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Monday, April 28, 2014

Why iPad sales are declining and what it means in the long term.

Why iPad sales are declining and what it means in the long term

Apple’s quarterly earnings report, released yesterday, highlighted a trend that was slightly unexpected. Although profits grew to $10.2bn from $9.9bn the year before, the engine for this growth were, surprisingly, the newer iPhone 5S and 5C models which posted year-on-year growth of 17%. iPad growth, by contrast, screeched to a halt with year-on-year sales down 16%.
How has this occurred, and what does it mean in the long term? The perfunctory reasoning of Tim Cook, Apple’s CEO and Luca Maestri, their CFO was that Apple’s channel inventory (the amount of products they make available for purchase by resellers) had declined over the period but this ignores the fact that even with these adjustments factored in (about a million units) it still constitutes an overall decline in year-on-year growth and that Apple’s forecasts themselves predicted year-on-year growth for their iPad range.
The real reason for these declining sales may be simpler: Competition and saturation. Although Android tablets competing with Apple in the tablet space have existed for a while now, Apple had a first mover advantage that essentially fused its brand with the word “tablet”. Indeed, they essentially invested the consumer-ready tablet and it gave Apple a kind of marketing narrative of being “the tablet company” that worked on its own, even alongside premium pricing. The increasing availability of not just Samsung Android tablets, but Android (and increasingly Windows) tablets from a wide variety of manufacturers is cutting into a consumer base that would have instinctively gone to Apple a few years ago for a tablet.
Moving on to the more important matter of consumer saturation. Most analysts predict the tablet market will grow by 50% this year in the United States (its main market by a long margin). This seems overly generous. The level of market saturation in the US for tablets (42% of adults) is at a level now where we can expect to see some tapering off of growth. Indeed, to be more bold about it, it’s looking increasingly likely that the whole of the “post-PC” market of smartphones, tablets and phablets are looking at long term “stagnation”, that is to say, slow growth and diminishing returns from a mature consumer market. This is already well documented in the smartphone space where existing consumers simply see no reason to upgrade anymore.
This is partly why yesterday’s announcement was surprising in that very few people in tech journalism or market analysis saw it as part of a broader trend, they expected tablets to be immune from stagnating smartphone growth when in fact the two types of product are only different by incremental differences in screen size now. IDC’s first Q1 2014 report, released in January, predicted this exact outcome by stating that the ”signs for slower growth are clear” and warning against extravagant expectations.
This shouldn’t be viewed as a “crash” however, the fact of the matter is that app store revenues across the App Store and Google Play are going to grow and increasingly establish themselves as huge e-commerce centres in spite of this. Which leads on to the final point:
The only way hardware growth of mobile devices in developed markets is going to see the sort of huge figures it did in 2010-2012 is with innovation. For the past few years we’ve seen incremental improvements to existing principles which is, of course, understandable and perfectly fine. But incremental improvements in the form of better SoCs, more RAM and so on cannot drive growth to the extent a truly disruptive device can. A question device manufacturers need to be asking themselves is “What can I do on an iPad 4 that is truly different to what I could do on an iPad 3?” Therein lies the increasingly common pattern of consumers holding onto devices for longer periods of time now. There is, as already mentioned, no real reason why consumers should upgrade.
What’s most interesting about this is that the floor is open to any challengers who think they can change the market with something truly disruptive, and realistically this could come from anywhere.