One of the headlines mostly missed yesterday as Apple Inc. (NASDAQ:AAPL) announced record profits for the holiday quarter was that the Apple iPad was celebrating its fifth birthday.
However, it was hardly a happy moment for the tablet computer that Apple CEO Steve Jobs unveiled onstage to tremendous fanfare — AAPL reported yet another quarter of declining Apple iPad sales.
The official announcement proclaimed: “iPad is our most advanced technology in a magical and revolutionary device at an unbelievable price.” The iPad did seem revolutionary at one time, and as competitors scrambled to field their own tablets, they failed — often spectacularly. The BlackBerry (NASDAQ:BBRY) PlayBook is textbook example of how tough it was to come anywhere near iPad sales. The tablet venture ended up costing BlackBerry nearly half a billion dollars in writedowns at a time when it could not afford a stumble.
However, five years in, the iPad story is turning for the worse.
From that promising start when the Apple tablet dominated the market and the company regularly reported quarterly iPad sales had doubled, iPad sales have been in decline, and now iPads account for less than 25% of tablets sold.
What happened? Does the tablet have a future in Apple’s product lineup, or is the Apple iPad already on the same path as the iPod — a slide from top seller to afterthought?
Android Tablets Appeal to the Masses
When the first Apple iPad was released in 2010, its $499 price proved tough to beat, Apple’s App Store was the only one that mattered, and the design of the product left the competition in the dust.
AAPL ended 2010 with 83% of the tablet market.
However, Android competitors like Samsung (OTCMKTS:SSNLF) and Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) along with Amazon.com, Inc. (NASDAQ:AMZN) figured out how to attack the iPad: through price. To cut costs, they released smaller 7-inch tablets and undercut the Apple iPad by hundreds of dollars.
The strategy worked and by the time Apple reacted with a smaller and somewhat cheaper iPad Mini in fall 2012, the Apple iPad held just 53% of the tablet market.
While AAPL has continued to position iPads as premium tablets, Android has improved, Google Play surpassed the Apple App Store in content, manufacturers like Samsung have seriously upped their design chops and most Android tablets remain cheaper than an Apple iPad.
The effect has been steadily eroding iPad sales to the point that AAPL now sells fewer than one in four tablets.
An Increasingly Complex Product Line
One of the beauties of the Apple iPad was the simplicity of the product line. There were always different storage options and a cellular model, but for the first two years there was one iPad model.
That made everything simple — from product design to marketing, retail inventory and display, third-party accessories and software development.
Then the company had to react to competition.
First an Apple iPad with a high resolution (Retina display) was added to the mix, followed by the smaller iPad Mini. Then the Mini gained a high-resolution option, and previous-generation models were kept as lower cost options.
Today, the Apple Store offers five different iPad models, each with multiple storage capacities, a cellular option and the choice of three different case colors.
Compared to the glory days of 2010, everything about selling (and buying) an Apple iPad has become more complex.
Not a PC Killer
When the iPad was selling like crazy, former Apple and Microsoft Corporation (NASDAQ:MSFT) CEOs Steve Jobs and Steve Ballmer used to wage a war of words about tablets killing off the traditional PC.
Jobs declared the Apple iPad had kicked off the “Post-PC” world, while Ballmer preferred the “PC-Plus” description that had consumers and businesses happily using a tablet beside their PC.
For several years it seemed as though the tablet really was killing the PC, with several years of sales declines starting after the historic AAPL product launch.
However, the tides seem to be turning. There’s a growing realization that even though Microsoft Office looks good on a tablet now, it works better on a PC.
By the time you outfit an Apple iPad with a stand and Bluetooth keyboard, you may as well have shelled out for a Windows Ultrabook or a MacBook Air — both of which are closing the weight and size gap while offering comparable battery life.
Schools Like Chromebooks
Apple was quick to market the iPad to the education market.
The AAPL tablet was cheaper than most PCs, easier to carry around and many students had one at home so there was little learning curve.
However, Google has stolen much of Apple’s thunder in the classroom in recent years, pushing its Chromebooks into the educational channel. They’re half the price of an Apple iPad, they have a keyboard, they’re secure and most of the software is free.
Apple made big news with a 2013 agreement to supply iPads to Los Angeles schools with one going to every student, in a deal that would be worth as much as $500 million. In 2014 — in what would become an all-too familiar scenario for AAPL — the school board reversed course, switching instead to Chromebooks and Windows laptops.
The iPad Upgrade Cycle Is More PC Than Smartphone
One of the biggest challenges for AAPL is convincing iPad owners to upgrade.
Typical iPhone owners upgrade to a new model every one to two years.
In contrast, iPad owners have been sticking it out. Despite the fact that Apple releases new models every year, many consumers are still holding onto original 2010-vintage iPads.
The Apple iPad is turning out to have an upgrade cycle that’s more like a PC than a smartphone.
In other words, those initial few years of rapid iPad sales represented the population loading up on their first tablet, and once that wave was over, the massive quarterly gains were not sustainable.
Phablets
While Ultrabooks and MacBook Airs made it tougher to justify using an Apple iPad as a productivity tool, the AAPL tablet has been challenged on the casual use and entertainment front by phablets.
When smartphones had tiny displays, a tablet like the Apple iPad with its 9.7-inch display was a far superior device for casual web browsing, playing games or reading. The 7.9-inch iPad Mini struck the ideal balance between usability and portability, while saving a hundred bucks.
Now that Apple has joined the phablet craze, the iPhone 6 Plus is selling like hotcakes. And with a 5.5-inch, Retina HD display, the AAPL phablet works quite well for casual web browsing, playing games or reading.
Why pay another $400 or $500 for an Apple iPad when the smartphone you carry everywhere does the job almost as well?
The Future of the Apple iPad
Apple has a history of cannibalizing its own products.
The iPod was once its monster business, but sales were decimated when AAPL released the iPhone. It hasn’t released a new iPod in a year and during last year’s monster holiday quarter, it sold just 2.6 million of the devices (in Q1 2009, it sold nearly 23 million).
The iPad isn’t near the end of its lifespan the way the iPod is, but it’s clearly not the iPhone either.
Apple is continuing to invest in the tablet business (look for a professional-friendly 12-inch model in 2015), but as it’s squeezed by the MacBook Air and iPhone 6 Plus on one side and Android tablets on the other, the Apple iPad is likely to continue losing market share until it stabilizes as a premium offering with modest yearly sales increases. Like the Mac has done in the PC market.
That’s actually the best way to look at AAPL’s iPad business in the future. It’s never going to be the revenue driver that the iPhone is. However, the iPad will settle in as a viable, long-term product line that gets incremental upgrades — like the Mac.
With anticipation building for a new Retina display MacBook Air, it’s possible that a surge of Mac sales later this year could actually push Apple iPad revenue down to third place in the company’s product hierarchy.
But that’s OK. It may have dropped from over 80% market share to under 25% in just five years, but the Apple iPad isn’t about to die.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
