Apple Inc.'s iPad Identity Crisis


Apple's iPad Air is an amazing tablet. But can Apple continue to distinguish the tablet from its iPhone? Source: Apple

You wouldn't know it from Apple's (NASDAQ: AAPL  ) latest iPad commercials, but the company's famed tablet is about to have an identity crisis. And it's all Apple's fault.

The iPhone is Apple's key revenue driver. Source: Apple

Sitting in the iPhone's shadow
Admittedly, that sounds a tad dramatic. But let's consider for a moment that later this year Apple will likely unveil a new and larger iPhone. What everyone's referring to as the iPhone 6 could quite possibly come in two different screen sizes -- 4.7 inches and over 5 inches -- if reports from Bloomberg and The Wall Street Journal pan out. They may not launch at the same time, but reports about two new iPhone screen sizes have surfaced enough to warrant the likelihood.

Maybe you've heard all this before. That's fine, but what investors need to consider is how Apple's iPhone, and current cash cow, can either help or hurt its much less influential tablet sibling.

Apple sold 43.7 million iPhones in its 2014 fiscal second quarter, compared to 16.35 million iPads. To be sure, that many tablet sales is no small feat. As it stands right now the iPhone makes up 57.1% of the company's revenue and that iPad makes up 19.9%.

So why does larger iPhone matter for the iPad? Because a 4.7-inch or greater than 5-inch iPhone phablet means that the iPad Mini becomes an oddity in the company's lineup.

Sure, Apple is pretty laid back about one product category eating into another. But only when the company's new products are destroying old products. Does anyone care that the iPhone has decimated the company's iPod sales? No, because the iPod -- though it was an amazing device that fueled tremendous revenue for years -- has been taken over by a much better product.

But a larger iPhone eating into iPad sales? Don't tell me that's the plan.

If a larger iPhone 6 surfaces, then it could hurt iPad Mini sales. Source: Apple

Apple needs both products
Though the iPhone rakes in the most revenue for Apple and the margins on the device are enviable, I don't think the company is interested in selling as many iPhones as possible at the cost of hurting the iPad.

The latest Gartner research shows the Android tablet OS experienced 127% growth in 2013 and now holds 62% of the tablet market. Meanwhile, Apple's iOS dropped from 52.8% tablet share in 2012 to 36% in 2013. Growth in mature tablet markets is also slowing, which has lead some of Apple's competitors to create the next wave of tablets that function more like computers. Microsoft is already doing it with the Surface Pro 2, and -- to a lesser extent -- Samsung is doing with its Galaxy Note Pro.

I've said before that I think Apple will launch a pro version of the iPad later this year. But whether or not that comes true in the next two calendar quarters or not won't change the fact that if Apple releases a larger iPhone, particularly one larger than 5 inches, it will need to add new features to the iPad that will distinguish it enough from its smaller counterpart.

Foolish final thoughts
All of this isn't anything Apple doesn't already know. On the company's earnings call last week Tim Cook said:

We continue to believe that the tablet market will surpass the PC market in size within the next few years, and we believe that Apple will be a major beneficiary of this trend.

The iPad is obviously Apple's driving force in the post-PC era. But as the iPhone continues to get bigger and is packed with more features, the iPad will have to work harder to distinguish itself.

I don't buy the argument that Apple just cares about large margins, regardless of the device. Any tech company that's creating products for millions of users and trying to stay ahead of fierce competition cares deeply about its product categories and selling boatloads of devices across the board.

Tablets are taking over the PC market more and more each year -- so we can't pretend Apple is OK with losing position in tablets as long as it's growing iPhone sales.

Here's Apple's next move 
While a larger iPhone and a pro version of the iPad are just speculation right now, they may not be the most important thing Apple's working on. But Apple's competition is pursuing the same new industry too, and right now this burgeoning market is anyone's game. 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.


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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 April 29, 2014, at 12:12 PM, SimchaStein wrote:

    Good point - but misses the point. Phablets will eat into mini-tablets. An iPhone maxi will impact the mini-Pad - fine.

  • Report this Comment On April 29, 2014, at 12:18 PM, dcfool2013 wrote:

    Apple could easily add mobile voice to all of it's ipad/iphone lineup, removing any confusion and any question. With a full size ipad, you would need a bluetooth headset or the like. Most people are already using a bluetooth device of some kind. Enabling the voice feature would be optional and up to you to pick a carrier/plan. Just put the chipset in everything and give people the option. Think of the possibilties - old iphones could have voice disabled and become an ipod touch for your kids.That's what happens now, they just ride around with an invalid sim card installed. Just acknowledge that's how people want to use their devices and give every iOS user the option, no matter what the device. Identity crisis gone. Want an ipad mini to be your only device? Fine. Full size ipad? Yup. (okay, you'll look silly holding that up to your face if you forget your earpiece). iPhone? Same thing. Open it all up Apple! (Just some ideas)

  • Report this Comment On April 29, 2014, at 12:39 PM, jdmeck wrote:

    I do not need or want an iPad that works on the cellular network, and I doubt I'm alone. So there will always be need for an iPad at multiple sizes for those of us who only need and want wifi.

  • Report this Comment On April 29, 2014, at 2:11 PM, twolf2919 wrote:

    So you're forecasting that if Apple comes out with a much larger iPhone (for which there is exactly ZERO evidence), then iPad sales might suffer?

    Brilliant.

    Like many, I suspect Apple will come out with a larger iPhone - probably in the 4.3-4.7" range. I highly doubt it will produce a 5.5" iPhone as some rumors (all of which seem to have as their source a single analyst - Kuo - which has been wrong before) have suggested. Apple wouldn't produce something as ugly as a Phablet.

    So would a 4.7" phone cannibalize the 7" iPad mini or the 10" iPad? Maybe the mini - a little. So what?

    iPad sales are already slowing down - independent of any upcoming iPhone. This is only natural as tablets have already mostly replaced the laptops and desktops of those folks who's computing needs didn't require a laptop or desktop and who had the money for the replacement or addition. Future tablet growth will more closely follow machine replacement cycles (i.e. as laptops and desktops fail, users who didn't need the power of those devices may choose a tablet replacement). There continues to be lots of growth potential in education and business (and in those areas, an iPhone would not replace an iPad either).

  • Report this Comment On April 29, 2014, at 6:32 PM, Bravadu wrote:

    No one complained when a $700 iphone cannibalized the sale of a $100 ipod

    Likewise, no one will complain when a $700 Apple phablet cannibalizes an ipad mini's sale.

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