Breakingviews - Apple takes lower-priced tablet fight to Amazon

NEW YORK Wed Oct 24, 2012 5:42pm IST

1 of 2. Visitors look over the new iPad mini at an Apple event in San Jose, California October 23, 2012.

Credit: Reuters/Robert Galbraith

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NEW YORK (Reuters Breakingviews) - Apple (AAPL.O) is taking the tablet fight to Amazon (AMZN.O). The Cupertino tech company's new iPad mini takes it closer to the price point for the online retailer's devices. The new hardware rivalry could pressure Amazon into price cuts.

Investors didn't seem to see it quite that way. They knocked some 3 percent, or about $20 billion, off Apple's market value despite a slew of product updates and the unveiling of the smaller iPad on Tuesday afternoon. Perhaps at an entry-level $329, Apple's widely anticipated new product wasn't seen as competitive enough with Amazon's $199 Kindle Fire HD.

To read Apple unwraps mini-iPad to take on Amazon, Google, click here

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Yet the iPad mini with its 7.9-inch screen is far cheaper than the full-size 9.7-inch iPad, which starts at $499. The higher quality finish could easily tempt quite a few users away from Amazon into Apple's ecosystem. At first glance, that seems more likely than too much cannibalization of the company's own larger model.

The threat for the retailer is to its content sales. Analysts don't think Amazon can be generating much profit from hardware. Instead, it is counting on selling lots of e-books, apps and physical goods though its internet store. If the iPad mini starts eating into that, the company may have to cut prices on its gadgets.

That said, Amazon is only projected to sell about $8 billion-worth of tablets and content next year, according to Barclays, whereas Apple raked in more than that from iPads alone last quarter. The trick for Tim Cook, the chief executive, is to maximize cannibalization of competitors' products and minimize the damage to the company's own offerings.

Though it's a new category of device for Apple, it may be impossible to avoid some erosion. And profit margins on the iPad mini could be slimmer than the company is used to. Moreover, iPads generate about 65 percent more content revenue per user than iPhones, according to Barclays research. If that's largely down to bigger screens, the iPad mini may bring Apple less extra sales than its big brother does.

Yet Apple's problem is much nicer to have than Amazon's: incremental sales at slightly reduced margins are far preferable to lost revenue. Apple may be filling in its product line rather than conjuring new ones like it did with the iPhone and iPad. But it's Amazon that is on the back foot.

CONTEXT NEWS

- Apple on October 23 unveiled its new smaller tablet device, the iPad mini. It has a 7.9-inch screen and will cost $329 for the basic version which contains 16GB of memory and Wi-Fi connectivity.

- Apple also introduced its fourth-generation iPad. The larger device's screen remains 9.7 inches, but it now contains a faster processor, a new connector and a better camera. The price for the basic 16GB version with Wi-Fi is $499.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Richard Beales and Martin Langfield)

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