Why Apple’s Shrinking Tablet Market Share Doesn’t Matter

Source: IDC.com

Source: IDC.com

Apple — the company that pioneered the tablet product category when it released the first iPad in 2010 — will likely soon lose its tablet market crown. It may not happen this quarter, or even next year, but eventually the iPad maker will surrender its tablet market dominance to one of its Android-based competitors, most likely Samsung. Fortunately for Apple, there are several important reasons why this inevitable market shift won’t matter. According to the latest data from market research firm IDC, Apple continued to be the top tablet vendor in the world during the third quarter of 2014, with a 22.8% share. However, Apple’s worldwide tablet market share also continued to shrink, slipping from the 29.2% share it held in the year-ago quarter. Apple is also selling fewer total iPads, with shipments dropping from 14.1 million units in the year-ago quarter to 12.3 million units this year. Meanwhile, second-ranked Samsung saw its market share drop slightly from 19.3% in the year-ago quarter to 18.3% in the third quarter of this year, despite increasing its total shipments from 9.3 million units to 9.9 million units during the same time period. So why is Apple’s market share falling so dramatically despite a relatively small drop in total unit shipments? In IDC’s data, the answer lies in the mysterious “Others” category of tablet vendors. This category of tablet makers saw the biggest increase in total units shipped, going from 18.1 million units in the year-ago quarter to 22.5 million units this year. This boosted the “Others” category’s market share to 41.8% this year, from 37.4% in the year-ago quarter. According to IDC, the “Others” category consists mostly of smaller companies that make “sub-$100” tablets. Although this flood of low-cost devices has helped drive Apple’s overall market share down, they cannot be considered true competitors to Apple’s high-end and high-margin iPads.

Source: Apple.com

Source: Apple.com

“Although the low-cost vendors are moving a lot of volume, the top vendors, like Apple, continue to rake in the dollars,” noted IDC Worldwide Quarterly Tablet Tracker senior research analyst Jitesh Ubrani. “A sub-$100 tablet simply isn’t sustainable — Apple knows this — and it’s likely the reason they aren’t concerned with market share erosion.” In fact, Apple SVP and CFO Luca Maestri noted that “iPad sales were consistent with our expectations,” according to a third-quarter earnings call transcript provided by Seeking Alpha. In this sense, it appears that Apple’s position in the tablet market will soon resemble its position in the smartphone market, where despite not having the largest market share, Apple still manages to take home the lion’s share of the smartphone market’s profits. On the other hand, the increasing number of low-cost tablets will likely have a more significant impact on tablet vendors with much thinner profit margins, such as Samsung. In its third-quarter earnings report, Samsung posted a 60% year-over-year decline in profits, according to CNN Money. There are also indications that Apple will pick up any “lost” iPad sales through its iPhone and Mac product lines. As recently noted by Gartner research director Ranjit Atwal, “The device market continues to evolve, with the relationship between traditional PCs, different form factor ultramobiles (clamshells, hybrids and tablets) and mobile phones becoming increasingly complex. Some tablet users are not replacing a tablet with a tablet, they are favoring hybrid or two-in-one devices, increasing its share of the ultramobile premium market to 22 percent in 2014, and 32 percent by 2018.” This mobile device market flux was reflected in Apple’s most recent quarterly earnings report, provided by Yahoo Finance. While the iPad’s share of Apple’s annual revenue fell to 17% in fiscal year 2014 from the 19% share it held in fiscal year 2013, the iPhone’s total share of Apple’s revenue increased from 53% last fiscal year, to 56% this year. Meanwhile, although Mac revenue held steady at 13% “due to price reductions on certain Mac models and a shift in mix towards Mac portable systems,” Apple actually increased total Mac unit sales by 16%. Both figures seem to indicate that consumers are increasingly opting to buy one of Apple’s larger-screen new iPhone models or ultraportable laptops in lieu of an iPad. In other words, Apple is cannibalizing its iPad line with its other products. Finally, even if Apple’s iPad product line is destined to lose its tablet market lead in the long term, there are some recent catalysts that may slow down its market share decline or even spark some short term growth. Apple’s recently announced partnership with IBM has the potential to reaccelerate iPad sales to enterprise users, while the release of two new Touch ID-enabled iPad models will likely boost sales over the holiday shopping season. Either way, it appears that this tablet market shift will have a negligible effect on Apple’s overall profitability. Follow Nathanael on Twitter (@ArnoldEtan_WSCS) More from Tech Cheat Sheet: