Apple 2.0

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How can Apple sell iPad mini for less than an iPod touch?

October 19, 2012: 6:02 AM ET

The big unanswered question about the new iPad is where it fits in Apple's price portfolio

Source: Flo's Weblog

FORTUNE -- There were a lot of eyebrows raised by a German blog's leak last week of what purported to be price points -- in euros -- of 16 iPad mini configurations, from 8GB Wi-Fi only to 64GB Wi-Fi and cellular. Converting the currency, subtracting Germany's 19% value added tax and doing some rounding, the price grid in dollars looks something like this:

8GB Wi-Fi Black/White, $250
8GB Cellular & Wi-Fi Black/White $350
16GB Wi-Fi Black/White $350
16GB Cellular & Wi-Fi Black/White $450
32GB Wi-Fi Black/White $450
32GB Cellular & Wi-Fi Black/White$550
64GB Wi-Fi Black/White $550
64GB Cellular & Wi-Fi Black/White $650

Some commentators, looking over this grid, saw the entry price of $250 (or $249) as too high, given that Google's (GOOG) Nexus 7 sells for $199 and Amazon's (AMZN) Kindle Fires start at $159.

Others saw $249 as too low. After all, the new iPod touch starts at $299. How in the world can Apple (AAPL) sell a 7.85-inch iPad for $50 less than a 4-inch iPod?

Two expert Apple watchers -- Daring Fireball's John Gruber and Asymco's Horace Dediu -- addressed that question this week.

Gruber's answer comes in two parts. First he argues that although bigger often costs more than smaller, miniature carries a premium. "Gadget prices tend to follow a U-shaped curve," he writes. "Big is expensive, small is cheap, miniature is expensive. The iPad (3) is near the beginning of the curve. The iPhone and iPod Touch are at the end. This new smaller iPad will be in the middle."

"Second is that Apple has no problem if iPod sales, including the Touch, continue to be cannibalized by other iOS devices. If a customer walks into the store and sees a (say) $249 smaller iPad and decides to buy that instead of a $299 iPod Touch simply because it's cheaper and bigger at the same time, that's still a win for Apple. The customer just bought an iPad."

Dediu begins by reminding us that Apple still sells a 16GB fourth-generation iPod touch for $199. When that device is added to the mix, the price chart he draws -- and which I've copied below -- makes a lot more sense. 

w = Wi-Fi only; c = Wi-Fi plus cellular. Source: Asymco

Dediu has created an interactive Pixxa "padcast" that shows how much iOS you can buy depending on how much you are willing to spend. If you have access to an iPad, you can get the padcast here.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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