If unit sold goes up by more than the lost per unit profit, then that's a winning proposition.

If people convert to the Apple brand, then Apple is going to make tons more than just that first sale. SSD prices also have probably REALLY made that 1k MBA a high profit device (they dropped a ton in the last year)

I predict the $800 MBA will just be this years 1k MBA.

See: The iPod Nano, the still sold iPhone 3GS (for $0 with 2 year contract), etc for past downmarket moves.

Short-run profits are maximized by producing at the point where marginal benefit = marginal costs (I think you state as much: "If unit sold goes up by more than the lost per unit profit, then that's a winning proposition."). Apple might want to produce these if the cost equation works (it might not--see below.).

You're also addressing the halo effect ("If people convert to the Apple brand, then Apple is going to make tons more than just that first sale.") This is anecdotally true: after I bought my first iPod in 2004, I purchased my first Mac in 2005 and now purchase Apple products as I'm happier in their ecosystem.

With that being said, what will Apple cut back on to generate large margins for a $800 MBA? Do they decrease storage? Produce a smaller (9.6") laptop? I really don't see how they go to $800 and preserve margins.

When manufacturing electronics, the cost curve has HUGE fixed cost elements (design, factory setup, supply chain setup, quality control adjustments), then relatively few marginal cost items (actual materials and shipping). Additionally, in tech, storage and ram of a given size typically gets cheaper year after year. SSDs have dropped precipitously from about $2 a GB wholesale to about $0.78 or less a GB wholesale.

So while they may only have had $50-100 profit on the newest 1k MBA on release day, they probably have 2-3 times that by now on the line. They can still sell it profitably (most likely) at this point as they get no more fixed costs with regards to the product.

Now you say 'Why not keep selling at 1k?'. The reason that doesn't work is because they're releasing a new line. So this older design (current 1k MBA) is just going to be obsoleted if they don't make a 800 MBA. They'll go back to the same initial high upfront cost 1k MBA.

Sure, some of the 800 MBA sales will be cannibalization of the 1k MBA sales they'd make this year. However, as I mentioned before, electronics have a very high start up cost for a new line, per item profit will actually be pretty similar between the new line and last years line, but they'll sell more total units, making higher profit.

Has this happened recently? I know retail != wholesale, but I haven't seen SSD prices drop at NewEgg for some time.

http://www.tomshardware.com/reviews/best-ssd-price-per-gb-ss...

http://www.amazon.com/s/ref=nb_sb_noss_1?url=search-alias%3D...

Look at the prices for a given manufacturer over time. These 3 links show 2008, 2010, 2011, and 2012

That said:

1. Apple is pointedly not afraid of cannibalizing its own markets.

2. Apple is pointedly thinking in terms of "the Mac should respond to the iPad as a competitor" and this basically puts the iPad + keyboard case directly in competition with the Macbook Air (expect the SSD capacity of the Air to be reduced or the iPad to increase -- no way a 64GB Air sells for the same price as a 64GB iPad).

3. Now that the Mac is decidedly not central to Apple's revenues, expect Apple to rethink its Mac pricing in (to competitors) scary ways. Apple can afford to license its OS to third parties, and/or replace the Mac Pro with a dongle-based OS X license (buy whatever beastly workstation you want, and install Mac OS X Workstation Edition on it).

4. Apple really has no-one to compete with but itself at this point. Its competitors are a joke.

#1 and #2 are fair points, in light of the fact that the iPhone completely cannibalized the iPod market. But, the amazing iPod sales weren't going to continue forever, and I think Apple just took the next logical step when they released the iPhone.

As you mentioned, an $800 MB Air would be in iPad + Keyboard/other accessory price range territory, which could certainly cannibalize iPad sales. But in this case it doesn't make much sense to cannibalize the still young and very profitable iPad market with a product that has been around much longer, has historically had low market share, and doesn't have the same "new and cool" factor.

#3 I don't see happening as long as Apple still intends to sell Macs, because that would dilute one of the things that makes a Mac a Mac (the combination of the hardware + Mac OS X), and they've fought pretty hard to keep Mac OS off of other machines.

Now, they've learned to make products price competitive without sacrificing quality or much of their profits. iPhones and iPads are not a more expensive option. They stay well away from the low end, but they are not expensive relative to the competing products especially those with similar specs.

Thats a whole other kind of strategy ('penetration' they called it at Uni) and maybe they're bringing it to the mac.

Now, clearly some people place enough value on iOS that they're willing to pay the comparatively expensive prices (or move to another carrier that subsidizes the iPhone sufficiently). Good for them. And good for Apple that they're able to sell phones at absolutely staggering margins without anyone grumbling about the cost. But let's not pretend they're competing on price.