With the iPad Mini finally on the market, one of Apple's biggest concerns is the cannibalization impact on the sales of larger iPads (4th generation iPad & iPad 2). Most analysts have estimated that cannibalization would fall in the 15-20% range, i.e. 15-20% of iPad Mini sales would be at the expense of larger iPads. Let's take a look at how realistic these estimates are.

### iPad 2 Cannibalization Estimate

The best way to estimate iPad Mini-related cannibalization would be to take a look at the impact of the iPad 2 (starting at $399) on 3rd generation iPad sales (starting at $499). Unfortunately, measuring that impact has always been a problem since Apple does not release sales by iPad model. This is where patent litigation comes to our rescue. During the Apple vs. Samsung trial, the companies were forced to reveal US sales figures of accused products until Q2 2012, which included the iPad 2 and AT&T's 3G-enabled, first generation iPad or iPad (AT&T), but excluded the 3rd generation iPad. Since the 3rd generation iPad was launched in the last week of Q1 2012, we have Q2 2012 US sales figures for all non-3rd generation iPads. This gives us some great data to start with, so let's dive in.To start off, we first need to estimate US iPad sales by model, in Q2 2012. We have 3 models to consider, the iPad (AT&T), the iPad 2 and the 3rd generation iPad. According to the figures revealed in the trial, Apple sold 5.71 million iPads in the US (excluding the 3rd generation iPad). Based on this, we can make the following estimates:

**iPad (AT&T)**- In Q2 2012, the original iPad (AT&T) would have been handicapped by limited distribution & marketing, compared to the two newer iPad models in the market. Therefore, we can safely assume that this product comprised a maximum of 15% of the sales revealed during the trial.

**iPad 2**- US iPad 2 sales would be the difference of the Q2 2012 figures revealed during the trial and the estimated sales for the iPad (AT&T) above.

**3rd Generation iPad**- In order to estimate the number of 3rd generation iPad sales in the US, we need to estimate total iPad sales in the US and deduct the sales figures revealed during the trial. Based on the trial data, US iPad sales have formed between 35-45% of global iPad sales for the past five quarters. The proportion of US sales seems to peak (at ~45%) during the first full quarter after a product launch. Since Q2 2012 meets those requirements, we can assume that US iPad sales formed 45% of global Q2 2012 iPad sales (17 million).

Based on the figures above, we get the following estimate for US iPad sales by model:

The figures above show that the iPad 2 was the most popular iPad model, with more than 60% of total sales volume in the US and more than 70% of iPad sales excluding the iPad (AT&T). But this does not mean that the iPad 2 cannibalized 70% of 3rd gen iPad sales. Cannibalization is a measure of the proportion of consumers that bought the iPad 2 instead of the 3rd generation iPad. The current figures also include consumers who may have never considered a 3rd generation iPad, but bought the iPad 2 because of its lower price tag. In order to segregate these two classes of consumers, we need to compare the above figures with the hypothetical sales of the 3rd generation iPad in the absence of a cheaper iPad 2.

Driven by the new iPad launches, global iPad sales grew by 44% from Q1 to Q2 2012. US iPad sales (excluding the 3rd generation iPad) grew by 28% over the same period. From these figures, it is fairly obvious that QoQ iPad sales growth in the US should have been above 44% (as the base is lower). We can also conservatively assume that if the cheaper iPad 2 was not launched, QoQ sales growth would have been lower than 44% (higher hypothetical QoQ growth implies higher cannibalization). Based on these limits to QoQ sales growth, we can draw the following sensitivity chart for iPad 2 cannibalization:

The chart above shows that the iPad 2 cannibalized approximately 60% of 3rd generation iPad sales, i.e. for every 5 million iPad 2 buyers, Apple lost 3 million 3rd generation iPad buyers and therefore, gained a net of 2 million iPad users. This is also consistent with the sharp QoQ drop in the iPad's average selling price in Q2 2012.

While this estimate is based on US sales in Q2 2012, long-term cannibalization in the global market is unlikely to be very different. Cannibalization in the US market could have been higher than normal in the launch quarter, due to pent up demand at lower price points. However, this should be balanced out on a global scale, by the lower purchasing power of non-US consumers.

### iPad Mini Cannibalization Estimate

Now that we have estimated the cannibalization impact of the iPad 2, it becomes far easier to understand the same for the iPad Mini. The cannibalization impact of the iPad 2 was primarily driven by the fact that it was priced $100 lower than the 3rd generation iPad. Now we have two levels of cannibalization, with an iPad Mini priced $70 lower than the iPad 2 and $170 lower than the 4th generation iPad. In addition to this, the iPad Mini is also available in far more storage options and configurations as compared to the iPad 2.Based on the points above, even though the iPad Mini is a smaller tablet, the cannibalization impact is unlikely to be far lower than it was for the iPad 2. In fact, it is quite possible for cannibalization to be at the same level as the segmentation analysis suggests that many price-sensitive buyers are unlikely to form a significant proportion of sales. However, since the iPad Mini is priced $70 lower than the previous starting price, it is likely to draw more first time (price sensitive) buyers than previous versions.

Based on this analysis, I would expect the iPad Mini to cannibalize at least 50% of iPad sales, i.e. for every 5 million iPad Minis sold, Apple would lose at least 2.5 million iPad buyers and gain at most 2.5 million iPad users.