Why Apple is reportedly building a 7-inch iPad: 3 theories

Apple is reportedly gearing up to launch a smaller version of its market-leading iPad. According to Bloomberg, two insider sources claim the computing giant plans to release a 7- or 8-inch iPad before the end of the year, possibly in October. The Wall Street Journal says its sources confirm basically the same thing. The smaller tablet probably wouldn't have the high-definition Retina screen of the larger 10-inch model, but would probably be available at a more budget-friendly price, perhaps around $200, pitting it directly against Google's new Nexus 7 and Amazon's Kindle Fire. Steve Jobs was vocal about his skepticism for smaller tablets, and Apple has always shied away from going directly after competitors. Why the apparent change of heart? Here, three theories:

1. Apple sees Google as a real threat

Apple is taking the Nexus 7 seriously, says Erica Ogg at GigaOm. It's obviously trying to quash any momentum that Google hopes to build before the search king's new tablet is even released, as Apple doesn't want to relinquish the "dominant grip on a market it largely created." Now "the ball is in Apple's court," analyst Shaw Wu tells Bloomberg, and a 7-inch iPad is sure to be any competitor's "worst nightmare."

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2. A smaller tablet opens up new markets

A 7-inch iPad would give businesses more options, says Larry Dignan at ZDNet. Size was one of the bigger knocks on Apple's original slab — at least from a professional-grade usability standpoint — and companies have long been clamoring for something they "can fit in lab coats" that would "work better for industry applications." Also, Apple's full-sized tablets are "too big for many consumers in Asia," says Hayley Tsukayama at The Washington Post, which is "one of the company's biggest growth markets."

3. It would make Apple a lot of money

Amazon loses money on every Kindle Fire it sells, and Google is probably planning to break about even with its Nexus hardware. Where these companies make up those losses is by selling digital media like apps and music, which traps consumers into the tablet ecosystem. In that realm, Apple would have an "advantage profitwise," says Wu. The gross margin on the existing $500 iPad is roughly 37 percent, and the company could earn a similar profit by using a cheaper, non-Retina screen on this smaller model. Plus, Apple would be keeping budget-conscious buyers in the iTunes/App Store ecosystem, which means more dollar signs in the long run.