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Apple's 7-Inch iPad Can Be Its Ace in the Hole

NEW YORK ( TheStreet) -- In the constant battle for mobile device supremacy from the likes of Google (GOOG - Get Report), Amazon (AMZN - Get Report), Research in Motion (RIMM) and Microsoft (MSFT - Get Report), technology giant Apple (AAPL - Get Report) has always prided itself on being the puppet master while showing very little interest in being just best puppet. In fact, its shrewd business practices, which has RIM teetering on the verge of bankruptcy, has become legendary.

So it shocks me to see that the company has allowed the seemingly inept competition to dictate its next move, essentially saying, "They were right." What does Apple stand to gain by this admission?
Is Apple really planning to launch a smaller version of its market-leading iPad by the end of this year?

The art of war
A recent story posted on Bloomberg says Apple plans to launch a smaller version of its market-leading iPad by the end of this year. It is expected to be priced comparable to Amazon's popular Kindle Fire and Google's recently announced Nexus 7 tablet, both $199. Though Apple has yet to confirm this report, it is speculated that a 7-inch iPad might be the talk of the market as early as October. It could be another blow to competition already unable to keep up.

Microsoft, which recently revealed its Surface tablet, can't be entirely pleased with the news -- although I doubt it is surprised. It remains to be seen how it approaches its pricing structure, since it plans to put out two models. And though the Surface resembles a tablet, I maintain that its primary targets are consumers that want the functionality of a laptop -- or, more specifically, the use of Windows. So competition now also comes from its partners in Hewlett-Packard (HPQ) and Dell (Dell) -- both recently told it is now every man for himself.

If it is true Apple's smaller iPad will be priced to undercut Google and Amazon, Microsoft might feel pressured to preemptively announce pricing or the date of availability for the Surface. The current iPad ranges from $499 to just a little over $800; Microsoft may be left with very little room to decide which market it wants to enter.

Amazon loses on each sale of the $199 Kindle Fire and Google only breaks even on the Nexus 7, but they serve essentially as storefronts for content distribution and the acquisition of ad market share. Microsoft does not have such a luxury. What does it stand to benefit by undercutting itself?

Conversely, it can't price Surface too high if gaining market share is a part of its strategy.

Either way, Apple wins again. The big losers are going to continue to be Hewlett-Packard, Dell, Samsung and essentially every Microsoft and Google partner -- particularly those of the latter. It remains to be seen how Amazon is affected by this, but I don't imagine that Google intended on entering this market and pricing its tablet at $199 without considering stealing market share from Amazon.

Bottom line
In the battle for market share and market cap, Apple has no comparison. As the largest company in the world, it is safe to say that the company has very few insecurities, even though it has succumbed to measuring its size with that of the competition. But a smaller iPad was seen coming a mile away -- particularly when Amazon launched its Kindle Fire late last year to rave reviews. Apple was determined to respond and has only been biding its time.

Clearly, it anticipated the arrival of other entrants to the market, some more successful than others. As it has been known to do, it let them show their hands and pulled out an ace of its own. Steve Jobs' vision and dictation of market movement is still at work. But this news reminds me of another famous visionary, Sun Tzu, who famously said "Every battle is won before it is ever fought." In this case Microsoft and Google have yet to sell a tablet and they've already lost.

At the time of publication, the author was long AAPL and held no positions in any of the stocks mentioned, although positions may change at any time.

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