Apple 2.0

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Apple's 'fat' 128 billion-byte iPad: What analysts are saying

January 30, 2013: 11:03 AM ET

There's money to be made between a $699 64GB iPad and a $999 MacBook Air

Screen Shot 2013-01-30 at 7.56.53 AMFORTUNE -- What at first glance seemed like a ho-hum memory boost may have deeper implications for Apple (AAPL), its margins and its competitors.

Wells Fargo's Maynard Um: A 128GB fourth-generation iPad. "We believe the new device will be in addition to the current product portfolio and will fill a hole in the market for tablets with larger storage capacities (business users and/or high-end consumers). Given that the new iPad is, in our opinion, geared towards a different end-market than the current iPad portfolio, we believe there should be minimal cannibalization of existing iPads. We currently estimate 18MM iPads in FQ2 (down 21% sequentially) and believe there could be some modest upside potential to our estimates. We note that for every 100,000 of new iPads sold, assuming an average selling price (ASP) of $864 and higher gross margin, EPS would benefit by about $0.02 in FQ2."

Goldman Sachs' Bill Shope: Apple adds to its iPad line. "While we believe this represents a relatively minor change, we believe it could add some momentum to Apple's efforts to displace traditional PCs in the enterprise longer term. Indeed, Apple noted that virtually all of the Fortune 500 and over 85% of the Global 500 are currently deploying or testing the iPad. This penetration is supported by our recent report, Global: Retail: Office Products: Paradigm shift in office products, printing, and paper continues; corporate consumers remain guarded, January 28, 2013, which shows that tablets are gaining momentum in office environments. As discussed earlier this week, this report included a survey of corporate purchasing managers, and 57% of the respondents noted that their white collar workforce uses the iPad, up from 52% in 2011 and 25% in 2010."

Citigroup's Glen Yeung: Margin and Marketing Implications. "Apple's announcement of a 128GB 4th Generation iPad is clearly focused on the corporate market. At $799, this latest iPad SKU is priced above the average selling price of a laptop ($703), bringing the two squarely into the same wallet discussion. Given what we estimate to be a 3 quarter slide in 10" iPad unit sales, we can't help but detect a defensive element to Apple's latest iPad SKU, trying to head off the onslaught of Haswell-based Ultrabooks & hybrids targeted for 2H13 release. Nonetheless, we acknowledge it provides Apple with another means to attack the ~200M unit market of non-Apple laptops (of which, ~70M are corporate). From a margin perspective, our calculations suggest the addition of a 128GB iPad is margin accretive all else being equal. Indeed, 128GB is the optimal configuration, noting that a hypothetical introduction of a 256GB version would be dilutive at current pricing."

Finally, although he's not a Wall Street analyst...

Apple Insider's Daniel Eran Dilger: Apple's 128GB iPad aims to drive profits up a path competitors can't easily follow. "The surprise announcement ... demonstrates how quickly (and unpredictably) Apple can shift direction. Since the introduction of the iPad mini last fall, critics have complained that the smaller form factor iPad didn't deliver a sharp enough screen to attract customers and, at the same time, that widespread adoption of the lower priced model would erode the company's relatively high margins. It turned out they were at least half right in that contradictory prediction: Apple outlined that its margins could decrease in the coming quarter due to selling a large number of the very popular new lower priced iPad minis. However, the iPad's critics are so preoccupied with the notion that low prices alone can drive sales that they failed to anticipate that Apple could also offer a new, more expensive and higher capacity full sized iPad, or that there could be an audience for it. If it is successful in selling in meaningful quantities, the larger capacity, higher margin new fat iPad has the potential to disrupt the predicted direction of Apple's margins. The same disruption of pundits' expectations has occurred time after time over the last decade as Apple has released alluring new products that have broken the ostensible trend toward cheaper commodity devices."

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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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