Shares of Apple soared 2 percent Thursday on a report from The Wall Street Journal that said Apple's Asian suppliers are ramping production for the September launch of a smaller, less-expensive "iPad Mini."
The price range on the third-generation iPad, which begins at $499 for a 32 GB Wi-Fi-only model, has arguably kept Apple from playing on the same court as the $199 Kindle Fire from Amazon and Google's recently announced Nexus 7, a 7-inch Android tablet selling for $199.
Even at higher price points, Apple still controls a hefty majority of the tablet market globally and until recently hadn't appeared to concern itself with the lower end of the market.
Ross Rubin, executive director and principal analyst of connected intelligence at NPD Group, said that if the recent rumors are true, Apple will have some backtracking to do to justify its move to a smaller format.
"Apple would need to reconcile its previous criticism of that screen size with the opportunity there now. … Both Steve Jobs and Tim Cook rebuked that screen size, saying that it was unusable," Rubin noted.
Still, he said, a smaller iPad is aimed at the only area where there's been significant volume apart from the 10-inch market segment that Apple dominates today. Of course, nothing being set in stone, Rubin entertained the idea that Apple might break from rumors of a 7-inch screen.
"There are rumors that Apple might do something a bit larger, closer to the 8-inch display size. Something somewhat similar to the Galaxy Tab 7.7 or the Droid Xyboard 8.2," Rubin said, noting that Apple would be able to preserve the aspect ratio of the 10-inch iPad so as not to cause developers too much pain.
A smaller iPad would be a bit of a departure from Apple's standard operating procedure. Because Apple's astronomical profits are fueled by high margins, the company rarely produces a new device to fill a hole in its market strategy.
Rather, Apple prefers to reduce the price of older models, thus clearing out inventory, while the latest generation of any particular device carries the premium price point.
Rubin said there is precedent for this kind of move in the iPod Shuffle but added that the game changed with an iOS-based product.
"You want to preserve compatibility. You want to preserve the message to developers of the consistency of the platform. So to optimize that, it would be a requirement to create a good experience on a smaller screen size," Rubin said.
An iPad Mini could attract a demographic that Apple typically loses due to its higher prices. According to NPD Group, iPad owners tend to be older and wealthier than the customer base of the rest of the market. More than 40 percent of iPad owners have a household income of $100,000 or more, compared to 26 percent of non-iPad owners, NPD found.
That said, Rubin contended there's still a healthy market for a smaller, presumably cheaper iPad. And this is an area where he said Apple may be changing strategy in a pretty radical way. A cheaper iPad could mean Apple is finally willing to subsidize its own product through the selling of content, possibly in the way Amazon does with its Kindle Fire.
"They always have made money on the device. They haven't sought to bring down price points through subsidization, or at least their own subsidization in order to compromise on materials or capabilities," Rubin said.
While the Kindle Fire and Google's Nexus 7 both appear to have foregone LTE, would Apple follow suit with a smaller iPad?
Rubin said he doubts it. "Apple's been moving in this direction with the latest iPad, and there's clearly a stronger case for [LTE] in a smaller, more portable product," he said.
As with all things Apple, particularly when it comes to the rumor mill, we'll just have to wait and see what gets toted onto the keynote stage by Tim Cook and company this fall.
Shares of Apple were trading down slightly less than a percent to $604.50 in early morning trading.