iPad mini: How much would you pay for one?

If the blogosphere is anything to go by, it seems that while the iPhone it too small, the iPad is also too big.

The endless speculation that Apple is planning to shrink the iPad while at the same time make the iPhone bigger continues. While I believe that there is a strong case for making the iPhone bigger, it's harder to make a compelling case for a larger iPad.

According to Patrick Moorhead, president and principal analyst of Moor Insights & Strategy, Apple needs a 7-inch tablet because without one the Cupertino-based giant face the prospect of losing market share and profit dollars.

"The Google Nexus 7 will sell well," writes Moorhead, "which is good for Google, Android, ASUS and NVIDIA, but bad for Apple, unless they act before the holidays".

The problem though, is price. "Apple may have redesigned some of the innards of the new iPad 2 as they lowered the price," writes Moorhead, "but not nearly enough to offset the $100 price reduction, so a mini-iPad would be additive, not dilutive like the $399 iPad 2".

The problem is massaging the numbers to make it work.

Take a look at the bill of materials estimate for the iPad 2 and iPad 3 drawn up in March by iSuppli Research:

Let's take the cost of a 16GB Wi-Fi iPad 2, listed as a little over $245 as a starting price for the mythical iPad mini. We can make a few common sense assumptions about any smaller iPad, for example, that it would have a smaller screen, a smaller touch screen and, one would assume, a smaller battery.

Problem is, it's hard to see this shaving much more than about $40 off the bill of materials. Let's push the numbers further by assuming that the component costs have dropped by some $20 since the original bill of materials was drawn up in March and we come up with a device that has an overall materials and manufacturing cost of around $185. This figure excludes costs associated with R&D, marketing and so on.

If the iPad mini costs around $185 to make, how much should Apple slap on the price sticker? $299 is the logical price point, pegging it at $100 cheaper than the current 16GB Wi-Fi iPad 2. On the face of it that seems like a healthy $115 above what it would cost to make.

However, scanning through the cost analysis we find that this would mean the iPad mini would have the smallest gap between the bill of materials plus manufacturing costs of any iPad.

In other words, this would mean that by releasing a 7-inch iPad Apple would be risking cannibalizing the sale of iPads with a better profit margin.

That doesn't sound like the Apple we know.

There's another problem with that $299 price point. Would the market stand a $100 price premium for the Apple logo on the back of the tablet when Amazon and Google already sell cracking tablets for $199? And what if Amazon slashes the price of the existing Kindle to $149? Where does that leave the iPad mini at $299?

In theory, a smaller and more portable iPad sounds great, but in practice, unless Apple is willing to massacre its profit margins to bring one to market, it's just not going to happen.

Image source: CNET, iSuppli Research.