Why did Apple make the iPad Mini so expensive?

10/23/2012 4:45 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

With Apple’s (AAPL) introduction of the iPad mini today, the company has opted for just a little cannibalization. Now we’ll see if that’s a possible strategy or is being a bit of a cannibal like being a little pregnant.

The new iPad mini has a 7.9-inch screen (compared with the 9.7-inch screen on the current iPad. And most importantly it’s priced at $329 to $659.

That’s serious competition on price for Microsoft’s (MSFT) new Surface tablet at $499 to $699, but it’s not much of an assault on the Nook ($149) from Barnes & Noble (BKS), the Kindle Fire ($200) from Amazon (AMZN), or the Nexus 7 ($249) from Google (GOOG).

Why is that?

I can think of three reasons.

First, Apple is always more focused on Microsoft than on any of its other competitors. There’s a lot of history between these companies. Apple may be figuring that the iPad Mini might be enough to relegate Microsoft’s product to irrelevance right out of the gate. And that would be a huge competitive victory since it might effectively keep PC-makers and the Windows operating system out of the tablet market.

Second, I think Apple is running an experiment to see exactly how much its name and the cachet of its Apps store are worth. Yes, the Nook, Nexus 7, and Kindle Fire are cheaper (and in some ways superior to the iPad Mini), but will some critical number of users be willing to purchase the Apple product despite it’s higher price so they can get all those Apple Apps? I think Apple wants to find out.

And, third, Apple wants to add new sales rather than cannibalize sales that might have gone to the full-scale and pricier iPad. This pricing is typical Apple—profits count for more than volume or (at least to a degree) market share. By pricing the iPad Mini here, Apple certainly isn’t going to kill off the Kindle Fire or the Nexus 7. But with its pricing Apple does put a lower lid on the price that Google or Amazon can charge. And that lid might be low enough to ensure that its competitors don’t make enough of a profit from their devices to turn their tablets into huge cash cows.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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