Reality Check: The iPad Mini Already Exists, Cannibalization Awaits

Most consumers still love Apple Inc. (NASDAQ: AAPL) and its growing list of products. The iPad seems to have created a new computing market that was technically not even a market before. Now we have to expect the iPad Mini. The “special event” is set for October 23,2012 at 1:00 PM. In all honesty, investors may have to start worrying about growing cannibalization here. The iPad has cannibalized sales of traditional Windows PCs, but this cannibalization also includes Apple’s Mac sales as the CFO said he believed in a prior earnings report.

Our fear is not just that the special event may create more cannibalization. The real fear is that consumers will come to the stark realization that the iPad Mini already basically exists. If someone wants a smaller iPad, they can just go out and buy the iPod Touch with a 4-inch screen. Janney Capital Markets said today that the Mini will likely have a 7-inch screen versus a 9.7-inch screen on the regular iPad. So, is it fair to ask if size matters that much here?

This expected launch is coming at a time when PC sales are declining. Gartner recently showed that global PC shipments were 87.5 million units in the third quarter of 2012 for a 8.3% drop from last year. The quarter was called a transitional quarter before Microsoft’s Windows 8 operating system release. Unfortunately for Apple, Gartner also said that preliminary US PC vendor estimates on units shipped showed that Apple shipped some 2,078,900 units and had 13.6% marketshare. While a gain in market share is good, this is down by 6.1% in unit shipments from the third quarter of 2011 when it shipped out 2,213,826 units. Gartner even said in its outlook, “Apple expected to have a PC shipment decline due to softness in the public market, but the company faced a slowdown in the consumer market.”

The question is what will be cannibalized more? Will the iPad itself be cannibalized? or will the iPod Touch be cannibalized? The real threat here seems to be a “netbook effect” that hit the PC market a few years ago. Rather than buying a large desktop or even a high-end notebook PC, consumers decided to slide into netbooks as “good enough computing.” Will the focus on iPad variations act as a serious Mac cannibalizer? In a soft economy that has to be a risk. Oh, and the new iPhone 5 likely gobbled up new tech spending dollars.

Janney Capital Markets today reiterated Apple as “Buy” and raised its fair value estimate to $745 from $720 for the stock. Janney’s Bill Choi said, “Look for a $299 to $399 price point on iPad mini. We believe Apple will offer the lower-priced mini iPad to compete against Android tablets, such as Amazon, Samsung, Google, etc. We recognize that these competing products are priced starting at $199, but see Apple providing a premium product at a premium price point. We see the mini iPad being priced between the new iPod Touch at $299 and iPad 2 at $399.” Choi did warn of a 15% expected cannibalization to the current iPad from the smaller iPad, noting modest cannibalization risk to the iPad and iPod Touch.

Here is what is available today before the iPad Mini. The entry level iPod Touch starts at $199 for the 4th generation with a small 3.5-inch screen. The 5th generation iPod Touch starts at $299 with a 4-inch screen. The new iPad starts at $499 with a 9.7-inch screen, while the iPad 2 starts at $399 and also comes with a 9.7-inch screen. The obvious answer would be that the iPad Mini would be priced in between the $299 and $399 price range and have somewhere around a 7-inch screen.

Steve Jobs was against a smaller version as a tinker toy. Apple’s efforts to go out hurt the Kindle from Amazon.com Inc. (NASDAQ: AMZN) and other tablets from Google Inc. (NASDAQ: GOOG) and Microsoft Inc. (NASDAQ: MSFT) may simply end up just cannibalizing Apple products.

The catalyst for this market may have been the netbook. The PC market has really never been the same since. Now the tablet market is taking over. As consumers only have so much money they can spend on smartphones, tablets, notebooks, and desktops, the obvious answer is that the lower-priced items will cannibalize the sales of higher-priced items. In a sluggish economy that is only likely to be magnified.

The iPad Mini pretty much already exists if you want it. Its name is the iPod Touch. Or is the new name really just the iPod Grasp?

JON C. OGG