Debunking iPad Mini Rumors – Part I

We have heard a lot of rumors surrounding Apple’s (NASDAQ:AAPL) iPad lately with some claiming that a smaller version of the popular tablet is on its way at a price point of $199-$249. There have been some more claiming a more believable $249-$299 range but every rumor that has come out has been purely speculative. ^[1]

In a recent piece, we argued that Apple doesn’t need to come out with an ‘iPad Mini’ just because Amazon’s (NASDAQ:AMZN) Kindle Fire has shown that there is a market for smaller tablets. In this three part series, we take a look at which of the many rumors make even the remotest of sense and which do not. Further, we will analyze what price points may Apple look to set and what it means to Apple’s stock should the company actually release such a product(s).

See our complete analysis of Apple here

Assumptions for iPad mini

For our analysis, we will be making a few assumptions taking into account most of the rumors floating in the market and modeling only the WiFi version of the iPad to keep things simple. We are assuming that Apple will consider bringing to market two forms of iPad mini – a low-end and a high-end version. The low-end iPad mini will have a 7-inch screen with the older display of the iPad 2. The high-end iPad mini will have an 8-inch screen with the Retina display of the new iPad. Both the iPad minis are assumed to sport a 8GB NAND storage. We also assume that the low-end iPad mini will sport a 512 MB RAM while the high-end version a 1GB RAM.

Further, we assume that the low-end iPad mini will have an A5 processor, a la the iPad 2, while the high-end version will have an A5X version to be able to support the high density Retina display. For the camera and power management modules, we make the assumption that Apple will replicate the iPad 2 and the new iPad specifications in the low-end and the high-end iPad mini versions respectively.

Taking the above assumptions into account, we arrive the following estimated prices of the various parts of the iPad mini.

For the NAND and DRAM flash memory, we have assumed a linear dependence of cost to specifications. The costs of the display and touchscreen modules of the low-end iPad mini are assumed to be in direct proportion of the screen size to iPad 2’s costs for the same. Since the retina display of the new iPad costs Apple $30 more than the iPad 2 screen, we assume the same premium for the retina display of the high-end iPad mini’s screen over the low-end mini. As for the high-end iPad mini’s touchscreen, we make the same assumption as for the low-end version, i.e, 80% of the new iPad’s cost of the same.

As for the WLAN module, we have taken the lower cost of the new iPad component for both the mini models. For the battery component, we assume Kindle Fire’s battery cost for the lower end version while for the high-end version, we assume its cost to be slightly higher than the component used in the iPad2 due to the presence of the power hogging Retina display.

The iPad mini’s enclosure and peripheries are assumed to cost Apple about as much as the average of the same for the Kindle Fire and the iPad 2 since Apple is likely to use more expensive materials than the Fire but the components would still cost less than the iPad 2 due to the smaller screen size. We have made a similar assumption for the higher end iPad mini whose peripherals are assumed to cost as much as the average of the same for the iPad 2 and the new iPad. The accessories or the box contents that are given along with the iPad cost the same for both the iPads out in the market, and we assume the same for the iPad minis as well.

Manufacturing costs are assumed to be around 3.3% of the BOM, in line with the previous iPad figures.

Apple’s cost could benefit from stronger supply chain

Having made these assumptions, we see that the cost of producing the low-cost iPad mini comes out to be close to $200, less than even the Kindle Fire, despite the assumption that Apple would use premium materials in the production of the smaller tablet. This is because we believe Apple will be able to leverage its greater economies to scale to better negotiate favorable contacts with suppliers.

For the high-end iPad mini however, the cost of manufacturing comes to around $270, making any rumor of such a tablet being made available for less than $299 difficult to believe.

In the next part, we will look at what this means for Apple in particular and the tablet market in general. Should the option of being able to manufacture a cheaper iPad swerve Apple’s decision in the favor of the iPad mini despite Steve Jobs’ famous design concerns? Or is Apple better suited if it pursues the high-end iPad mini design seeing as Apple has always made premium products.

We have a $700 price estimate for Apple.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Every iPad mini rumor there’s ever been — all in one place, CNET, May 18th, 2012 [↩]