In contrast, most who wrote about the iPad mini, from stock analysts to bloggers, focused instead on market share. They made their case based on the apparent success of Kindle Fire and behemoths like Google entering the low-end market. To paraphrase what many opined, a smaller iPad would allow Apple to continue to grab market share as its competitors nip at its heels on the lower end. Funny—since when did Apple start worrying about market share over profit share?

Apple’s official announcement last week did two things. It quickly demolished the market share argument—at a $329 price point, Apple is obviously not targeting the lower end of the market. And it also reinforced the thesis that Apple plays a profit-share game; that is, it’s focused instead on soaking up any possible profits with a carefully designed pricing strategy. In short, the iPad mini is not competing on price, in fact it is not even competing for the same customers as other players in the 7-inch tablet market.

Unfortunately, and crucially, we cannot tell from Apple’s messaging which customers they are targeting or how they are positioning the mini. AllThingsD is positioning it as the iPad for those who find the current one too big and heavy. In my last article I wrote that Apple would try to position the mini as yet another device we all must haven in addition to the iPad and iPhone. That is clearly not the case though, as evidenced by their messaging. My best estimate then is that they uncovered a sizable market segment that values lightness and smallness in a tablet, but is not willing to give up the user experience they get from iOS by switching to any of the Android tablets.

How big is this segment? Will any of the current iPad customers see more value from lower-priced and smaller-sized iPad mini and switch?

Let’s run some numbers to find out.

As I did in the case of Pinterest revenue modeling, I am going to use statistical model to find the profit impact. What we will find is how likely each profit scenario is when considered against the input conditions. If you are a betting person you will see this as the odds of Apple making A specific profit (or loss) from iPad mini.

In simple terms:

Profit from the iPad mini = Margin on the iPad mini  X  Volume of the iPad mini

We determine the Volume of the iPad mini from four sources. There are those buying it as their first tablet, or as an addition to their current iPad. Then there are others who are trading down from an iPad, which is to say choosing the mini instead of an iPad. Finally there are those switching from Android tablets and then those who trade-up from an iPod Touch.

The trade-down from an iPad and trade-up from an iPod Touch have a negative impact on profit affecting these product lines:

Profit Cannibalization = Margin on the iPad X Trade-down from an iPad + Margin on the iPad Touch X Trade-up from an iPod Touch

We know for certain the margin on the iPad and iPod numbers (~42 percent). But for other variables we have to make an estimate to do the modeling. We begin with listing the different variables that feed into final result and their 90 percent confidence interval values. That is, we list all the different variables, and then state the low and high values that we are 90 percent confident about (we are 90 percent confident the real value is between low and high and there’s only a 10 percent chance the real value is outside this range).

Estimates for Trade-down volume come from marketing research conducted by TechBargains.com, however that was likely based on the assumption that Apple would price their iPad around $199. Given the unexpectedly higher price point, I used a range of 10 to 30 percent, versus their average of 35 percent.

With these inputs I ran a Monte Carlo simulation to find the likelihood of different volume and profit scenarios. After running 1600-plus iterations, the results are stunning.

First the iPad mini volume numbers:

The results show that at the low end, come what may, Apple is all but guaranteed to sell 12 million iPad Minis per year. At the high end, Apple could sell as many as 58 million, but those chances are very very slim (1 percent). Considering all the possible scenarios, the expected value of volume is 40 million.

These are large numbers that frankly Google and Amazon could only wish for. But an interesting question is whether those big numbers automatically translate to big profits.

The results point to a high-risk game Apple is playing with the iPad mini. At the low end they could possibly lose $1.7 billion and at the high end they could make $2.5 billion in profit. But the chances of both these scenarios are just 1 percent. And so realistically, considering all possible scenarios, the expected value of profit is half a billion dollars—and that is gross profit, not including marketing and other costs associated with iPad mini. On a per unit basis that translates to a $12.50 incremental profit. And note that the volume and profits are just expected value—the actual results could be worse because in a surprising 30 percent of the cases, Apple is losing money from iPad mini sales.

So despite an expected strong sales volume of 40 million units, Apple will realize at best just a teeny, tiny profit compared to iPad and iPhone lines. Such high volume is certainly nothing to be sneezed at (especially if you’re an Android tablet seller, with shelves full of stock), but the outcome of the game is not certain. Even with the assurance of expected of strong sales, the incremental profit from iPad mini appears too small to make any dent in Apple’s overall profit share. It leaves us to conclude that, strengthened by its string of successes, Apple chose this time to focus only on the bright side and unusually play a high-risk game.

Rags Srinivasan specializes in product strategy and strategic marketing and blogs at Iterative Path. Follow his tweets @rags.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• How consumer media will change in 2013
• Takeaways from connected consumer’s second quarter
• Netflix may suffer from limited mobility

The survey size of 230 is small, so taken alone, it doesn’t point to any sweeping conclusions about tablet brands. But when added to other data points, the survey should at least concern the current Android tablet makers. Essentially, a new tablet device that competes well on price and focuses on a few primary mobile activities may be more desirable than a higher-priced slate that’s been available for some time and offers a wider feature set and greater flexibility. Surprisingly, Barnes & Noble doesn’t appear in the survey, so my guess is that it wasn’t an option to choose.

For a second data point — and out of curiosity — I created a Google Trends graph for all of the tablets and brands over the past 30 days. I left out the TouchPad, because at this point, it’s not for sale. What happened when I ran the trend chart? The Kindle Fire came in second to the iPad here as well:

The Fire, as well as the just-launched Barnes & Noble Nook Tablet, are both priced under the $320 median cost that consumers are willing to pay for a tablet, according to data from IMMR. And we don’t need a survey to validate this data: Just look at the HP TouchPad fire sale for $99 slates, which sold out in hours.

These results also speak to Amazon’s brand and ecosystem. The company is already known as a top-tier retailer of digital and physical goods. Plus, it has something that Motorola, RIM and HP don’t have: A direct selection of Android applications, books, movies and videos. I recently did a mobile media store comparison among Apple, Amazon and Samsung, showing that only Apple rivals Amazon in this area, which is key for a consumption-driven device.

For $199, I was generally impressed by the Kindle Fire after just 30 minutes of use. I have a Nook Tablet review unit arriving soon and will share thoughts as soon as I can, but it’s becoming clear that one way to compete against the iPad isn’t to compete directly at all. Instead, a better strategy may be to keep the price down and limit the feature set by compensating with a strong media ecosystem.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Tablet market to hit over 377 million units by 2016
• Tablets wars: Apple is from Venus, Amazon is from Mars
• What Amazon’s new Kindle line means for Apple, Netflix and online media

Asymco's chart of Apple's cash hoard following the company's Q3 2011 earnings

Here’s what some of the most vocal are saying about what Apple should do with its mound of cash.

• Bernstein Research analyst Toni Sacconaghi in the Wall Street Journal called it ”a level of cash that’s preposterous by any metric.” He says Apple should either buy back shares of its stock or issue a dividend.
• Over at Fortune, Philip Elmer-DeWitt argues against such a movie and warns “don’t be fooled” by those Wall Street analysts howling about Apple paying a dividend. “What these men want done is for Apple to give the money to ‘the stockholders,’” he writes. “What they don’t say is that they are the stockholders. Institutions own more than 70% of Apple’s shares and would be the primary beneficiaries of any buyback or dividend.”
• Daily Finance suggested Apple could buy a company with its hoard of cash. DF didn’t suggest any company in particular should be targeted. But it did point out that “[w]ith a market cap in excess of $360 billion, it could easily use its stock as currency” to make an even larger acquisition.
• Other eyebrow-raising suggestions thrown out there include Apple getting into the TV or gaming business, or snapping up Facebook, Hulu, or Netflix.

If the past is a predictor of the future, Apple is likely to do nothing drastic. This is not the first time the company has come under fire for its conservative spending ways. At a shareholder meeting last year, Jobs was peppered with questions regarding his plans for the money (he joked he was going to “throw a toga party” with it) but he answered very directly about how Apple think about its cash on hand: namely that it provides “security and flexibility.”

“When you take risks, it’s like jumping up in the air, and it’s nice to know the ground will be there when you land,” he said at the time. “We run our company conservatively from a financial point of view because you never know what opportunity is around the corner … We’re very fortunate that if we needed to acquire something we could write a check for it and not have to borrow money.”

With the ongoing war in the mobile industry over intellectual property taking place right now, that attitude is proving awfully prescient. Earlier this month Apple was able to put down $2.6 billion as part of a consortium that bought Nortel’s mobile patent portfolio, an amount that’s relatively tiny compared with the rest of the cash Apple’s got stashed away.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Research In Motion: future scenarios for its fate
• What the Google-Motorola deal means for Android, Microsoft and the mobile industry
• What the shift to the cloud means for the future EPG

Ready to ditch discs?

Apple is putting a lot of faith in the fact that its customers are ready to leave physical install media behind, and instead wholly embrace a digital distribution model. That’s the whole idea behind the Mac App Store, of course, and it has worked out very well for mobile software with the original App Store for iOS devices. But will Mac users be willing to take it to the next level, and welcome digital delivery even for that most essential software component, the core desktop operating system?

Our recent poll on the subject indicates that many will be upgrading, and that most will do so as soon as the 10.7 update becomes available. Only a tiny 3.4 percent of all those surveyed didn’t plan on upgrading at all. Those results favor Apple’s decision pretty highly, but they also probably aren’t a terribly accurate representation of the population at large, since our readership here at GigaOM tends to lean toward the early adopter end of the spectrum.

The old barriers, and some new ones

Typically, new operating systems are greeted cautiously by consumers. For example, take a look at the chart below, taken from a Net Applications report on OS market share in May. It shows the trajectory of Apple’s last few major OS updates, and you can see that adoption of each tends to start relatively slow and grow steadily over their lifetime. People can be hesitant about major OS changes, since it’s the software they depend on most heavily, and unfamiliarities necessitate an adjustment period some would rather not deal with. But Apple may be setting itself up for a lower than normal initial pool of upgraders, because Lion is digital-only, and because it requires 10.6.8, the most recent update, to be installed.

Because OS X 10.6 Snow Leopard is already so well represented among OS X users, it’s good for Lion’s prospects. Installing Lion requires the Mac App Store, which is only available for Macs using Snow Leopard, but a good number of Macs should fall into the category of those technically able to upgrade.

We’ve also talked about the risk Apple is taking with regard to customers who may have poor Internet connections, or severely restricted bandwidth allowances for their home connections. Some reports suggest Apple might get around that for some notebook users by offering Apple Store wireless as a means to download the update, but that’s not a practical solution for everyone.

Digital supply and demand

Apple has also had hiccups with major digital software launches in the past. Download speeds have been slow for past iPhone OS (now known as iOS) launches, and in some cases demand brought Apple servers down for extended periods. Apple now has a new data center facility which should help alleviate the strain, but at around 4 GB per copy, Lion stands a chance of causing a strain on the Mac App Store servers as early adopters rush to grab it.

The Lion launch, whether it comes next week as rumored or later on, could represent a major turning point in how we approach software distribution. But there’s also a small chance that it could turn out to be a moment when consumers say “we’re not ready for this just yet,” sort of like what pro users have been saying about Final Cut Pro X. Which way do you think the wind will blow?

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• The evolution of consumer-media cloud storage
• Connected world: the consumer technology revolution
• HTML5 or native mobile app? How about both?

A number of other cloud computing providers also offer free mobile apps for managing cloud resources on their Apple devices, including GoGrid, VoxCLOUD, Linode and Jungle Disk. Third-party developers have created cloud management for Amazon Web Services, Heroku, OpSource and Google App Engine.  The web interface for managing most cloud platforms makes mobile apps just a luxury in some instances, but it’s a luxury that that should find its way to even more cloud offerings as iPads and other tablets continue to become popular as business devices. There are a number of cloud management apps for Android devices, as well.

Feature image courtesy of Flickr user Jon Mountjoy.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• A near-term outlook for big data
• Cloud and data first-quarter 2013: analysis and outlook
• The fourth quarter of 2012 in cloud

Novelty or Lasting Value?

Though the researchers originally thought the iPad might be passed off as a flashy device that held little long-term value, 77.6 percent of the users found their iPad usage went up after their initial “honeymoon” period. So, the iPad probably won’t end up in your return pile shortly along with oddly-colored sweaters.

PC Replacement?

When it comes to function, 28.9 percent of users say that the iPad has replaced their primary computer. In a related question, users were asked which device they used most frequently. The iPad was found to be used most often by those surveyed: 31.8 percent of the time. Laptop usage, at 31 percent, fell just under, with the desktop further back still at 22.1 percent, and smartphone usage coming in last at 15.2 percent.

Taken together, the numbers make a strong case for the iPad’s ability to meet the basic computing needs of a large group of users. As the iPad gains even more ground on its notebook competition through hardware and software upgrades, we could see that number grow significantly.

Kindle and iBooks

The iPad is also used as an e-reader; 74.5 percent of those surveyed read books on their iPad. But, though the iPad is a popular book device, 50 percent of users who read on their iPads chose the Kindle app as their preferred reading app. Only 42.4 percent chose iBooks first. Amazon is clearly winning the e-book war by being platform-agnostic.

Daily Usage

On average, around 74.8 percent of iPad users spend between one and five hours a day on their tablet device; 15.3 percent spend less than an hour; and 9.8 percent spend five or more hours per day.

Web browsing occupies 37.7 percent of the time spent on the iPad, followed by 23.6 percent of time spent on email, Facebook, and other communication apps. The lowest category, at only 10.2 percent, was spent playing games. Users clearly value the iPad for its usefulness as a web and communication tool first and foremost.

iPad App Habits

The survey found that 56.1 percent have downloaded 20 or more apps. Most have downloaded around 10 paid apps (52.3 percent having downloaded 6-20 paid apps). So while free apps account for a majority of downloads, paid apps are by no means being ignored.

Yet, of all of the downloading, whether it be paid or free, most people use 10 apps or less on a regular basis, leaving half or more of their apps ignored shortly after download. In fact, the most commonly used app is one you don’t even download: Safari. The built-in browser remains the iPad’s killer app.

Taking in the News

When viewing news on the iPad, the majority (at 37 percent) preferred the iPad’s web browser, while those using news apps came in a close second at 34.7 percent. In last place, we find using a newsreader app such as Flipboard or Reeder with 28.3 percent. So, if you’re ready to leave behind the newspaper, the iPad offers many viable alternatives.

iPad to MacBook Air

Only 4.2 percent of iPad users surveyed have purchased the new MacBook Air. Of that small number, 95.8 percent say it hasn’t decreased their iPad usage. Also, 76.1 percent of those surveyed felt that the iPad and MacBook Air weren’t competing devices. Obviously, Apple is still doing a great job of convincing us that each of its devices has a very specific purpose, even among devices that scratch the same portability itch.

All data considered, the survey reveals that the iPad is making inroads on the role traditionally filled by notebook PCs, and it’s replacing a selection of lower-tech devices, too, like print books and newspapers. Developers, take note: People seem happiest using their devices for browsing the web and connecting with one another. Combine those elements in just the right mix, and you could have a top-selling app on your hands.

Related content from GigaOM Pro (sub req’d):

• Why Apple Should Consider a 7-inch iPad
• Five Things Needed for a 48 Million iPad Market
• Crucial Elements for a Successful Gaming Phone

Samsung Galaxy Tab. Samsung is wisely leveraging the design, hardware and success of its Galaxy S smartphone line, of which a million units have shipped in the U.S. since June. The Tab is essentially a blown-up Galaxy S handset with 7-inch capacitive screen running Android 2.2 at 1024 x 600 resolution. Unlike the iPad, the Galaxy Tab has front and back cameras. One huge positive for the Tab is support for all Google apps and the Android Market, two factors that have held back prior Android tablets from any chance of success. Prices — not officially announced yet — will be a factor however, as early talk at IFA indicates a €699 – 799 ($890 – $1,020 USD) price tag. That’s without carrier subsidies, however, and retailers could decide to price lower. Odds of selling a million tablets by year end: 4-1 if the price is competitive with the iPad, 10-1 if not.

Toshiba Folio 100. Toshiba isn’t a force in the smartphone market, so unlike Samsung, it took a top-down approach and built the Folio 100 from a smartbook design. Folio 100 gets a strong performance boost with its Nvidia Tegra 2 processor powering a 10-inch capacitive display. It too will run Android, but since the Folio 100′s hardware doesn’t meet Google’s specifications, there are no Google apps and no access to the Android Market. Instead, users can buy apps from Toshiba’s far more limited market — a factor that will limit Folio sales to all but the geek crowd. Below is a hands-on video from Carrypad that shows both the silky performance, as well as limitations without full Google support. Odds of selling a million tablets by year end: 50-1.

Viewsonic ViewPad 7. Another 7-inch entry, the ViewPad 7 isn’t hobbled by the lack of Android Market access, but could be handicapped based on the 600 MHz ARM chip that powers the device. It’s too early to make performance determinations, but I’d expect the ViewPad experience to lag behind both its fellow tablets and the iPad. Unfortunately, Viewsonic opted for an 800 x 480 screen, which is the bare minimum for a decent experience on a 7-inch display. The choices of CPU and screen are helping the keep the price down. The tablet is estimated to max out at €399, which may be compelling enough to make up for any potential performance pitfalls. Odds of selling a million tablets by year end: 30-1.

More competitors will likely jump into this market between now and year end — even more as the Android paltform matures. For now though, these three are trying to lead the fight against Apple’s iPad. Without the support of a massive and easy to use ecosystem, such as the iTunes App Store, none are likely to dethrone the iPad. But at the very least, if Android’s Froyo sounds tasty on a tablet, consumers have some reasonably good options.

Related content on GigaOM Pro (sub. req’d): Can Anyone Compete With the iPad?

Twitter for iPad handles all of the standard Twitter functions in a way that focuses on the user interface. The app serves all functions well in portrait orientation (my favorite for using Twitter), but really shines when the iPad is turned to landscape. The amount of information displayed at all times makes using Twitter an enjoyable interactive experience.

The app uses multiple panes that slide into view from the right as needed. When you click on a link in a tweet, the internal browser slides in from the right to display the article, photo or YouTube video. These panes are fully adjustable, as you can slide them left or right to the desired location to keep other panes in view. There is no simple open or close pane function as in most apps; they can be slid to personal preference. This turns Twitter for iPad into a very powerful tool.

While the Twitter app is very good for a first version, there are a few minor glitches that need to be addressed. The internal browser is slow to open a linked article, although it’s smooth once opened. It can also be harder than it should be to close exposed panes when sliding them back to the right. Sometimes they get “stuck” midway, requiring an extra slide to get them off the screen.

Those are minor gotchas compared to the functionality that Twitter for iPad brings to the user. Working with Twitter for iPad is so enjoyable it may just make the Twitter web site obsolete. It isn’t shooting for the glamor of apps such as Flipboard, but its innovative use of multiple panes makes it more useful.

Related content from GigaOM Pro (sub req’d):

The App Developer’s Guide to Choosing a Mobile Platform

Now that iPad orders are flowing around the globe, international service providers are stepping up with data plan pricing for the 3G models. Here’s a table compiled with plan information by country and carrier — we’ll update as we get more info.

Related Research from GigaOM Pro (sub. req’d):

• How AT&T Will Deal with iPad Data Traffic

• Metered Mobile Data Is Coming and Here’s How

• Hot Topic: Mobile Broadband Pricing

Bytemobile recently tested the Apple iPad to see how its data consumption compares to that of the iPhone. The same web and software activities were run on both devices and overall, the iPad used 2.5 times more data than the iPhone. The USA Today application offered the most striking difference during Bytemobile’s tests — using the software to read news on the iPad required 6.3 times more data throughput, likely due to higher-resolution pictures and other multimedia supplements, which provide a more immersive experience.

Of course, such an experience is the primary benefit of the iPad with its touch-friendly interface and 9.7-inch display. Indeed, when here at home, I opt to use my iPad in lieu of my smartphone because the experience is so much better. And with no difference for international data plans between smartphones and iPads, traveling consumers could find themselves topping off the data plan on the more enjoyable iPad and then wondering why half an hour’s worth of of YouTube videos cost them $200 to watch.

Related research on GigaOM Pro (sub req’d):

• Why Carriers Can’t Afford to Wait for New Spectrum
• Everybody Hertz: The Looming Spectrum Crisis
• Hot Topic: Apple’s iPad
• Company Profile: AT&T (free)
• Company Profile: Apple (free)