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iPad: Why Apple may cede much of tablet market

(MoneyWatch) The new lineup of iPads and MacsApple (AAPL) unveiled today in San Francisco suggests the company is torn. The tech giant wants the massive global growth that would please investors, and yet it also wants to maintain high profit margins on products, which is increasingly off-putting to many consumers.

The upshot? Apple may effectively write off much of the tablet market. That is no way to keep Wall Street satisfied, as the dip in the company's stock price today shows. Tablets are a vital category because they are quickly replacing, not just supplementing, PCs. According to some estimates, tablet sales could outstrip PC sales as soon as this year.

Although Apple leads in the total number of tablets already sold, it is losing the race for new customers. An analysis from ABI Research shows that Google's (GOOG) Android platform recently surpassed the iPad in sales of new devices. There were three events that lead to this shift:

  • During the second quarter, the number of Android tablets passed iPads for the first time. One contributing factor was the drop in Apple tablet sales both year-over-year and in successive quarters.
  • The shift was not only in units, but in revenue. In another first, iPads took only about half the worldwide end-user tablet revenue, as Android tablets largely scooped up the rest.
  • The iPad's average sales price fell roughly 17 percent this year, while the price of Android tablets grew by the same amount.

Compounding Apple's problems is the significant drop in its profit margins resulting from offering cheaper products, including the iPad mini. The pricing pressure on Apple in the tablet space isn't about to let up, particularly as Amazon (AMZN) drives down the cost of full-featured tablets to well below $150.

Apple's new version of its full-sized tablet is called the iPad Air. Weighing only 1 pound, it is an exceedingly light, but pricy, piece of hardware, starting at $499. To attract more budget-conscious customers, Apple is selling the iPad 2 for $399. Given how long that model has been around, the margins are likely hefty and a way for Apple to try and shore up attack from the likes of Amazon.

Similarly, the original version of the iPad mini will sell for $299, while the newer version is $399. The intent is to attract the many buyers looking elsewhere while keeping the higher margins that make strong profits possible.

"This is the clearest statement Apple could have made that it is only interested in competing in the premium tablet space," said Ovum chief telecommunications analyst Jan Dawson in a statement. "The yawning gap between the specs of the cheaper iPad Mini and iPad 2 and the new iPads signifies that it is only willing to compete at the lower price points with older models. This leaves a huge chunk of the tablet market unserved by Apple, while others such as Google, Amazon and a raft of others aggressively target the sub-$400 market."

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