Rumors of a new, smaller iPad have been flying fast and furious lately. While this isn't the first time we've heard noise about such a device, recent reports from normally reliable news sources like Bloomberg and the Wall Street Journal, as well as the recent introduction of the Nexus 7, have lent this round of speculation some extra credence. If the Nexus 7's sales are as good as its critical reception has been, it could be enough to convince people that a seven- or eight-inch tablet can succeed when done well.

There has been plenty of reason to doubt a smaller iPad's existence: nearly every write-up about it includes some mention of Steve Jobs' infamous "you'll have to sandpaper your fingers to use a smaller tablet than the iPad" comments, and his vehement opposition to the idea of a smaller-than-original iPad was enough to convince me it wasn't happening in the short term. Now, the presence of seemingly legitimate sources for the swirling rumors, as well as Joel Bernstein's excellent analysis of the smaller iPad's size (which explains how the touch points in properly designed apps on a 7.85" iPad would be about as large as properly designed apps on a 3.5" screen), have convinced me otherwise.

Questions still remain: what kind of hardware would a smaller iPad use? How much would it cost? How would it fit into Apple's existing iOS lineup? I'll look at Apple's current lineup, its past behaviors, and the facts about the Nexus 7 in order to give you what I think are the best answers to those questions.

The screen

First, let's talk about the screen, and why it makes sense that this first iteration of the product wouldn't use a "Retina" display: Daring Fireball's John Gruber offers up a hypothesis that Apple could make the screen for the smaller iPad from the same screen material used for the iPhone 3GS, simply cutting the LCD material into 7.85" panels rather than 3.5" panels. This makes sense given that the pixel density for a 7.85" screen at 1024x768 is pretty much identical to that of a 3.5" screen at 480x320.

It follows that Apple could also construct a Retina version of the smaller iPad by using the same material currently used in iPod touch and iPhone 4/4S displays. In the long run, this does indeed make sense and it's probably what the smaller iPad would move to eventually, but I doubt it would be used in a first-generation product despite Apple's push toward Retina displays. Remember that the Retina display in the 2012 iPad needs both a gigantic battery and a new graphics processor that can get pretty toasty when fully loaded. Advancements in display technology and the process technology used to make these chips will eventually make a chip like the A5X, the Retina display it can drive, and the battery they both need feasible in a smaller 7.85" device, but it seems unlikely right now.

The processor

Assuming the smaller iPad will be using a 1024x768 screen like the iPad 2's, it would make the most sense for a smaller iPad to continue using the same dual-core A5 processor currently powering the iPad 2 and the iPhone 4S. Apple has been making this chip for a while, meaning that yields are going to be good, prices will be cheap, and developers won't have to change anything to support its capabilities. The low-power, 32nm version of the A5 that gives the $399 iPad 2 better battery life than the original iPad seems like a great fit for a smaller tablet with a smaller battery.

The possibility does exist that Apple could create a 32nm version of the 2012 iPad's A5X processor in order to reduce power requirements and push a Retina display, but let's check out the size of the current 45nm A5X relative to the 45nm A5:

Even if the A5X is shrunk to 32nm, and even if that shrinkage reduced the power requirements and heat output enough to make the A5X feasible in a smaller tablet, the A5X is much larger than the A5. This means fewer dies could be harvested from a single silicon wafer, increasing the cost of each chip. To hit a price point below the current 10" iPads while also maintaining its traditional healthy profit margins, Apple will want to cut costs wherever it can. Hence, the cheaper, proven 32nm A5 (and its accompanying non-Retina display) makes more sense than a hypothetical 32nm A5X.

Storage

Lastly, let's talk about storage: the 8GB in the entry-level Nexus is not nearly enough for an iPad, especially since the advent of Retina apps and their accompanying gigantic graphics started blowing up app sizes. An app like iMovie weighs in at 403MB, while a game like Infinity Blade II is a whopping 1.03GB. Even the 16GB iPad is feeling a bit small these days when fully loaded with media and apps, and I think anything less than that will cause major headaches on a smaller iPad running those same apps. 16GB seems like a reasonable minimum, with 32GB and 64GB upgrades available for those who want to shell out—same as the current 10" iPad and (most of) the iPod touch lineup.

The price

One of the most appealing things about the Nexus 7 is its price, especially given the overall quality of the tablet. But looking at its price and assuming that Apple must hit the same price points doesn't take all of the facts into consideration.

Google has said publicly that it's not making money on the Nexus 7. And the component analysis from iSuppli confirms that it's probably breaking even on the $199 8GB model, while turning a small profit on the $249 16GB model. Apple, with its extensive and well-managed supply chain, could probably build a 7.85" iPad more cheaply than Asus and Google are spending to build the Nexus 7, but Apple's product strategy has always been to sell products for a premium price and with a premium profit margin.

There's also the fact that non-iPad tablets have historically had to undercut the iPad significantly on price to attract consumer interest. You can see that reflected in the $200 price point of the Nexus 7 and the Kindle Fire, and 10" competing tablets like the HP Touchpad are also instructive. At its starting price of $500, the HP Touchpad was sitting unsold in storerooms. A few weeks later, its unprecedented fire sale price of $99 made it a bestseller. Apple can afford to mark up the price of the iPad relative to other tablets in its price class simply by virtue of the tablet being an iPad.

For these reasons, I see a new, smaller iPad with the specs outlined above starting at $299. This puts it within spitting distance of the $249 16GB Nexus 7 while maintaining a healthy profit margin, and slotting right in between the $199 iPod touch and the $399 iPad 2. If that seems too high, remember: if a smaller iPad doesn't sell well at its introductory price, it's much easier for Apple to drop the price after the fact than it would be to raise it, as we've seen with initially expensive products like the iPhone and MacBook Air. And doing so will usually get you good press and make people give you a second look.

What of the iPod touch?

The prospect of a smaller iPad also raises questions about the fate of the iPod touch which, for all intents and purposes, serves the role of "low-cost mini tablet computer" in Apple's present-day lineup. Even if a smaller iPad never surfaces, the presence of the much more powerful Nexus 7 at the same price point means that the two-year-old iPod needs to either get more powerful, less expensive, or both.

The iPod touch currently accounts for more than half of all iPods sold, and it's a great way to get an iPhone-style device without shelling out for a phone contract, so it's probably not going anywhere. (Its last real refresh was in September of 2010.) Regardless of whether a new, smaller iPad is manufactured, I think it's pretty likely that we'll see something new this year, probably in September at Apple's traditional iPod event.

I can see several things being true for the new iPod touch: A new processor is definitely in the cards, since the current iPod touch's single-core A4 is getting pretty long in the tooth. Either the low-power dual-core A5 in the refreshed iPad 2 (probably clocked at about 800MHz, as in the iPhone 4S) or possibly the harvested single-core version of the A5 found in the current Apple TV are the most likely candidates. If the iPhone 5's screen is to be elongated, the same will probably happen to the iPod touch as well. A slightly better camera and a bump in storage capacity from the current minimum of 8GB also seem plausible (if not exactly a certain in something this cheap. 8GB is a small but still workable amount of space for iPhone apps, and Apple is still happy to push devices with that capacity, as evidenced by both the 8GB iPhone 3GS and iPhone 4).

Whatever happens, I don't think the smaller iPad will have much impact on the iPod Touch's price, which was just lowered from $229 to $199 last year. The 64GB touch is available for the same $399 as the 16GB iPad 2, which suggests to me that Apple isn't too worried about a little overlap as long as its products are sufficiently differentiated.

Conclusions

I imagine that the smaller 7.85" iPad—if it does indeed exist—is more or less a smaller version of the iPad 2 that's cheaper than the current 10" iPad but a bit pricier than the current iPod touch. If the device starts at $250 or even $300, it will be good enough and cheap enough to fight the coming flood of small, cheap Android tablets. It will also slot neatly into the iOS lineup between the iPod touch and (subsidized) iPhone on one end of the spectrum, and the larger iPads at the other. Apple has the upper hand here in all of the ways that matter—market share, mind share, and developer support are all healthy pillars of the current iPad ecosystem. As good as the Nexus 7 is, all Apple has to do is show up to the fight in order to threaten the Nexus 7's success.