The smaller version of the Apple iPad is designed to compete against 7 inch tablets, especially the Amazon Kindle Fire which is scheduled for release on November 15th. Priced at $199 or less than half the cost of a $499 16GB Apple iPad 2 Wi-Fi only, the Kindle Fire will lean heavily on the cloud. Amazon is taking a $10 hit for each tablet it sells, but expects to turn that into a $10 profit for each sold unit because of apps and content it will charge users for, as well as the cloud based services it will sell.
The story in Economic Daily doesn't completely match a report by Ticonderoga Securities' Brian White, who says that a less expensive-not necessarily smaller-version of the Apple iPad will be offered in the early months of 2012. In the past, Apple didn't consider a 7 inch tablet because its CEO at the time, Steve Jobs, said that a screen size of 7 inches was "too small to express the software." Jobs even went as far as putting down the competition for offering 7 inch tablets, joking that manufacturers of such devices would need to ship sandpaper with their device so that users could file down their fingers in order to press certain images on the screen.
source: EconomicDaily (translated) via AppleInsider