7-inch iPad, maybe—but $199?

There’s a lot of noise suddenly—again—about the supposed 7″ iPad that Apple will (or won’t) be releasing. Lorraine Luk of the Wall Street Journal writes “Apple’s component suppliers are preparing for mass production in September of a tablet computer with a smaller screen than the iPad,” and that doing so “could help Apple maintain its dominance in a market that keeps getting more crowded.” John Gruber at Daring Fireball didn’t exactly confirm this, but in his linked list piece he wrote,

I bet Apple could make a $199 iPad Mini and turn a profit on it. It’s that simple. If Apple thinks people would buy a smaller cheaper iPad and that they can turn a profit making them, they’ll do it. No reason to overthink it.

Maybe, but since when has Apple—at least in the last fourteen years—ever been guided by that principle? I bet Apple could turn a profit with a $699 laptop. I bet Apple could turn a profit with the oft-wished-for “xMac,” a headless iMac aimed at people who want iMac power without building it into the monitor. You can go down a checklist of things that people have wanted Apple to build that they could almost certainly have made some profit on.

But they didn’t.

It’s not that Apple eschews making products that don’t fit with their noble all-encompassing aesthetic. (Two words: iPod Sock.) They eschew making products that are low margin. Horace Dediu estimates that Apple is making close to a 33% margin on iPads.

Apple makes as much money as they do—a whole lot of money indeed—by being strategic about what money they go after. They’re fine with being a “premium” brand. And even as good as their supply chain management is, I don’t think Apple can produce a 7″ iPad for $140. The iPhone 3GS’s unlocked retail price is $350; what do you think that makes its production cost? Apple’s operating margin across the iPhone line is estimated at 51%—some research says the 3GS is a little higher, and some says it’s a little lower. A 7″ iPad has to cost more to produce, though, and Apple would be getting less than 60% as much revenue. To hit that $199 price point, does the profit margin drop from 33% to 25%? 20%? Even 15%?

Granted, most consumer electronics companies would be ecstatic with a 15% profit margin. But Apple has never been. I wouldn’t rule out a 7″ iPad—but if it happens, I’d be surprised if it starts at less than $249. And I wouldn’t be surprised if it never happens at all.

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