The New York Times has reported that Apple is developing a smaller, 7.85-inch iPad, citing unnamed people “with knowledge of the project who declined to be named discussing confidential plans.”

In terms of hardware rumors, the report only has some confirmation of the size. But it also reveals that Apple may have been working on a smaller tablet since the mid-2000s — which Apple’s late co-founder Steve Jobs found too small. The report, citing an unnamed former engineer, said that Jobs questioned whether the device would be useful for anything besides “surfing the Web in the bathroom.”

The report said that regardless of whether Jobs would have come to like the smaller tablet , Apple as a company has become more open to the idea to diversify its line as competitors come out with petite tablets such as Google’s Nexus 7 or Amazon’s Kindle Fire.

In an interview with the Times, analyst Horace Deidu said that the new device could be positioned more as a large iPod Touch as opposed to a miniature iPad, focusing on the consumption focus that has worked so well for Amazon with the Kindle Fire. The smaller tablet would be more difficult to type on, but would be more convenient for reading or watching on the go and would particularly help Apple in markets with a lot of commuters, such as China and Japan.

Serious Apple fans have been giving a lot more thought to the smaller iPad lately, with the rumor mill spinning back up to full speed after Bloomberg published a report early this month saying that the new tablet would have a “retina display” and said, speculatively, that the tablet may be announced by October.

Of course, other companies aren’t giving up any tablet market ground to Apple. Microsoft has already announced its Surface tablet and Amazon is widely expected to be releasing a larger version of the Kindle Fire to compete with the iPad — something else mentioned in the Times article.

All in all, that makes for a very interesting tablet market on the horizon, though Amazon, Microsoft and Google will all have a lot of catching up to do to match the iPad with any single model. As Computerworld reported, the market analysis group IDC said that Apple will stay above 50 percent marketshare through 2016 if it launches a smaller iPad. The group had previously predicted that Apple would keep its lead only through 2014.

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