Tablet Sales Battered by Surging Phablets, Recovering PCs

Tablets recorded impressive year-over-year growth after Apple Inc. (NASDAQ:AAPL) launched the category in 2010 with the first iPad. However, despite 52.5% growth in the tablet market in 2013, alarm bells began to sound in 2014.

Tablet Sales Battered by Surging Phablets, Recovering PCs

Phablets — super-sized smartphones — turned from a joke to the hottest mobile category, while current tablet owners weren’t upgrading as frequently as hoped.

IDC just released the tablet sales numbers for 2014. They show manufacturers shipped just 4.4% more of the devices in 2014 and the market actually marked its first decline, when sales in the fourth quarter dropped 3.2% from 2013.

Holiday Tablet Sales Were Brutal

Apple and Samsung Electronics took it on the chin over the holidays, both selling around 18% fewer tablets (Apple fared slightly better at -17.8% to Samsung’s -18.4%), but the big loser was Amazon.com, Inc. (NASDAQ:AMZN).

Despite a news release trumpeting Black Friday Kindle Fire sales as tripling from 2013, Amazon’s tablet sales plummeted 69.9% in the fourth quarter.

When Amazon reported those amazing Kindle Fire numbers, I was dismissive of the company’s chances of seeing that momentum continuing, but I wasn’t expecting its overall holiday sales to tank to the tune of a near 70% drop.

Amazon is disputing the numbers. According to Re/Code, the bone of contention is the $99, 6-inch Kindle Fire that Amazon released in late 2014. IDC doesn’t count something that small as a tablet (there are phablets with bigger displays), but Amazon says the smallest Kindle Fire made up a significant chunk of its holiday tablet sales.

Dim Future For Small Tablet Sales

Regardless of the demand Amazon may have seen for 6-inch Kindle Fire tablets, the long-term future for these hybrid devices is dim.

Originally released by Amazon, Google Inc (NASDAQ:GOOG,NASDAQ:GOOGL) and others as a way to undercut the phenomenally successful Apple iPad, 7-inch tablets (with smaller displays, CPUs and batteries) allowed manufacturers to cut costs. The Kindle Fire and Google Nexus helped these companies beat Apple on price, finally eating away at iPad market share when previous Android tablet sales had struggled.

Those small tablets served their purpose — and even forced Apple to react with the smaller iPad Mini the company had vowed would never be released — but now 7-inch tablets are themselves being eclipsed by another money-saving device.

The phablet.

You could make the argument that a $749 iPhone 6 Plus is a heck of a lot more expensive than the average 7-inch tablet, and that the tablet offers a better experience for reading or viewing movies. And you’d be right.

However, just as the 7-inch tablet was “good enough” to replace a full-sized tablet for many people, a 5.5-inch or larger phablet is good enough to replace those small tablets. When the phablet takes the place of both the smartphone and the tablet in a single device, all of a sudden the cost equation is reversed in favor of the phablet, and it’s more convenient than carrying around two devices.

That’s why phablets are eating small tablet sales and are likely to continue to do so.

Outlook for Full-Sized Tablet Sales

While the consumer market shows all signs of shifting toward a phablet future, that doesn’t mean full-sized tablets are doomed.

The apparent recovery of the PC market after a long, tablet-fueled slide doesn’t mean full-sized tablets are in trouble, either. Many businesses and educators may have given up on the dream of saving money by replacing PCs with tablets (turns out by the time you add on a keyboard and stand you’ve spent as much for a compromised experience), but there are still roles where tablets excel.

The prosumer market — professionals and power users — who have really embraced tablets will continue buying the devices, regardless of whether they carry a phablet too. But they’ll buy full-sized tablets and they’re going to want high performance, high-style designs with plenty of apps.

That pretty much means Apple and Samsung. Despite the fourth-quarter beating, the two companies control nearly 43% of tablet sales between them and they are the companies that tend to be seen as offering the premium products.

Amazon’s Kindle Fire HDX 8.9 is a nice tablet that was designed to offer a full-sized experience for bargain hunters (it’s priced more than $100 less than comparable iPads and Samsung tablets) and Amazon customers. It’s a little small, lacks the app selection of the market leaders and has never been seen as a competitor in the premium, professional or prosumer market.

That’s why Amazon’s Kindle Fire tablets continually fall back to abysmal numbers after the traditional holiday bump — a global share of tablet sales of just 4.4% in 2013 and now 1.4% in 2014.

Maybe Apple Was Right About Tablet Sales

Apple argued that the 9.7-inch iPad was the right size for a tablet display. For several years, the runaway success of 7-inch tablets made that wisdom seem questionable. All signs now point to the future of the tablet coming full circle, validating Apple’s original position that bigger was the right size for tablets.

What Apple didn’t anticipate was that iPad owners would wait years between upgrades. That — combined with the rise of phablets — led to last holiday’s poor tablet showing. Don’t expect the boom times to return, but those tablet sales numbers don’t mean the business is going to die out either (at least not full-sized tablets).

However, based on its holiday tablet sales performance and its reliance on small screen models, Amazon has some deep thinking to do about the Kindle Fire’s future in the new reality of the tablet market.

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

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