Apple, Inc.'s iPad Business Is Struggling for 3 Reasons

Apple's iPad business continues to disappoint investors.

Apr 27, 2014 at 11:00AM

Apple (NASDAQ:AAPL) reported a strong quarter on Wednesday, with profits exceeding analysts' expectations. Revenue was a beat; iPhone and Mac sales came in much better than expected. Gross margin, which had been trending down, bounced back.

Yet, there was one glaring weakness in the report: iPad sales (16.35 million) fell far short of estimates (19.7 million) -- Apple's tablet business declined 16% on a year-over-year basis. This isn't just a one-off instance, but a troubling trend. With the exception of the holiday shopping season, the iPad has fallen short of expectations in nearly every quarter for the last year. But why?

Longer replacement cycles
While smartphones are typically replaced on a biennial basis, tablets are kept for a longer period of time. Research firms, including IDC, have noted that a maturing tablet market poses a challenge to manufacturers, as consumers see little reason to upgrade from their existing devices.

Consumer Intelligence Research Partners, in a survey of some 2,000 consumers, noted that iPads tend to be used in ways much more comparable to devices with longer replacement cycles (PCs, TVs) rather than shorter ones (smartphones). iPad owners take their time replacing a lost or broken unit, and are much more likely to hand their iPad down to a friend or family member.

In short, while Apple can rely on its loyal customers to buy a new iPhone every two years or so, the same can't be said for iPad buyers.

No carrier support
That regular, two-year replacement cycle is largely the byproduct of a wireless industry willing to subsidize the cost of a new handset every two years. When a wireless contract expires, iPhone owners upgrade to a new model -- and Apple gets another sale.

iPads, in contrast, are overwhelmingly separate from the carrier complex. Sure, you can buy one of Apple's tablets through a major carrier, but very people few do. Last year, analyst Craig Moffett estimated that 80% of tablets sold in the U.S. do not sport wireless chips and only 5% are actually connected to wireless networks at any given time. Analyst Chetan Sharma came to a similar conclusion in 2012, noting that only 10% of U.S. tablets relied on wireless networks.

The separation of device and network has another component -- it allows Apple to be more easily undercut in price. Apple remains the single largest manufacturer of tablets, but its overall market share has slipped, surpassed by Android-powered tablets last year. Android tablets are available for a fraction of the price of iPads, and many of them are just as capable. Admittedly, this is no different from the phone market -- many Android handsets are available at a fraction of the cost of iPhones, and so far, that hasn't had much of an impact on the iPhone business.

But there's a crucial distinction between the two -- whereas iPhones are subsidized by the carriers or financed over 24 months, iPads have no such advantage. Consumers purchasing a new tablet have to pay the entire purchase price up front -- making a cheaper Android alternative far more enticing.

A weakening tablet market
Finally, one trend affecting both Apple and its Android-powered competitors is a tablet market that, overall, is showing signs of weakness. Last month, IDC cut its estimates for tablet sales, projecting the market to grow less than 20% in 2014. If that's the case, it will a sharp drop from last year, when the tablet market grew by more than 50%.

The growing popularity of smartphones with larger screens may be having some effect on tablet demand, particularly in emerging markets. Last year, IDC reported that phablets outsold both tablets and PCs in most Asian markets during the second quarter. These phones boast screen sizes between five and seven inches, calling into question the need to own a separate tablet.

The iPad company
During its first two years on the market, the iPad experienced rapid growth, selling faster than any of the products that had preceded it. Some projected that, one day, Apple would become the "iPad company" -- its tablet business looked on track to eventually overtake the iPhone.

At this point, that notion looks to be thoroughly shattered. Barring drastic changes to its tablet strategy, Apple's tablet business should continue to disappoint.

Bigger than the iPad, here's Apple's next revolutionary product
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers