Originally i would have thought this was another red herring, but now that 
Apple is going after the lower end market by still selling the two generations 
old 3GS, a less expensive iPad does seem plausible.

Taiwan's United Daily News reports [Google translation] that Apple has received 
samples of 7.85-inch screens carrying the same 1024x768 resolution of the 
current iPad. The report (via Unwired View) claims that AU Optronics and LG 
DIsplay have sent samples of the display to Apple, which is reportedly 
targeting a launch for the "iPad mini" early next year. 

 
Previous mockup of a 7-inch "iPad mini"

It is unclear how Apple and its developers would handle a considerably smaller 
screen for this iPad mini at the same resolution as the current iPad. While 
maintaining the current resolution would mean that iPad apps would display 
natively on the iPad mini, the interface elements would be somewhat smaller 
than on the iPad, a reduction that could introduce usability issues in some 
cases. 

Steve Jobs had also famously panned 7-inch tablets from competitors, claiming 
that roughly 10 inches was the minimum screen size needed for a useful tablet. 

Apple has been said to be interesting in fending of Amazon's new Kindle Fire 
tablet, which is launching next month at a $199 price point. Ticonderoga 
Securities analyst Brian White had noted just last week that his research among 
Asian suppliers is indeed pointing toward Apple releasing an "iPad mini" early 
next year to take on the Kindle Fire. White cautioned, however, that the "mini" 
moniker was in reference to the device's price rather than necessarily meaning 
a smaller device.
Regarding Apple, our research is pointing to the unveiling of a lower priced 
iPad in the first few months of 2012 that is aimed at expanding the company’s 
market potential by tapping into a more price sensitive consumer segment. 
Essentially, this “iPad mini” will also fend off the recently announced Amazon 
Kindle Fire that addresses the low-end tablet market with a $199 price tag but 
could lead to bigger tablet ambitions from the online retailer in the future. 
The "mini" refers to a reduced price point of this iPad and not necessarily the 
size of the device. We believe this lower priced iPad could be priced in the 
mid-to-high-$200 range.
Apple is widely rumored to be preparing to introduce the iPad 3 early next 
year, a device which is said to carry a Retina display with 2048x736 
resolution. A smaller iPad at the lower resolution of the current iPad could 
enable Apple to lower entry-level price points for its tablet products if it 
does indeed view Amazon as a significant threat.


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http://www.macrumors.com/2011/10/18/ipad-mini-rumors-revived-with-claims-of-7-85-inch-screen/



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