10-23-13 1:07 PM EDT | Email Article
 

By John Shinal

 

When surrounded by enemies, it's usually best to pull out the shotgun.

 

That maxim of the Old West could be used to describe Apple (AAPL) Chief Executive Tim Cook's recent approach to product development.

 

On Tuesday, for the second time in as many months, Cook summoned the world's technology press to San Francisco and unveiled not one but two (or more) new Apple mobile devices to showcase. This week's unveiling included a slimmer iPad, a sharper-screened iPad Mini and two MacBook Pro laptops -- all souped up with faster chips.

 

There was also an expensive desktop computer called Mac Pro that will thrill power-hungry professional users but be of little interest to average consumers.

 

Coming on the heels of the mid-September rollout of two new iPhones, the new tablets likely will help ensure that Apple gets a large share of personal electronics sales this holiday season.

 

But it's less sure that any sales boost driven by the new iPads will last long enough to raise the company's flagging profit margins. Those falling margins were the biggest reason Apple's stock began a long, deep dive in September of last year, a decline that put a big hurt on investors who didn't see the trend early enough.

 

For the nine months ended in June, Apple's gross margin fell to 38% of revenue, compared to 45% a year earlier. For the quarter ended in June, the company said fiscal third-quarter gross margin was 37% compared to 43% in the same period last year.

 

Even though Apple generated just over half of its revenue for the Jun period from sales of iPhones, a decline in iPad sales and average selling prices was a big reason for the margin decline. iPad revenue fell 27% in the June quarter from a year earlier. That was almost twice as fast as iPad unit sales, which dropped 14%.

 

It was the first year-over-year drop in iPad sales, which contributed 18% of Apple revenue for the June quarter.

 

In its quarterly filing to securities regulators, Apple blamed the decline in average tablet selling prices on "the introduction of the iPad Mini and a price reduction on iPad 2."

 

This time around, Cook did things differently.

 

Even as Apple unveiled the iPad Air -- which has a much-sharper screen, much faster chip and is one-third lighter than the existing iPad 2 -- it kept pricing on the older tablet unchanged.

 

But given that consumers can get all those new Apple features for just $100 extra -- the 16Gb version of the iPad Air starts at $499 versus a $399 starting price for the iPad 2 -- it highlights the question of why (or how long) Apple will continue to make the older model.

 

What's more, the Apple website now lists four different iPads for sale, with starting prices for the various tablets ranging from $299 for the lowest priced version of the original iPad Mini to $929 for the most-expensive iPad Air -- one that comes with LTE connectivity to wireless networks.

 

In other words, Apple now has a wide range of tablets at a wide range of prices, moving away from its initial iPad strategy of focusing on only the high end of the market.

 

That makes sense given that the market has matured and attracted a wide range of competing products from Samsung and others. Some of those competitive offerings still underprice the cheapest iPads, keeping some pressure on Apple's pricing ability.

 

Developing those new iPads -- and iPhones -- wasn't cheap, which is why Apple's research and development costs rose 34% in the June quarter, even while sales for the period were essentially flat from a year earlier.

 

So unless Apple can sustain higher sales of the new tablets at their introductory price points, higher unit volumes during the holidays may not lead to a corresponding rise in profits when the company reports fiscal first-quarter results in January.

 

Next week, investors may get an update on iPad pricing trends when Apple reports fiscal fourth-quarter results.

-John Shinal; 415-439-6400; AskNewswires@dowjones.com

 

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(END) Dow Jones Newswires

10-23-13 1307ET

Copyright (c) 2013 Dow Jones & Company, Inc.
Copyright 2014 MarketWatch
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