Seven or ten inches? Apple, Microsoft to drive tablet wars part 2

With rumours of Apple's (AAPL) iPad mini to be released in the fall, Google's (GOOG) own 7 inch tablet coming soon and Microsoft's (MSFT) hardware army about to flood the market with 'laplets' in October, the tablet industry approaches a major shift.

The iPad and Amazon's (AMZN) 7 inch Kindle Fire are cleaning up at the moment, with the Kindle acheiving an Android market share of over 50 percent, while together they account for 80-90 percent market share of tablets. Although we often hear of the slew of Android tablet models and might be misled by the large impact of Android, Android has in fact become the Kindle Fire's kingdom.

The impact of the iPad mini
So while there is great demand for the 10 inch tablets, primarily the iPad, the demand for Android mainly comes from the 7 inch Amazon tablet. This means that Apple has a great incentive to enter the more price sensitive 7 inch tablet market. So the real question is: Will Amazon and Google's 7 inch tablets be able to compete with the rumored iPad mini? The price of the iPad mini is expected to be between $249-279 versus the $199 price tag for the two Android devices, so would consumers prefer a higher price iPad mini or a Kindle Fire? I would be willing to bet that many price sensitive consumers would rather pay an extra $50 for the iPad. The iPad mini might actually be able to crowd out the Kindle Fire and the 7 inch Nexus and capture the majority of the low and mid-range tablet market.

The iPad mini will most likely not be a huge earnings driver for Apple but should still benefit the company. If we assume that the iPad mini can capture 20 percent of the Kindle Fire market in 2013, or about 10 percent of the Gartner projected 60,000,000 Android tablet, the company could see sales of around 6,000,000 units. And if we assume an iPad mini cost of around $200 and a price point of $249 to $279, a profit of around $300-480 million could be made from the minis (2-3% of 2011 earnings). The impact will be more clearly felt in a strategic sense as Apple could deal a serious blow to Android and Amazon.

Is there such a thing as the high end tablet market?
There is a slew of Windows 8 'laplets' (read: laptops/tablets) coming in October, they will provide a hybrid alternative of notebook and tablet with a complete operating system including Office. Some pricing details have been released from Acer where the lower end 'laplets' will be priced between $599 and $799, directly competitive with the newest iPad. The higher end laplets will be priced similar to current ultrabooks, $1000+. So Apple should be only partially affected by the Windows 8 tablets, partly because of the experience they provide and partly because of the price. The reason Microsoft will benefit from Windows 8 is it will finally have decent exposure to the 'touch' experience in tablets where it currently has none. Basically Microsoft has everything to gain and not much to lose.

My prediction
I believe that if Apple does release a smaller iPad, Apple will eat away at the Kindle's lower end dominance and the company will be able to dominate the low and mid-range tablets. Windows 8 on the other hand will  come to dominate the higher hand tablets erasing most of Android's leadership in that range, basically splitting up the tablet market into two dominating forces between Apple and Microsoft, much like the PC industry, albeit with roles reversed.

Additionally Apple's halo effect should continue to increase the company's market share gains in the traditional PC market against Microsoft, and if Windows 8 does not become another Vista, the company should benefit in the smartphone segment with its 'Metro' styling push across all platforms.

Google and Amazon won't be immediately impacted by a decreased Android presence since their forays into tablets are only strategic long term goals and not key earnings drivers. On the other hand, both Microsoft and Apple could see some benefits from this second tablet battle. After that, who knows?