Why Apple’s iPad Sales Slump May Not Matter

Source: Apple.com

Apple certainly had no shortage of good news to report for its latest quarterly earnings results. The California-based tech company posted a record quarterly net profit of $18 billion, due in large part to its record iPhone sales of 74.5 million units.

The Wall Street Journal reports that Apple’s quarterly profits were the most any S&P 500 company has ever reported, while its quarterly iPhone unit sales marked a 45% increase over the previous record of 51 million units that was achieved in its fiscal 2014 first quarter. According to CEO Tim Cook in an earnings call transcript provided by Seeking Alpha, Mac unit sales and App Store revenues also saw year-over-year increases.

However, not every aspect of Apple’s business was booming. According to Apple SVP and CFO Luca Maestri, iPad sales saw a year-over-year decline of 18% last quarter, slipping to 21.4 million units. This dropped Apple’s year-over-year iPad revenue from the almost $11.5 billion it reached in the December 2013 quarter to about $9 billion in the last quarter.

Although Apple released two new iPad models last quarter — the iPad Air 2 and the iPad mini 3 – it appears that its iPad product line is succumbing to the same “massive deceleration” that market research firm IDC previously predicted would hit the worldwide tablet market in 2014. While it would be easy enough to just ignore the iPad sales data when looking at the impressive overall success of Apple’s fiscal 2015 first quarter, there are also several good reasons to believe that the iPad sales slump may not even matter.

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Cannibalization is good

There is evidence that one of the reasons Apple’s iPad sales are declining is because the iPad product line is being cannibalized by the latest larger-screen iPhone models. Apple’s iPhone 6 and iPhone 6 Plus have screen sizes of 4.7 inches and 5.5 inches, respectively. While these so-called “phablets” may not be able to provide the same experience that a 9.7-inch iPad Air can, there is evidence that for many consumers, the experience is good enough to make owning a tablet redundant.

Approximately two months after the iPhone 6 and the iPhone 6 Plus became available, the company behind the Pocket app released a study that examined how the larger-screen devices were impacting iPad owners’ media consumption habits. According to the study, iPad owners who purchased either of the larger-screen iPhones began relying less on their iPads and more on their iPhones for their media consumption tasks.

Although this study examined the media consumption habits of consumers who already owned both types of mobile devices, the trend that it revealed suggests that consumers will abandon the iPad in favor of a device that can double as both a smartphone and a tablet. In other words, Apple is likely cannibalizing its iPad sales with its new larger-screen iPhone models.

Cook noted the possibility of cannibalization during the company’s fiscal 2014 fourth-quarter earnings call. “I am sure that some people will look at an iPad and an iPhone and decide just to get an iPhone, and I’m fine with that as well,” he said, according to a transcript provided by Seeking Alpha.

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One reason why Cook may be fine with that particular consumer decision is that the company has previously had a positive experience with cannibalizing another product: the iPod. The digital media player that was once Apple’s cash cow saw its sales numbers steadily decline after Apple introduced the iPhone, because that device was able to subsume the iPod’s media playing functions.

Needless to say, no one is lamenting the decline of the iPod after Apple’s latest earnings results. It is perhaps fitting that Apple stopped reporting iPod sales as a separate category in its latest quarterly report, just as the cannibalization of the iPad appears to be getting underway.

Finally, Apple appears to be substituting its iPad revenue with its larger-screen iPhone revenue at an opportune time. According to the latest tablet market data from IDC, worldwide tablet shipments experienced their first year-over-year decline in the fourth quarter, while shipments for the whole year only increased by 4.4%. On the other hand, according to a recent report from Juniper Research, the burgeoning phablet market is set to explode. While 138 million phablets (smartphones with screens from 5.5 to 6.9 inches) are expected to ship in 2015, Juniper predicts the market will see a fivefold increase over the next four years to reach 400 million units by 2019.

Fewer iPad sales is really a sign of quality

As previously noted, it appears that the entire tablet market is experiencing a slowdown in growth. While some of this slowdown may be due to market saturation, there is also evidence that Apple’s declining iPad sales are at least partly related to the device’s unexpectedly long lifecycle. In other words, people aren’t buying as many iPads because the first ones that they bought are still working fine. There are several reasons behind the longer lifecycle of iPads in comparison to iPhones.

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Unlike iPhones, iPads don’t necessarily need to be carried by the owner wherever they go and therefore experience less wear and tear. Many consumers opt to purchase the Wi-Fi-only version of the iPad, which makes it even less likely that the device will be taken with them wherever they go. Another reason might be that Apple’s iPads are simply built to last. Additionally, while many of Apple’s iPhone upgrades have included must-have new features, such a fingerprint sensor or a larger screen, the iPad has essentially stayed the same except for progressively getting thinner.

So while a customer may think it’s worth spending a few hundred dollars upgrading to a new iPhone 6 Plus in order to get a bigger screen, that person may not feel the same about spending the same amount just to have an iPad that’s a little more powerful and a few millimeters thinner. Although the latest iPad models were upgraded with a fingerprint sensor, the feature may hold less appeal for iPad customers, since it can’t be used in conjunction with Apple Pay for in-store purchases like it can on the latest iPhone models.

The iPad’s unexpectedly long lifecycle could explain the large discrepancies between Apple’s iPad sales numbers and the number of people who actually use the device for Web browsing and other tasks. According to IDC’s latest tablet market data, Apple had a 28.1% share during the fourth quarter of 2014, while its nearest competitor (Samsung) had a 14.5% share. However, as noted by Apple’s Maestri during the company’s earnings call, the most recent report from Chitika Insights indicated that Apple’s iPad accounts for over 70% of tablet-based Web traffic in North America.

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While Apple has historically been stronger in North America than it has in the worldwide market, these two data metrics still suggest a large discrepancy between the iPad’s sales market share and its Web traffic market share. Samsung, which sold approximately half as many tablets as Apple did last quarter, only had a 6% share of Web traffic in North America during the same time period. One possible interpretation of this data is that many of the iPad models that Apple sold several years ago are still working and being regularly used by customers, in contrast to cheaper tablets made by Apple’s rivals.

This interpretation is bolstered by the remarkably high customer satisfaction ratings that consumers regularly give the iPad. As Maestri said during Apple’s earnings call, per a transcript provided by Seeking Alpha, “In our November survey, ChangeWave measured a 98% customer satisfaction rate for iPad Air.”

The iPad may be down, but it’s not out

Despite the lack of iPad sales growth, Apple still dominates the worldwide tablet market. IDC says that Apple still accounts for over a quarter of total shipments in the worldwide tablet market, with a 28.1% share in the fourth quarter of 2014. Meanwhile, there are persistent rumors that Apple is working on a larger-screen iPad.

Most of the rumors suggest that the so-called “iPad Pro” will feature a 12.2- or 12.9-inch screen. At least one analyst — KGI Securities’ Ming-Chi Kuo — believes the device could also be bundled with a stylus. Since this upgrade would provide noticeable differences from previous iPad models, the larger-screen device has the potential to jump start Apple’s iPad segment.

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The iPad Pro could also play an important role in Apple’s overall plans to expand its presence in the enterprise market. Last year, Apple announced a partnership with IBM to “transform enterprise mobility through a new class of business apps.” Cook noted the importance of the iPad to its plans with IBM during the company’s last earnings call.

“The issue is that enterprises, generally speaking are only deploying iPads to a small percentage of their workforce,” said Cook, per Seeking Alpha. “And so the real opportunity is to bring mobility into the enterprises and change how people work. … I think if we can really change the way people work, I think the opportunity is enormous. We’re not hanging numbers out there to be measured on at this point, but we don’t do a lot of big partnerships as you probably know. And so when we do one, it is significant and it’s because we really believe in it, and we really believe in this one and what it can do for customers.”

There appears to be room for iPad sales to grow despite the slowdown in sales that has widely been interpreted as market saturation. Cook estimated that the upgrade cycle of an iPad falls somewhere “between an iPhone and a PC.” However, he also said that “We haven’t been in the business long enough to say that with certainty,” according to Seeking Alpha.

In any case, data cited by Cook during the earnings call suggested that the market is still far from saturated, especially in overseas markets.  “[I]f you look in some of the developed market like the U.S., Japan, the U.K., you would find that 50% of the people are buying an iPad for the first time,” said Cook, according to Seeking Alpha. “If you look in China, it’s over 70%. And so that — when you have that kind of first time buyer rates, you don’t have a saturated market.”

Whether the decline in iPad sales is due to cannibalization from the new iPhone models or is merely the result of an unexpectedly long product lifecycle, it doesn’t appear to be having any negative impact on Apple’s overall business. With an upcoming expansion into enterprise mobility and the possibility of a new larger-screen model, it is unlikely that Apple’s iPad will be disappearing anytime soon.

Follow Nathanael on Twitter @ArnoldEtan_WSCS

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