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

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.

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Read/Post Comments (9) | Recommend This Article (4)

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 April 27, 2014, at 11:05 AM, TMFAeassa wrote:

    Solid article! Thanks, Sam!

  • Report this Comment On April 27, 2014, at 12:01 PM, skippywonder wrote:

    No reasonable person can look at Apple's iPad sales and conclude that the business it "struggling". True the iPad sold 3% less year over year (It's only 16% if you choose to use the arbitrary sell-in numbers that include changes to units in the channel). But they are still selling a million iPads every week during the slow season. Anyone who calls this "struggling" is either lying or not too bright.

  • Report this Comment On April 27, 2014, at 12:19 PM, Thompr97 wrote:

    Not one mention of the reason for the overstated year-over-year decline provided by Cook?

    Lame basher. Can't even read and reference a conference call.

  • Report this Comment On April 27, 2014, at 2:57 PM, RussBinder wrote:

    The iPad needs to step up the game a bit. My current iPad works as good as new, but if they want me to buy another one, here's what it needs:

    Have two apps on the screen at the same time - no more switching back and forth. Apple INVENTED the window idea, and yet they LEFT IT OFF the iPad...what?

    USB and other direct plug ins that are directly accessible from the iPad - read, write, edit, everything. Now that MS Office can be on the iPad, have it do the other basics.

    How about some up-down-left-right arrows on the keyboard? Or this - look at the keyboard you sell now, copy that on the iPad. Done.

    Large format - like the Samsung 12.2", or bigger, except good. And a big-ass battery to run it. And a battery-in-a-case to back it up.

    SOFT, IMPACT RESISTANT EDGES!!! Mr. Cook, these things get dropped. They need to be able to take at least a reasonable bounce. The edges don't need to be razor sharp. Rubber edging, or something, would be cool.

    A way to hold it with an open palm - like a built in strap across the back. Or at least A PLACE for the strap you sell as an add on. Or how about at least a loophole for a wrist strap - like some cell phones have ( and, yes, PUT IT ON THE iPhone too! ZERO incremental cost, BIG utility).

    Big drop-in memory cartridges. Something like a USB, but without a stick sticking out of the pad.

    FAST charger - like the Tesla, except smaller.

    Optional double-battery version. Yeah, it costs more, but as long as things that cost more are actually WORTH MORE to the user, big deal.

    Tracking by serial number, to a central database. New owners would log it as part of the first-time startup. If you sell it to someone, you transfer the login to the next user - they should not be able to do it on their own, without you doing a "release."

    Direct communication with the new iWatch (which, IMHO, should set the new standard for wearable health monitors, too...please...most of what is out there is lame). Or, have a hardware deal that you wear, but downloads everything in, say, 15 minute increments, to the iPad.

    Anyone else's thoughts?

  • Report this Comment On April 27, 2014, at 3:44 PM, CraigWPowell wrote:

    Missed The Recent Surge? Apple Stock Forecast Indicates Better Buying Opportunities Ahead

    http://seekingalpha.com/article/2165713-missed-the-recent-su...

  • Report this Comment On April 27, 2014, at 11:24 PM, larryw101 wrote:

    This clown faced so-called author can't stand Apple.

    He's obsessed with bashing Apple.

    He knows nothing about finance and would be better off working at McDonalds. At least he would get more respect.

  • Report this Comment On April 28, 2014, at 1:06 AM, mmoney3 wrote:

    Come on seriously? iPad business is far from struggling. They sell the most tablets by any company and the extended life cycle should be praised not seen as a negative. No one likes those cars that die at 100,000 miles and no one likes technology(Android) that dies after a year. This article is a joke I'm sorry.

  • Report this Comment On April 28, 2014, at 1:26 AM, cotten999 wrote:

    Apple is a COMPUTER company. Not a commodity handset maker or a white box tablet maker.

    How are the Windows 8 tablets doing?

    “It doesn’t look like Apple’s iPad will be the next big thing. That isn’t to say the iPad is doomed — It could be a big business for a very long time to come. But the Windows PC killer that Apple’s management once hinted at? Likely not. A combination of alternatives running Google’s Android and Microsoft’s Windows 8 seem to have stunted the iPad’s growth. For now, Apple remains what it’s been for the last few years — an iPhone company.”

    Sam Mattera, Motley Fool, 29 October 2013

  • Report this Comment On April 28, 2014, at 7:34 AM, jdmeck wrote:

    Always negative Sam. If you call that struggling then what do you call all the other brands selling far less?

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