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Is iPad mini cannibalizing its bigger sibling?

News Analysis

(MoneyWatch) This week has been a hot one for Apple (AAPL) rumors. First came a story that might indicate that iPhone 5 sales were slower than the company initially predicted.

Now Reuters is reporting that says Sharp Corp, the maker of screens for Apple's iPads, has significantly cut back production of the 9.7-inch iPad screen. There are several possible explanations, but some analyst research suggests that people may increasingly be turning to the iPad mini. That saves them money, and eats into the profits for Apple.

According to Reuters, Sharp has cut production to the minimum needed to keep manufacturing lines running. The report added that manufacturers of screens for rival pads have not slowed production.

If the report is accurate, there could be various explanations:

  • Apple had over-ordered screens for holiday sales and is working through the inventory.
  • Sales of the regular iPad have fallen because consumers are choosing other products.
  • Apple is shifting screen manufacturing to another company.
  • Apple is getting ready for a new iPad that will replace the current ones with a new screen size.

The last possibility certainly exists, but is unlikely, as Apple has kept the iPad 2 available as a lower price choice, following its typical strategy for other products such as the iPhone.

Apple tends to keep a tight control on parts inventory, as is true for many electronics companies, so having high levels of excess screens would indicate that estimates of unit purchases have been too optimistic. Given that the market continues to grow, it would suggest buyers are increasingly choosing something other than the full-size iPad.

Reuters quotes a Macquarie Research estimate that iPad shipments will drop by 40 percent, to 8 million, in the current quarter from 13 million last quarter. (The actual number for last quarter will be released with Apple's earnings announcement next week.) But total tablet shipments for Apple are supposed to be much higher as the iPad mini takes up much of the slack.

If true, it would suggest that the mini has cannibalized a large portion of the iPad market. Such a move would likely result in lower sales and profits because of the lower prices and margins.

However, that type of shift would actually show how smart the move to introduce the mini was. The other option would have been to let other companies, including Amazon (AMZN) and Barnes & Noble (BKS), take the sales instead.

Some of these questions may be answered on Wednesday, when Apple announces quarterly earnings. The company's shares dipped below $500 a share in early Friday afternoon trading.

Image: Apple Inc

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