Are Apple and Samsung Threatened by Verizon’s Move Into Hardware?

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Last week, Verizon Wireless (NYSE: VZ  ) started selling its own tablet, the 7-inch Ellipsis 7. The device, which is exclusive to Verizon, uses the Android operating system and boasts LTE connectivity.

As the nation's largest carrier, Verizon could steal some tablet sales from Apple (NASDAQ: AAPL  ) and Samsung (NASDAQOTH: SSNLF  ) . Still, investors shouldn't get too concerned just yet.

Verizon enters the device business
It's unlikely that Verizon is making the Ellipsis 7 itself. More probable is that it is partnering with a company such as Foxconn to manufacture the device. Regardless, it's a Verizon-branded device, and the carrier will likely use its sales force to push the tablet on subscribers. Verizon gives the Ellipsis top billing on its website and is offering a $100 discount on the tablet when subscribers sign a two-year contract.

Verizon sells several models of Apple's iPad and half a dozen different Samsung tablets, but the Ellipsis 7 is by far the cheapest tablet the carrier offers. Price-conscious consumers may be more likely to opt for Verizon's product over a Samsung or Apple device.

But buyers seeking quality are likely to stay away. Even though it's fairly cheap -- just $250, or $150 on contract -- the Ellipsis 7 is relatively underpowered. Compared to Apple's iPad Mini with Retina display, the Ellipsis has a much slower processor, lower-resolution display, and a far worse camera. Of course, the iPad Mini costs more than twice as much -- $429 with a two-year contract.

Apple's tablet business has slowed
While I don't think the Ellipsis specifically will weigh on iPad sales, that extreme difference in pricing is symptomatic of the precarious state of Apple's tablet business. In recent quarters, iPad demand has slowed significantly, or even declined, as consumers may be opting for cheaper tablets in place of Apple's premium products.

Apple once had more than 90% of the tablet market. Now, according to IDC, it has less than 30%. In time, I predict that Apple's share of the tablet market will fall into the single digits, paralleling the Mac's share of the PC market.

Apple shareholders shouldn't necessarily be troubled by this trend. Despite having just a sliver of the PC market, Apple makes more from its Macs than the top five PC vendors combined, according to analyst Horace Dediu. Nevertheless, the iPad business may never be as big as some investors may have hoped.

Samsung's market share dominance is extending into the tablet space
As Apple's share of the tablet market declines, Samsung's business is growing. In the third quarter, Samsung shipped about one-fifth of all tablets, according to IDC, a gain of 123% from the prior year.

As with smartphones, Samsung has followed the strategy of offering a multitude of tablets at different price points. Samsung's Galaxy Note 10.1, for example, is actually more expensive than Apple's competing iPad Air, but for consumers on a budget Samsung offers several cheaper models. The Galaxy Tab 3 7.0 is just $180 with Wi-Fi, and it has similar specs to Verizon's Ellipsis 7.

For now, the Android ecosystem may remain the primary impediment to Samsung's tablet dominance. Apple's iPad has a plethora of apps made for it specifically, while most Android tablet apps are simply blown-up versions of Android phone apps. Samsung, however, has taken things into its own hands, partnering with Twitter for a Samsung-exclusive tablet app, and going after developers with its own developers conference.

Don't expect Verizon to dominate the tablet market anytime soon
Given Verizon's large base of subscribers, and the Ellipsis' cheap price point, it would shock me if the tablet was a total failure. But investors shouldn't expect Verizon to take a meaningful amount of sales from Apple or Samsung, at least not anytime soon. Ultimately, most consumers just don't buy tablets through their wireless provider. Last year, analyst Chetan Sharma estimated that 90% of tablets sold in the U.S. are Wi-Fi-only, and earlier this year analyst Craig Moffett reported that only 5% of the devices are connected to a wireless network. For most consumers, buying an LTE-capable tablet just doesn't make sense. It's cheaper to buy the Wi-Fi version, and to tether the device to their phone if they need Internet on the go.

Maybe Verizon's move into hardware could help reverse this trend, but I doubt it.

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