the iPad Mini is just the opposite of hitting the $329 price point with a dramatic price cut on the Retina iPad. It's a sign that they think they can sell roughly all the iPad Minis they can make this holiday season while maintaining an Apple-sized profit margin.

Now maybe they're mistaken. Maybe there'll be lots of unsold iPad Mini inventory or factory idling. Maybe the only way to play in the 7 inch tablet market is to offer Amazon-style razor-thin margins.

Going by the iSupply data, Apple has a 37% profit margin on the low-end Retina iPad. If we assume there's a similar 37% profit margin built into the $329 price for the low-end iPad Mini that suggests a zero-profit iPad Mini would retail for $207. And it turns out that an ad-free Kindle Fire HD retails for $214. So I think if Apple actually has to match Amazon pricing to move inventory, they probably can. But in any conventional analysis, that's what would be bad news for Apple investors—the company's transformation into an Amazon-style thin margin retailer. And some day it'll presumably happen. It would be bizarre for Apple to be able to maintain such fat profit margins indefinitely. But the $329 price point is a sign they think they still can.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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