Apple, Inc. (NASDAQ: AAPL), led by Tim Cook, is expected to release iPad Mini, a lower priced version of the popular iPad, at a special event in San Jose on Oct.23.
Apple normally gives clue of the upcoming product with the title of invitation. The latest event is not an exception, and media apart from consumers are going gaga over the title "We've got a little more to show you," speculating it to be the most-anticipated smaller iPad -- dubbed iPad Mini.
If Apple releases iPad mini, it would be one small step for the iPad, but a giant leap for the ecosystem as creating barriers to exit is critical to Apple's long-term economic model.
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"Offering a lower-priced tablet not only brings more consumers to Apple's ecosystem, it increases their exposure to higher-priced content and increases switching costs," UBS analyst Steven Milunovich wrote in a note to clients.
Platform switching costs are becoming an important element of Apple's competitive position. As paid content per device increases, consumers will be less willing to switch to rival platforms such as Android or Windows and will be more forgiving regarding their own platform's imperfections.
Additional devices that increase penetration, such as the iPad mini, along with iTunes and iCloud are key ingredients in raising switching costs.
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On average, iPad app content is significantly more costly than phone apps. The iPad generates 65 percent more revenue per app than does the iPhone on average across all regions. Excluding Asia, there is an even greater disparity, in which iPad revenue per download is more than double the iPhone.
According to several sources, the majority of iPad owners have 20-50 apps on their device. Excluding separately managed subscription content like Netflix, Hulu, HBO GO, and several newspapers, the average North American/European user would have $15-50 of paid app content on his iPad.
"Using Apple's estimate of 80 apps downloaded per iOS device, including apps not on device, iPad paid app content would be $56-80. We estimate iPhone paid app content per device to be significantly less. Adding other features, including iTunes Match and iCloud, increases cost by another $25-50 per account," Milunovich noted.
Finally, iTunes users would need to apply Digital Rights Management (DRM) removal to their song list in order to play on other non- Apple devices—DRM removal is 30 cents per track and not available for videos.
"We calculated one of our own team member's switching costs. Including 104 Apps containing $421 of content, iTunes Match, iCloud, $280 of video content (mostly seasons of Entourage and Go Diego Go!!!), and 7,354 DRM-laden songs, our platform switching costs would total $2,962," Milunovich said.
According to third-party research, the Apple App store tallied 14.6 million downloads per day across its top 200 apps this past July. About 77 percent of downloads were to iPhones though this statistic may be misleading considering the roughly 150 million iCloud users who can share downloads and in-app purchases across multiple devices.
The analyst found this disparity when observing gross revenue allocations in North America for iPhone/iPad, where he presumes the majority of iCloud users are located.
North America represented 44 percent of download activity, followed by Asia with 33 percent and Europe with 23 percent. When observing the top 200 download apps, paid- app downloads represented 13 percent of gross revenue while in-App purchasing made up the remaining 87 percent of gross App Store revenue.
For both the iPad and iPhone, games with in-App purchasing like CSR Racing, Dragonville, Slotomania HD, and the Amazing Spider-Man were the dominant grossing apps across all regions, followed by Apple productivity apps (without in-App), such as Pages, Numbers, and Keynote.
Despite having more download activity than Europe and slightly less than North America, iPad gross revenue per download in Asia was 21 cents, significantly lower than the 70 to 98 cents generated in Europe and North America.
"We think part of the reason for lower iPad gross revenue stems from the lack of local content optimized for the iPad. Although not a comprehensive measurement, we counted 17% of the top 300 iPad apps with Asian characters in the app title compared to 25% for the iPhone," Milunovich said .
Another reason might be demographics—the majority of Asian iPad users are affluent executives less likely to download games, the dominant revenue category across all regions.
Nevertheless, iPad mini would be an exciting device to watch for. If speculation are to be believed, then iPad Mini will feature a 7.85-inch display at 1024 x 768 pixel resolution and will be a thinner model. According to MacRumors, the smaller iPad will be powered by a different version of the A5 processor, which powers the iPad 2, rather than the A6 chip found in iPhone 5.