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Why the iPad Mini Drew Smaller Crowds


Should investors really worry about cannibalization caused by the iPad Mini?

MINYANVILLE ORIGINAL Apple launched its iPad mini today in 34 countries, but the lines of Apple enthusiasts outside the stores were noticeably shorter than during past product launches; in some stores employees outnumbered customers.

Piper Jaffray
analyst Gene Munster counted the number of individuals waiting in line for the tablet as he normally does on the date of an Apple product launch. At the Fifth Avenue store in Manhattan, he counted 580 customers (despite Hurricane Sandy) in line compared to the 750 who waited for the iPad 3 released last March. Other stores around the globe also had lower numbers.

Is Apple losing its appeal?

Probably not. Munster points out that Apple directed this product launch towards a smaller market and highlighted two reasons for the shorter lines.

First, the iPad minis launched today only supported Wi-Fi connectivity. The models with connectivity to 4G LTE networks will launch later in the month, so stores only rolled out half of the product line today. Second, competitors Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) have already crowded the smaller tablet market with the $199 Kindle Fire HD tablet and $199 Nexus 7 tablet. Apple's 7.9-inch tablet has to compete in an existing market at a starting price of $329.

Furthermore, Apple stores began selling the iPad 4 today, so customers can choose from two different tablet models rather than one, further diluting the demand for the iPad mini.

Munster predicts that Apple will sell between 1 million and 1.5 million iPad mini units this weekend. Though off to a slow start, he sees the iPad mini becoming more prominent "over the next two to three quarter."

AppleInsider reported that Shaw Wu believes the iPad mini will do well when competing against Microsoft (NASDAQ:MSFT) Surface tablets.

According to Forbes, Brian White of Topeka Capital Markets predicts sales of 800,000 units to 1 million units over the three-day period. Also, despite the shorter lines, White released a note stating the Fifth Avenue store ran out of iPad minis today.

Other analysts, though, still expect to see many iPad minis sold over the weekend. According to AllThingsD, BTIG Research analyst Walter Piecyk wants to see 3 million iPad minis sold over the weekend, which is the same amount Apple sold during launch weekend of the iPad 3.

He reasons, "We believe 3 million units is an appropriate bogey given that the mini is being launched in nearly 3x the number of markets than the iPad 3, is at a much lower price point and sold out of pre-ordered product deliverable this weekend."

Investors also have had high expectations for the company.

Apple's stock price has dropped more than 15% from its high above $700 on the launch date of the iPhone 5. Investors have worried that Apple will be unable to keep successfully innovating after the death of Steve Jobs. In regards to the iPad mini, many do not view shrinking the larger iPad as an impressive technological leap.

Others fear the cannibalization rate of the iPad mini will grow substantially as many average tablet owners may see no real difference between the two tablets other than the size and select the cheaper model. Munster believes the iPad mini will have a cannibalization rate of around 20%, or "for every five million smaller iPads, you lose one million standard iPads."

This likely cannibalization concerns investors because it means reduced margins for the company. Apple admitted during its recent quarterly conference call that the iPad mini has much lower margins the the larger iPad.

The cannibalization fear may be unwarranted, though.

According to Motley Fool, Apple has made cannibalization part of its business. If Apple does not offer cheaper alternatives, it is only a matter of time before a competitor fills the gap with its own product and steals the revenue from Apple completely. Margins will shrink but revenue will increase.

Apple has successfully cannibalized many of its products in the past. The iPhone cannibalized the iPod, and the iPad took away sales from the MacBook.

The challenge for Apple will be to design products that are as popular as past devices.

Twitter: @ChrisWitrak
The author has a position in Microsoft.
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