Apple’s iPad Business Is Shrinking, Nothing Announced Tuesday Changed That

When Apple (NASDAQ: AAPL  ) reported earnings last quarter, its iPad sales were a notable disappointment -- down 14% from the prior year. This quarter probably won't be much better -- Morgan Stanley is projecting sales of 13 million, a 7% decline.

Some analysts have attributed disappointing iPad sales to the lack of a new model. If that's the case, Apple's new iPad Air and iPad Mini with Retina Display should help to revive demand. Yet, a more sinister trend may be taking shape. Tablets running Google's (NASDAQ: GOOGL  ) Android, including those made by Samsung (NASDAQOTH: SSNLF  ) , are finally starting to dominate the market.

Apple's competitors have undercut its tablet pricing
For a long time, Apple's tablets were the absolute best: the best quality at the best price. If you were in the market for a tablet, buying an iPad was truly a no-brainer -- all of its competitors' devices were either more expensive, or lower quality, or both.

Take Motorola's Xoom tablet: When it was released in 2011, it retailed for a full $600. It was $100 more expensive than Apple's iPad 2, running what was widely regarded as a worse operating system, Android 3.0. Motorola was forced to cut the Xoom's price, and then eventually discontinue it, amid disappointing sales. But it isn't 2011 anymore. Nowadays, there are tons of tablets running Google's Android, many of which are far cheaper, but almost as good, as Apple's iPads.

Consider Google's own Nexus 7. Starting at $229, it is almost half the price of Apple's new iPad Mini with Retina Display. Admittedly, the screen is a bit smaller and the processor is a bit slower, but consumers who opt for Google's device will save themselves $170.

Samsung's Galaxy Tab 3 is 10.1-inch tablet that competes with Apple's full-size iPad. Its vastly unpowered compared to the new iPad Air, but also much cheaper -- retailing for just $360. Despite its relative lack of power, consumers seem to be buying -- Samsung's share of the tablet market has grown dramatically in recent quarters, up to 18% from just 8% last year.

The fundamental difference between tablets and smartphones
And when it comes to pricing, the tablet market is vastly different from the smartphone market: there are no carrier subsidies for Apple to take advantage of. Most would-be American smartphone buyers deciding between competing flagship smartphone models (say Samsung's Galaxy S4 and Apple's iPhone 5s) are not factoring in price -- because of carrier subsidies, both phones cost roughly the same, $200 (with the exception of the occasional sale) .

The same is not true for tablets. While some tablet subsidies are available, most consumers buy their tablets out-of-pocket; every dollar difference between Apple's tablets and its rivals is a reason to stay away. That difference in price is finally starting to be reflected in market share. Although Google's Android overtook Apple's iPhone in popularity years ago, it wasn't until earlier this year that Android tablets outsold the iPad. Google's operating system now has 60% of the market, and it likely won't be long until its dominance in tablets matches its dominance in smartphones.

Google is starting to take tablet apps seriously
Still, Apple leads when it comes to quality -- as Apple's management pointed out on Tuesday, there are now some 475,000 apps designed exclusively for the iPad. Google's Android, meanwhile, has many apps, but few designed specifically for tablets. That could change.

Google seems to finally be doing something about its weakness. An upcoming redesign to its Google Play app store will highlight apps designed for tablets. Google needs developers to actually create the apps, but by emphasizing them, consumers may be more likely to buy them -- giving developers more incentive to create them.

Ultimately, developers are in it for the money, and for now, Apple's platform remains a better bet. But as Business Insider points out, the gap between the two is rapidly narrowing -- Android developers now earn 90 cents for every dollar earned by an iOS developer.

Is Apple's iPad business in danger?
To be clear, Apple's two new iPads -- the iPad Air and the iPad Mini with Retina Display -- are, for most people, the best tablets you can buy. They're light and thin, with great battery life and great screens. They also come equipped with Apple's new A7 processor -- the fastest mobile processor on the planet.

Unfortunately, they're also expensive. Google's Nexus 7 is, by most measures, almost as good as the new iPad Mini, but $170 cheaper. Samsung's Galaxy Tab 3 is $140 less than the full-size iPad, and though it isn't as good, for many consumers it may be "good enough."

Investors may expect these new iPads to help turn Apple's iPad business around. Possibly, but if iPad sales continue to disappoint, I wouldn't be surprised. As it conquered phones, Google's Android is now conquering tablets. In fact, its dominance of the tablet market could end up far greater -- without the benefit of carrier subsidies, Apple's expensive iPad is much more vulnerable than its iPhone.

In the end, Apple will probably make the iPad obsolete
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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 October 23, 2013, at 10:46 AM, WineHouse wrote:

    Again, Apple doesn't need market share so much as it needs a critical mass of sophisticated consumers who want to (and know how to) make full use of the remarkable capabilities of the Apple mobile and desktop computing machines. Most of the astonishing features of the new Apple tablets, phones and "regular" computers are completely beyond what "ordinary" folk want or need from their computational devices. Apple doesn't expect such people to pay the extra premium for features they don't even comprehend. But for those who not only understand the capabilities of these machines but also are interested in actually using them, the cost is absolutely worth it and those people will buy these things. And Apple will continue to make astonishing profits as a result.

    That Mac Pro is astonishing! It's almost like having a Supercomputer on your desk. And the "fit" between OSX-Mavericks and iOS7 devices (especially with the A7/M7 processors) is uncanny. But if you don't "get" the capabilities, why should you spend $$ to get the devices?

  • Report this Comment On October 23, 2013, at 11:17 AM, pbensh77 wrote:

    Misleading title. ipad business/sales are not shrinking. Just market share is getting smaller because of the glut of cheap tablets. Apple is selling and ipads unless of a halt on. Purchased in anticipation of a new model. Year over year sales are up. Present all the facts without spin, please. ipad is not going to be obsolete any time in the near future.

  • Report this Comment On October 23, 2013, at 12:08 PM, st0815 wrote:

    The new iPad mini should help Apple in the 7"-8" region. It still has a formidable competitor in the Nexus 7 II, but unlike the first iteration with its disappointing display, this is now actually a premium device again.

  • Report this Comment On October 23, 2013, at 12:40 PM, melegross wrote:

    There isn't even any real evidence of all of these increased Android tablet sales. It's all just guesses. Samsung, supposedly the biggest Android tablet vendor hasn't released numbers for shipments, much less end user sales, since the first quarter of 2011.

    There is simply no way to verify any of these numbers, other than those of Apple and Motorola, both of which release sell through numbers. The rest is just wild guessing.

    Indeed, from historical information, Samsung's numbers could be well under what the guessing is giving us.

  • Report this Comment On October 23, 2013, at 12:55 PM, deemery wrote:

    What pbensh77 said!

    I'd expect a Fool author to be sensitive of the distinction between 'shrinking volume' and 'shrinking market share (in a rapidly increasing market).'

    For what it's worth, I'm trying to remember how many times I've seen anyone actually using something besides (a) iPad or (b) Kindle. The qualitative answer is "not very often." Depending on what/how you count tablets, the big competition for Apple is likely to come from Amazon.

    If you view tablets as primarily 'consumption devices', then content is king, and Amazon is pretty much Emperor of Content. (This is particularly true after the Apple legal problems with ebooks and how Amazon's dominant position was substantially reinforced by what I think was a bad policy decision by the Obama administration.)

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