Can Apple build an iPad Mini that wouldn't cannibalize iPad sales?

Yesterday, ZDNet's James Kendrick suggested that Apple could rock the world with an iPad Mini, which he dubbed the iBook. Could Apple deliver to market such a product at a price that would work?

Let's see if we can make it work.

I'm not a big fan of the whole idea of an iPad Mini as the only real justification for the device is the fact that the likes of Google and Amazon have enjoyed some success with their 7-inch Android-powered tablets. If Amazon and Google have a 7-inch device, the reasoning goes, then so must Apple.

The problem with the iPad Mini is pricing. The iPad 3's pricing starts at $499 for the base model, while the iPad 2 starts at $399. An iPad Mini would ideally need to be priced at or below $299 in order to remain competitive in the face of the iPad 2 and 3.

Let's start with the bill of materials for the iPad 2 and iPad 3 as drawn up by iSuppli back in March:

The problem with trying to scale down the iPad 3 is that the numbers don't add up. Even assuming that making a smaller iPad costs 20 percent less than making a full-sized model -- factoring in that components are now cheaper than they were back in March -- the component and marketing costs of the devices would still be in the region of $250.

Believe it or not, shrinking an iPad doesn't shrink the price by that much.

It doesn't make economic any sense for Apple to sell a device at $299 that costs them $250 to make. It's not as though Apple needs to come up with a way to bump up the iOS market share. While I agree with Kendrick that "Apple would sell 10 million iBooks in just a few short months," it's likely that a great deal of these sales would be at the expense of full-sized iPad sales.

In effect, Apple would be cannibalizing sales of a more profitable product and putting market share over profits.

That just doesn't make sense.

Another option would be to take the iPad 2 -- which Apple still sells -- and use this as a base from which to create a smaller iPad. Right from the start this would mean a cheaper screen, cheaper battery, cheaper processor and a cheaper camera. Back in March it was estimated by iSuppli that the revamped iPad 2 cost Apple some $245 to make. If we assume that an iPad Mini based off of the iPad 2 would cost 20 percent less to make, this brings the total cost down to a more manageable $195.

All of a sudden that $299 price point seems doable, even taking into account Apple's bounteous profit margins.

This is a far better starting point for an iPad Mini. It does mean compromises, but for a device powering a smaller screen -- and perhaps aimed at a different market -- they matter less. Much of the improvements made to the internals of the iPad were to drive the new high-pixel-density Retina display panel. A scaled-down iPad Mini would after all require a lot less hardware to power it.

By basing the iPad Mini on previous-generation technology, it's possible that this would put a damper on cannibalization. Just as people can already choose an iPhone 4S, and iPhone 4 or an iPhone 3GS, or an iPad 3 and an iPad 2, a lower-spec iPad Mini wouldn't compete directly with the full-sized offerings.

This way the cheaper iPad Mini would be seen as a standalone device -- much like the iPod touch -- rather than a cheap alternative to a pricier device.

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Image source: Nickolay Lamm/InventHelp, iSuppli.