By Poornima Gupta
SAN FRANCISCO (Reuters) - Apple Inc will host an event on October 23 where it is expected to unveil a smaller iPad that will take on the less expensive devices offered by Amazon.com Inc and Google Inc, a source familiar with the matter said on Friday.
Wall Street analysts have predicted for months that Apple was planning a smaller, less costly version of its popular iPad to take on cheaper competing devices, a move that analysts say might hurt its margins, but prevent its rivals from dominating an increasingly important computing segment.
The source did not specify what the product would be and an Apple spokesman declined to comment, but tech blog AllThingsD reported earlier on Friday that Apple would launch the mini iPad at the event. The device is expected by many experts to have a screen between 7 and 8 inches.
A smaller iPad will directly compete with e-commerce company Amazon's Kindle Fire HD tablet and Google's Nexus 7. Both devices have 7-inch screens and sell for $199. The first Kindle Fire, launched last year, grabbed about a fifth of the U.S. tablet market.
The consumer device company is gearing up to unveil a new product at a major October 23 event, said the source, who declined to be named, only days before Microsoft Corp unveils Windows 8 and its new Surface tablet on October 26.
The Nexus 7, manufactured by Asustek Computer Inc, has also seen a successful start, with the tablet selling out soon after launch.
One Wall Street analyst said he had seen the smaller tablet, dubbed iPad mini by the media, while visiting component suppliers in Asia.
"We actually had the opportunity to play with a pilot iPad Mini used by one of the vendors," Topeka Capital analyst Brian White said. "This 7.85-inch iPad Mini fit our hands like a glove and we were easily able to tuck the device in our sport coat, offering consumers a more mobile iPad experience for certain use cases."
Apple events are typically among the most-watched items on the industry calendar, monitored by consumers and technology investors alike. The event in two weeks, however, comes at a time of volatility for the popular technology stock.
Apple shares closed up 0.25 percent at $629.714 on the Nasdaq market, barely recouping significant losses suffered over the past three weeks as investors cashed out after it touched an all-time high of $705.07 on September 21.
While the stock is up 55 percent this year, it is currently down 10 percent from its record high. Wall Street analysts have cited concerns about disruptions of iPhone supplies after a riot in September at one of the plants operated by its main contract manufacturer, Foxconn Technology, and sharp criticism from consumers about errors in its Maps service.
Apple's fiscal fourth quarter financial results are scheduled to be released on October 25, two days after the event, offering analysts a rare opportunity to grill executives about a new product just after details are made public.
A smaller iPad could be a risk to Apple's industry-leading margins, given that neither Amazon nor Google has been known to make much money from the smaller tablets.
Amazon's first Kindle Fire just about breaks even, according to IHS iSupply estimates. But the internet retailer sells a lot of content - music, books - through the Kindle line.
Google has said that its $199 Nexus 7 is being sold at cost and has no profit margin.
Apple earned gross margins of 23 percent to 32 percent on its U.S. iPad sales between October 2010 and the end of March 2012, a court filing by Apple in a recent patent trial against Samsung Electronics Co Ltd revealed in July. The company's margins on U.S. iPhone sales are almost double those of the iPad, averaging between 49 percent and 58 percent.
Sterne Agee analyst Shaw Wu said that, if Apple prices the smaller tablet between $299 to $349, it could maintain the current margins.
"The biggest cost in a tablet is the display," he said. "On a mini, the display will be a bit cheaper.
If the tablet is priced below $299, Apple could still maintain a decent margin if it offers 8 GB of storage instead of the minimum 16 GB storage it has in the current iPad, Wu added.
A mini version of the iPad marks a departure for the company that now has just one 9.7-inch iPad, although it does come with various storage options and starts at $499.
Late Apple founder Steve Jobs famously derided the 7-inch screen as unwieldy for tablet applications, saying the devices should come with sandpaper so that users can file down their fingers to use them.
But an internal email revealed during the patent trial showed that Internet chief Eddy Cue argued there was a market for a 7-inch tablet and that Apple should have one. The email, sent in early 2011 to top Apple executives, said Jobs had warmed up to the idea.
Struggling Silicon Valley technology icon Hewlett Packard Co was among the first to show, albeit unwittingly, that there was indeed a healthy market for cheap tablets. Sales of the TouchPad took off after the company slashed the price to $99 from $399 and $499 after deciding to kill the product.
(Reporting By Poornima Gupta and Jennifer Saba; Editing by Gerald E. McCormick, Marguerita Choy and Andre Grenon)