Is Apple Making Another iPad Blunder?

Earlier this week, Bloomberg inadvertently revived hope that Apple (NASDAQ: AAPL  ) would unveil new iPads at its rumored Sept. 10 iPhone launch event. This new rumor was quickly shot down by The Loop and other relatively reliable sources. Instead, most Apple-watchers now believe that the next-generation full-size iPad and iPad mini will be introduced at a launch event in October before going on sale in late October or early November¬†.

The first-generation iPad Mini. Photo: Apple.

If this timeline is accurate, it would mean that Apple is essentially replicating last fall's product release timetable. This doesn't seem like a very good strategy on Apple's part. A late October or early November release won't give Apple enough time to build up sufficient inventory for the holiday season.

As a result, iPads are likely to be supply-constrained through the 2013 holiday season. That means lost sales, as people who need to buy a present in time for Christmas but have trouble obtaining an iPad may opt to buy a rival tablet instead, such as Google's (NASDAQ: GOOGL  ) Nexus 7.

Disappointing FY13 iPad performance
Last year's fall release of the iPad Mini and a refreshed full-size iPad spearheaded strong sales growth for the iPad product line. Apple sold 22.9 million iPads in Q1 of FY13, up 48% from the prior-year quarter, even though there was an extra week in Q1 of FY12. The average selling price declined because of the iPad Mini's lower price point, but total iPad revenue still increased 22% year over year.

iPad sales would have been even higher but for supply constraints that prevented Apple from meeting the market's full demand. Indeed, during a visit to Best Buy (NYSE: BBY  ) in early January, I witnessed a salesperson explaining to a distraught customer that the company had no iPad Mini inventory in the entire New York metro area.

Pent-up iPad Mini demand therefore carried over into the March quarter, when Apple managed to post an even stronger 65% increase in total iPad unit shipments. iPad revenue was up roughly 40% year over year. However, by the end of March, an appropriate supply demand balance had been reached. As a result, in Q3, Apple posted the first ever year-over-year decline in iPad shipments. iPad revenue fell 27% on a 14% decrease in unit shipments.

In total, Apple's iPad revenue has grown by a paltry 8% year over year through the first three quarters of FY13 (around 11% after adjusting for the extra week in FY12). With no new iPad expected until October or later, I expect this revenue growth figure to end up close to zero by the time Apple closes the books on FY13. Moreover, in light of the iPad mini's relatively low gross margin, the iPad product line can reasonably be pegged as the main cause of Apple's profit decline this year.

Bad timing
It's safe to say that the iPad Mini hasn't lived up to expectations. This product was supposed to destroy the Android tablet market by narrowing the price gap between the iPad and popular competitors like the Nexus 7. Instead, Android tablet vendors have gained ground on Apple in the past year.

In light of the iPad Mini's strong initial sales and long period of supply constraints, it doesn't seem that Apple's problem was product quality or pricing. Instead, Apple's biggest problem was bad timing. When the iPad Mini went on sale in early November, Apple ran through its initial supply meeting the demand from hardcore fans and early adopters. That situation made it impossible to build up enough inventory to meet strong holiday season demand. By the time iPad Mini supply reached a normal level, seasonality was working against Apple, leading to a sharp drop-off in sales.

If Apple follows the same iPad release schedule this fall, it will encounter some of the same problems. It's very unlikely that the company will be able to build up inventory of the new iPads fast enough to meet seasonally strong demand. Some of that demand may remain "pent-up" and translate to strong March-quarter sales. However, by then, plenty of potential customers could bail out and purchase an Android tablet (or a totally different gift) instead.

Foolish bottom line
For the most part, I think tech analysts pay too much attention to timing issues. When a new product release doesn't quite line up with the previous launch cycle, it can have a dramatic impact on quarterly earnings. However, from a longer-term perspective, it usually has no impact on the company's earnings stream.

In this case, though, timing could be crucial. Apple's supply constraints last fall opened the door for Android tablet vendors to gain share. Looking forward to this fall, the earlier the iPad hits the market, the better off Apple will be. Even if a September launch is out of the question, an early or mid-October on-sale date would give Apple more time to fulfill initial demand and build up holiday inventory. If iPad supply constraints once again hamper Apple this fall, Android will move another step closer to dominating the tablet market share battle.

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Read/Post Comments (15) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2013, at 11:56 AM, cdkeli wrote:

    Methinks they're gonna need more than an iPad to stop the bleeding,,,perhaps an iTournikuet.

    I've just heard scientists are been able to grow a human brain in the lab - perhaps they can find a remnant of Stephen Jobs,,,

  • Report this Comment On August 31, 2013, at 12:51 PM, Foolorama wrote:

    Actually, if Apple lowers the price of the existing iPad Mini and releases a currently priced iPad Mini Retina, it will DESTROY the holiday season. THIS YEAR.

  • Report this Comment On August 31, 2013, at 1:27 PM, Henry3Dogg wrote:

    "A late October or early November release won't give Apple enough time to build up sufficient inventory for the holiday season."

    Moronic comment.

    Inventory build depends on then they start making them. Not on when they release them.

    No point in reading further. Filter the author.

  • Report this Comment On August 31, 2013, at 1:31 PM, ddillan wrote:

    Seriously Adam (author) you figured out they are gonna have a supply problem with their release date and not one single manager at Apple saw it coming? I agree with Henry - filter the author.

  • Report this Comment On August 31, 2013, at 1:42 PM, StockgeniusII wrote:

    Apple seems to think that the refresh of the iPhone 5S and the 5C will be the main drivers for Apple sales.

    I myself am not interest in either iPhones because it just a continuation of the iPhone 5. Not interest in the extra security of a thumb scanner.

    I am very interested in now buy an iPad Mini Retina. I am hoping that Apple does not continue to dumb down the insides; like they have down with the original Ipad Mini using an outdated display resolution, low RAM and 2 year old A5 processor; which is now 3 years old.

    Apple needs to be on equal terms with their competitors in what they offer in technology going with the iPad Mini Retina. That calls for an A7, 2GB of RAM and HD+ resolution display!

  • Report this Comment On August 31, 2013, at 1:46 PM, applefan1 wrote:

    This wasn't supposed to "Kill off the Android market". it was to address a smaller screen market that was and still is obviously there.

    The only area that Android is really gaining ground is in countries where the majority of the population doesn't have enough money to buy nicer products.

    Apple has the dominance amongst those that actually USE the damn things. Like business professionals, audio creation/production, educational markets, corporate use, and people that aren't looking for the next cheapest product on the market. The fact remains that the only people really making any money from smartphones and tablets is actually Apple and Samsung. The Nexus products don't sell well contrary to this and other article's written on the subject. Apple still sold more iPad minis in their first month of sales than the Nexus 7 did since their introduction. They only sold 7 million units as of July 2013. That's not that many. Apple sold almost that number in the first week of the non-cellular iPad mini.

    Apple also had production problems as they couldn't make them fast enough. I don't know if it was a component supply issue or another issue, but they are now going to be using Pegatron a lot more in addition to Foxconn, so hopefully Apple won't have production problems.

    The other aspect is that Apple might not have been able to get the higher resolution screen that they wanted to use. Most of the Android products use AMOLED, which Samsung supplies, (surprise surprise) and Apple wants to use the IGZO technology or something they can get in large quants that runs from lower power, etc.

    Apple seems to have a commanding lead in the areas that matter. Trying to compete after the "I don't have any money" market where there is pretty much NO money to be made, Apple will certainly outlast these other companies.

    If you do an internet search, there are lots of $70 Chinese tablets one can private label, just buy in big enough quantity. Apple's not going after the NO profit business.

    Again, this journalist is a joke. Obviously doesn't really understand the market.

  • Report this Comment On August 31, 2013, at 3:44 PM, ChrisCarlton10k wrote:

    One impressive Android tablet to launch in September is the new 7-inch - Novo 7 EOS($189) that features a built in SIM card slot with 3G HPSA+ service through any GSM Carrier, including AT&T and T-Mobile and offers both Internet data access and Voice Calling function, and a phone SIM card maybe used interchangeably with both phone and tablet-- this new model features an HD Screen (1280x800) MicroSD Memory, built-in GPS, a 4400 mAh battery, and Bluetooth - which works nicely with wireless headsets for phone calls--

    Another Android tablet that packs a lot in for the price that launched in August is the 8.9 inch Pipo M7 Pro($255) -- which overall, offers a solid device for about the same price as the new Nexus, but with a larger 8.9" 1900X1200 PLS display (Samsung technology), Quad Core performance, built-in GPS navigation, premium speakers, a 6300 mAh battery, Dual WiFi (2.4/5.0 GHz) and the option to use standard Android 4.2.2 O/S or a user-friendly Windows style Interface; and a 3G HSPA+ edition is also available for $30 more --

    Both new Android models are available in the U.S. through -- TabletSprint

  • Report this Comment On August 31, 2013, at 3:51 PM, 0gre wrote:

    "Moreover, in light of the iPad mini's relatively low gross margin, the iPad product line can reasonably be pegged as the main cause of Apple's profit decline this year."

    Not a reasonable assumption at all. The mini didn't have a large enough share of Apple's revenue to have accounted for that big an impact in the bottom line. It's far more likely the decline is due to lower margins on the iPhone 5 which sold about 4 times more units, accounted for 6-8 times the revenue of the mini, and had a lot of known manufacturing issues.

  • Report this Comment On August 31, 2013, at 7:38 PM, mfooljdg wrote:

    Apple has had a lot of time to work through all of the iphone & ipad manufacturing issues that relate to the aspects that will be carried forward with little or no change. Since the size of these products are not likely changing that includes a lot of assembly issues. As always the newer components are an area of possible supply weakness but they have had a lot of time to work on these issues. To suggest that Apple will have continued supply problems is an argument that they are not learning from prior problems and this is unlikely.

  • Report this Comment On August 31, 2013, at 7:49 PM, TMFGemHunter wrote:

    @0gre: I don't understand why you are focused on revenue share: the whole point is that iPad revenues fell well short of where they needed to be to produce stable or increasing profit. Based on Apple's comments, the iPad mini has a much lower gross margin than the full-size/full-price iPad. Moreover, the iPad mini significantly cannibalized sales of the full-size iPad.

    Based on Apple's FY12 iPad sales of $32.4 billion, if gross margin dropped by 10 percentage points, that's a reduction in gross profit of more than $3 billion. If iPad gross margin dropped by 15 percentage points, it's a nearly $5 billion reduction. That accounts for a substantial amount of the company's profit decline.

    Obviously, iPhone has had margin pressures, but it's had much stronger revenue growth to offset that.

    @applefan1: From my perspective as an investor, the point is to make a profit. "Delighting users" as Tim Cook loves to put it, is only a means to that end. The iPad mini resulted in a huge hit to the iPad product line's margins due to cannibalization, without producing strong revenue growth. The main reason for the lack of revenue growth, in my opinion, is that Apple was short of supply during the one time of the year with the strongest demand.

    It's clear that the iPad is the best tablet out there. I think we both agree on that. It's also clear that Apple should not be chasing the profit-less bottom of the market (and I've discussed this in other articles.) I think we agree there, too.

    Nevertheless, the fact that Apple's iPad related profit has dropped substantially from FY12 to FY13 indicates a major execution problem. That's the point of this article.

    @Henry3Dogg: I think you're being a little pedantic. Apple won't launch the next generation iPads with 20 or 30 million units already in inventory. Could they add another week or two of production before putting the products on sale? Sure. But they're not going to start producing 2 million units per week tomorrow and then wait until November to start selling them.


  • Report this Comment On August 31, 2013, at 9:25 PM, Henry3Dogg wrote:


    You call me pedantic. Try looking that up in a dictionary. Now I am being pedantic.

    I think you are being more than a little arrogant.

    You state

    "But they're not going to start producing 2 million units per week tomorrow and then wait until November to start selling them."

    How do you know? There are scenarios where they might do exactly that.

    For instance if the hardware design is ready but they were still working on the software for the fingerprint sensor, then it might make perfect sense to do exactly that.

    Stop bending reality to give yourself a story.

  • Report this Comment On September 01, 2013, at 12:37 AM, Diogeneez wrote:

    @ChrisCarlton10k : Chris... Did you have to pay for that ad?

  • Report this Comment On September 01, 2013, at 12:19 PM, sftv wrote:

    Here is an unofficial "Starbucks" assessment of the tablet market. I live in an Upper Class area of LA. I go to Starbucks Every Morning. All of the reports on Tablet, 'iPad Sales seem pretty impressive. Yet, out in the real world, in the morning at a Starbucks with Young executives getting their Lattes before heading into the office. This is what I see. For ever 5 laptops there is 1 tablet. For Everyone there is a smartphone. So 'they' report that tablets are selling millions and millions of units... seems like BS hyperbole to me, a marketing ploy to let us think if we don't buy a tablet we are missing out.

  • Report this Comment On September 05, 2013, at 11:57 AM, tacain wrote:

    Hmmm... Lots of ranting over nothing. Seems to me that Apple needs to make an iPad blunder before they can make another one.

  • Report this Comment On October 23, 2013, at 8:49 PM, Bujutsu wrote:

    However, the profit margins on the iPad Mini are actually higher than the regular iPad.

    That doesn't sound like a blunder to me.

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