The No. 1 argument against Apple's iPad Mini

The rumour mills are getting louder. Apple (Nasdaq: AAPL) — if we're to believe Asian publications, stateside analysts, and countless bloggers — is working on a smaller tablet.

The thesis is sound. Amazon.com's (Nasdaq: AMZN) Kindle Fire is no match for the iPad, but the leading online retailer managed to sell nearly 5 million of its portable gadgets over the holidays. Google's (Nasdaq: GOOG) Nexus 7 — matching the Kindle Fire on both price and 7-inch screen size — will begin shipping as early as next week.

The proliferation of 7-inch Android-fueled tablets is hard for Apple to dismiss. After all, this is the one niche where Apple actually commands the lion's share of a growing market. Yes, the iPhone is a bigger contributor to Apple's business at the moment, but roughly two Android smartphones sell for every iPhone that's picked up. Apple's desktops and laptops are still the devices that many consumers associate with the company that until recently was known as Apple Computer, but Apple isn't even one of the world's five largest PC makers by unit volume.

That leaves us with the iPod. Apple has had this market cornered for years, but sales of the portable-media player have been falling over the past two years.

The iPad is important to Apple, and it can't let the market get away.

But there's the rub
Bigger screens cost more money to make, and it's probably the biggest reason the more successful tablets outside the iPad, with its 9.7-inch screen, happen to be smaller devices with 7-inch touchscreens.

Introducing a 7-inch iPad would be great, but what would it sell for? This is the biggest sticking point in all of the "iPad Mini" chatter that's making the rounds. Teardown reports suggest that Amazon is selling its Kindle Fire at a loss. Google's Nexus 7 packs slightly better specs, so it wouldn't be a surprise if Big G is positioning its own tablet as a loss leader, too. Amazon and Google have ecosystems where they can make back the hardware subsidisation.

Apple can, too — but it won't. The company's thick margins would disappear. Have you seen what's been happening to Amazon's margins lately?

However, the main reason Apple wouldn't price its smaller iPad — if it even comes out — at the same US$199 price point as the Kindle Fire or Nexus 7 is that it would destroy the sale of its 9.7-inch iPads that start at US$499.

Even tacking on a slight premium to get to US$249 or perhaps even US$299 will cannibalise iPad sales more than it eats into what Amazon, Google, and any other low-cost tablet manufacturer is up to.

That's the product-line killer, folks. There is no appropriate price for an iPad Mini.

The price isn't right
When Apple decided to keep the iPad 2 around after its rollout of the new iPad, the US$399 price point was deliberate. It's priced at a point where most potential buyers will just fork over an extra US$100 to get the latest tablet with all of the upgrades that Apple introduced earlier this year.

Would the same argument hold up if Apple's slightly smaller iPad was priced at US$249? No. Most people would just buy two iPad Minis if they had enough to buy one new iPad.

One can argue that Apple could really scale back on the features. It can go with a crummy camera with low resolution (since going with no camera at all would be a FaceTime killjoy). It could cut corners on the display or other chips. Would it, though? This is Apple that we're talking about here.

"Some people aren't used to an environment where excellence is expected," Steve Jobs once said.

It's one thing to sell last year's model for US$100 less the way Apple does with its iPad and iPhone gadgetry. It's another thing entirely to dumb down an Apple product so it can compete on price.

Playing crazy eights
This could be why the new rumour isn't talking about a 7-inch tablet anymore. The new chatter is about a smaller iPad that is simply smaller than 8 inches. Even if it's by a fractional inch, putting out a tablet that's bigger than the 7-inch standard championed by Research In Motion (Nasdaq: RIMM) , Amazon, Google, and Barnes & Noble (NYSE: BKS) opens the door for a US$299 — or more than likely a US$349 or a full-featured US$399 — price point that may not interfere with sales of its flagship tablet.

Then again, who would buy that? It would be the worst of tech tweeners, and we know how Jobs felt about those.

There is no right price here, and because of that, we may never see the iPad Mini.