Um, have you seen the $0 3GS and $99 iPhone 4??
Tim Cook is on record saying that they do not want to offer a price umbrella for competitors to exploit.
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The 3GS and 4 did not debut at 0/99 dollars. They trickled down to those price points after newer models were introduced, preserving their premium brand status.
IMO, its a good decision to filter down your previous flagship device to the lower market segments than to develop a budget device, with a difference set of specs, to sell for cheap for 3-4 months. Something a few Android manufacturers could learn from.
Ok, but if the 10" iPad has a set starting price of $499, then a smaller one should, by all accounts, and based on historical evidence and precedent, be priced below that.
Alternatively, they also may just drop the price on the 16GB iPad 2 to $399 and roll out the iPad 3 at 32GB for $499.
Another piece of historical evidence WRT Apple would be the fact that at least the past few years, they don't raise prices, they lower them. The MacBook debuted at $1099, it was $999 before it was killed off. The Air debuted at $1799, the 13" now starts at $1299. The 15" Pro has basically always been $1999, but they added one without dedicated graphics for $1799.
AppleTV was originally $249 IIRC, it is now $99 (they got rid of the hard drive, and analog outputs, but made it better in every other regard) I could go on, but you get the idea.
Why does it matter if Apple debuts a product at a lower price point or just slides one into that position? One way or another consumers are getting good products for lower prices. Unless one is tied into the Amazon ecosystem in a deep and meaningful way, is there any argument that a $299 smaller iPad wouldn't essentially obviate the Kindle Fire and Nook Tablet? It would have access to the entire Apple ecosystem which, with today's announcement of Mountain Lion, is about to become significantly better.
Give it a 1024*768 screen, which is in line with other 7" tablets (I really think that it should be 7" not 8", but that is just me talking), and about the size of a kindle or paperback book, and open to one-handed operation. The biggest concern would be the battery life.