Phablets Now Crushing Small Tablet Sales

Phablets — those 5-inch or larger smartphones everyone was making fun of a few years ago — are on an absolute tear. Not only are they the hottest selling smartphone category, now they’re eating into small tablet sales — the same devices that have been driving tablet sales.

Phablets King Asus Fonepad
Source: Asus

Nowhere is the irony of this development felt more deeply than at Samsung (SSNLF). The company that popularized the phablet segment in North America faces falling profits and it’s pointing fingers at phablets for eating into its small tablet sales.

Phablets: From Joke to Market Domination

The problem for Samsung is that, once everyone else stopped laughing at the original Galaxy Note (the 2011 device’s claim to fame was an enormous 5.3-inch display), they realized the phablet had sold more than 10 million units in less than a year. Smartphone display sizes were already on an upward trend, and the apparent consumer demand for bigger drove the phablet into the mainstream. Manufacturers reacted.

According to Canalys, the category of 5-inch and larger smartphones grew by 369% in Q1 2014 compared to last year and now accounts for over one-third of all smartphone shipments worldwide. Perhaps more tellingly, 47% of smartphones with a retail price of $500 or more — the flagship devices — were phablets.

Smartphone manufacturers including Sony (SNE), LG, HTC and Microsoft’s (MSFT) Nokia have been focusing on phablets. It’s virtually impossible to find a flagship smartphone released in 2014 that doesn’t have a display of 5-inch or larger — other than Amazon’s (AMZN) foray into mobile with the Fire Phone. Samsung is still tops in phablet sales, but it no longer has the market to itself.

The only major smartphone manufacturer not currently in the phablet game is Apple (AAPL). And with that company all but certain to release its own phablet this year in the iPhone 6, it’s safe to say that phablets have officially conquered the high-end smartphone market.

Small Tablets Were Once the “Phablet”

When Apple first released the iPad in 2010, competitors were at a loss. Despite Apple’s reputation for premium pricing, no one seemed able to manufacture a decent tablet that cost less. Android, the operating system powering most of these tablets, was also less polished than Apple’s iOS, and as a result, the iPad dominated the tablet market.

Then the competition found the chink in Apple’s armor…

While the iPad stubbornly remained a full-sized device, Amazon, Google (GOOG) and Samsung began releasing small tablets with displays between 7 and 8 inches. Smaller meant cheaper, and they were also able to leverage the portability compared to a 9.7-inch iPad.

Apple and many industry observers scoffed at these small tablets — just as they would later with phablets — but consumers ate them up. At half the price of an iPad, they were willing to live with a smaller display and Android. Apple was finally forced to cave in and released the iPad Mini, but by then it was well on the way to losing its dominance.

Like phablets, small tablets became the fastest-growing category in the tablet market. In 2013, IDC projected that tablets with a display of less than 8-inches would capture 57% of the total tablet market by 2017. (Those small tablet actually hit 58% for 2013, significantly outperforming IDC’s estimates.)

Phablets Are Killing Small Tablets

That was 2013. Now, the picture isn’t looking so rosy for small tablets and with those sub 8-inch devices driving growth — and it doesn’t look quite so good for the tablet market in general.

A recent report released by NDP DisplaySearch says that in Q1 2014 sales of tablets declined year-over-year for the first time ever.

The reason?

That previously hot small tablet category is taking a hit from phablet sales — and many people who buy a phablet don’t also need a small tablet. The trend looks so entrenched that, rather than expecting small tablets to be the majority of tablet sales in 2017, DisplaySearch is calling for them to drop to around 45% while the tablet market in general slows to single-digit growth.

We’re seeing some hard evidence of this trend in Samsung’s second quarter earning estimates. The company is expecting earnings to slide 24% compared to last year, and one of the reasons it spikes out is that the demand for 5-to-6 inch smartphones “cannibalized the demand for 7-to-8 inch tablets.”

Phablets are definitely here to stay. The question is, now that consumers have accepted the idea of talking into a smartphone with a 5-inch or 6-inch display, is there any chance phablets could get even bigger and not just cut into small tablet sales, but replace the devices altogether? It may sound ludicrous … but so did phablets themselves, just a few years ago.

We might find out soon. In what could be either the beginning of the end for the small tablet — or a manufacturer pushing things just too far — Asus announced an 8-inch phablet, the Fonepad 8 in June.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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