Business

New iPad mini could pressure profit margins

Apple’s expected debut next month of an iPad mini is likely to cause a frenzy among its fanboys — but could also put a squeeze on its top-shelf profits, analysts warn.

Last quarter, margins at the Cupertino, Calif., company shrank to 42.8 percent from a record 47.4 percent in the previous three-month period — as sales of the iPhone, its most profitable gadget, slowed ahead of the iPhone 5 launch in the current period.

With the iPad mini expected to be priced considerably below the 10.1-inch iPad, Wall Street analysts see the possibility of margins shrinking even more.

“The iPad mini is unlikely to have the same margin profile as the iPhone or even the current iPad,” said BGC Partners analyst Colin Gillis.

The tech giant is expected to start selling a smaller, 7.85-inch tablet next month.

The price has been pegged anywhere from $229 to $399, but most analysts predict $249 to $299.

Rhoda Alexander, a researcher with IHS iSuppli, said that Apple has flexibility with how it wants to handle the mini iPad.

“Does Apple maintain strict control to profit margins or make moves like it did with the iPod with ever and ever less expensive versions of the product, which allowed them to dominate the MP3 market all the way through?” she said.

Apple took the other way with the iPhone, which hasn’t destroyed rivals but rakes in profits.

The iPhone has transformed Apple’s business with profits that are the envy of the industry. However, it is a reliance that cuts both ways.

In quarters when Apple’s i-Phone sales are big, margins are big, but when the iPad is the hot seller, profits take a hit.

It costs Apple about $325 to make the latest iPad, according to IHS, and the average sales price is about $540. The i-Phone costs about $200 to make, and sells for an average $625.

Apple is likely to keep production costs down on a smaller iPad by forgoing expensive retina displays. So the mini could be a stripped-down iPad, designed to compete with Google’s Nexus 7 and Amazon’s Kindle Fire.

The competitors have found the only way to challenge Apple in tablets has been with low prices. Their 7-in. tablets cost about $150 to make and sell for $200.

Apple controls about 60 percent of the tablet market, which is expected to grow to 117 million units sold this year, according to IDC.

The iPad mini will compete not only with Amazon and Google, but also with the iPad, and potentially the iPod, which in some cases could cost more, analysts said.

Of course, Apple could still find a way to protect its margins if it prices the new iPad mini higher than rival sub-$200 tablets, Alexander said.

“Apple is able to command a significant premium for their equivalent products,” she said. “They’re not going to change strategy to suddenly not make a profit on the device.”

The mini also marks the first time in recent memory that Apple is playing catch-up, Gillis noted.

“They’re playing in the low end to capture share, but they are doing so at the expense of profitability,” he said. Apple shares closed at $671.45, up $10.14.