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Does Apple Need a Cheap iPad?

In the scheme of things, the iPad, up until recently, was not considered to be an expensive product. The pundits had it that Apple would be charging up to $1,000 for the first version, and were totally flummoxed when Apple announced starting prices at just $499. Indeed, that price point formed the threshold for competing products, some of which actually required a data contract with a wireless carrier to match it. But, of course, the iPad, even the one with a 3G radio, doesn’t require any contractual commitment.

Over time, as the competing tablets failed miserably in the marketplace, the prices largely became equivalent to Apple’s, except, of course, that other electronics companies usually don’t have the economies of scale and hence aren’t making the same profit margins.

There did come a time when competing tablets became a lot cheaper, but only when manufacturers dumped unsold units into the marketplace. So you do recall the rush to buy a $99 HP TouchPad which, as a failed and discontinued product, is mostly a curiosity these days. It’s not as if there are many apps for it, or that there will ever be. HP does have hopes an open source WebOS will make things better, but I doubt it.

The market changed when Amazon introduced the 7-inch Kindle Fire, and Barnes & Noble countered with the $250 Nook of the same size. Based on the current reports, it appears the Fire did pretty well during the holiday season, though Amazon is curiously shy about delivering absolute numbers. There is, though, a published report suggesting that the Fire cannibalized one to two million iPad sales. I suppose we’ll get a better picture of the situation when Apple releases its financials later this month.

Regardless, I suppose the Fire is an attractive buy largely because it is cheap, and also because it has been heavily marketed by Amazon. And that’s a highly respected name. As a practical matter, Amazon evidently sells the things at a loss, expecting to make up the difference by selling you stuff. Indeed, although you can surf the Internet and manage email on a Fire, it’s primary function is to serve as a storefront for Amazon’s products and services, and that’s how the interface is designed.

Based on an older version of the Android OS never certified for use in a tablet, there were the typical customer complaints about erratic performance and the poor implementation of the touch feature. That’s understandable, and Amazon did release an online update said to address at least some of the problems. Well, at least Fire owners can get updates, unlike customers of other Android tablets and smartphones that may be running versions of the OS that are way out of date, in need of critical stability and security fixes, but cannot get them.

My limited encounter with the Fire wasn’t terribly promising. The product is very no frills, no doubt the result of severe cost cutting. There’s no camera and no mic. It’s strictly a consumption device, and Amazon hopes you’ll consume their stuff.

But where does that leave Apple?

For now, Apple dismisses the competition, as you might expect. Indeed, the poor hardware and sales performance of iPad competitors shows their approach is correct. The late Steve Jobs also said that a 7-inch tablet is a bad idea, not nearly as usable as the 9.7-inch iPad. But that didn’t stop rivals from offering that size. Evidently the Kindle Fire is at least reasonably successful.

For 2012, the rumors suggest a new iPad, a so-called iPad 3, by February or March; the former would be on February 24th, to coincide with Jobs’ birthday. But since Apple doesn’t observe such events, or hasn’t in the past, that doesn’t seem very logical. When the iPad 3 is ready to roll, Apple will roll it.

Now if Apple follows the iPhone playbook (and it’s not meant as a pun on the failed RIM tablet, on which the Kindle Fire appears to be based), they will offer the new version at the same price as the one it replaces. Maybe it’ll even have that high resolution display and an eight megapixel camera. At the same time, the iPad 2, or a somewhat modified version, will be sold for less. Here the estimates range from $399 to as little as $299. If Apple can deliver an iPad 2 (or 2S) profitably for the latter, the market for the Kindle Fire could be hurt seriously. Why buy a wannabe when the real thing is only $100 more?

Sure, Apple isn’t into engaging in price wars, but they will be competitive when they need to be. Whether that means a cheaper iPad is in the offing, I cannot say. On the other hand, if the Kindle Fire made a severe dent in iPad sales, Apple isn’t going to take that sitting down. You’ll probably get a better picture if iPad sales meet or exceed expectations, or fall a tad behind. If the latter, expect the model lineup and pricing structure to be altered somewhat. Regardless of how it turns out, it does seem sensible to keep the existing iPad in the lineup so long as customer demand stays relatively high.