Have Tablet Sales Peaked?

The sale of phablets has cut into tablet sales, and while the market will not fall in 2014 it won't be growing as fast.

May 30, 2014 at 11:21AM

Since the launch of the iPad in 2010 the tablet market has been on an extraordinary growth path. That could change in 2014 as a leading tracker of tablet sales and sales trends predicts the market will still grow but not at the pace it did last year.

Based on a greater decline in demand than predicted in the first quarter and concerns that tablets and 2-in-1s will face additional market challenges the rest of the year, International Data Corporation has lowered its 2014 worldwide tablet plus 2-in-1 forecast to 245.4 million units, down from the previous forecast of 260.9 million units. These revised numbers predict a 12.1% year-over-year growth rate -- a steep fall from the 51.8% gain in 2013 versus 2012.

"Two major issues are causing the tablet market to slow down. First, consumers are keeping their tablets, especially higher-cost models from major vendors, far longer than originally anticipated. And when they do buy a new one they are often passing their existing tablet off to another member of the family," said Tom Mainelli, IDC's Program Vice President, Devices & Displays. "Second, the rise of phablets – smartphones with 5.5-inch and larger screens – are causing many people to second-guess tablet purchases as the larger screens on these phones are often adequate for tasks once reserved for tablets."

Tablet-makers -- led by Apple's (NASDAQ:AAPL) iPad, Samsung (NASDAQOTH:SSNLF), Amazon (NASDAQ:AMZN), and to a lesser extent Microsoft (NASDAQ:MSFT), which has been trying to gain a foothold with its Windows-powered Surface line -- can at least celebrate that they still have a growing market. Traditional desktop and portable computer sellers are not as lucky as those sales dropped by 9.8% in 2013 with IDC seeing further falls in 2014.

There are more choices

Phablets are growing their market share and improving technology is making it easier for customer to choose a big phone over a dedicated tablet. Apple may even jump into that market as rumors persist that the company will offer a version of its popular iPhone with a 5.5-inch screen. That's smaller than the 7.9-inch screen on an iPad Mini, but it might be big enough to convince customers they don't need both.

And that's the inherent negative of succeeding with a phablet, specifically for Apple and Samsung, which dominate the mobile phone handset market: the bigger phone can convince customers not to buy two devices. You need to make a phablet to satisfy customer demand but the success of that category can lead to lower sales.

In the past year the phablet share of smartphone shipments has more than doubled, from 4.3% in the first quarter of 2013 to 10.5%, according to IDC, representing 30.1 million units shipped. While larger phone screens are impacting near-term tablet growth, IDC expects the market to recover by tablet-makers doing the same thing -- offering bigger screens. Microsoft's new Surface Pro 3 has a 12-inch screen and an optional keyboard.

That type of machine, which IDC defines as 2-in-1, could win market share from laptops. (Microsoft has specifically called the new Surface a laptop alternative.) In some cases that's even worse for manufacturers as the total number of devices someone owns still drops from three to two, but instead of losing the tablet they will drop the more expesnive (in most cases) laptop. 

"The shift back toward larger screens will mark a welcome sea change for most vendors as the average selling price for these devices will remain roughly 50% higher than the average sub-8-inch device," said Jitesh Ubrani, research analyst, Worldwide Quarterly Tablet Tracker. "Microsoft is also expected to benefit from this shift as the share for Windows-based devices is expected to double between now and 2018."

IDC is not the only research firm predicting that tablet sales will slow down due to the popularity of bigger screens on smartphones.

"Replacing tablet PCs with large-size smartphones is expected to be a theme in the coming years, expanding on a trend that has mainly been limited to China," NPD analyst Richard Shim wrote in a blog post. "As the emergence of large-size smartphones becomes a bigger influence in the U.S., shipments of small-size tablet PCs are expected to decline."

It's about offering the right choices

With Apple potentially offering bigger iPhones and Microsoft pushing Surface Pro 3 as a laptop alternative, the category lines are increasingly blurring. Is a Surface really a tablet just because its keyboard detaches and is purchased separately? When is a phone a phablet and when is it a small tablet? Generally phablets are defined as having between a 5-inch and a 6.9-inch screen, but there is no legal definition. Apple could theoretically add phone capabilities to an iPad Mini and have a device that is both a small tablet and a big phablet.

Categories, however, aren't really important. Manufacturers have to deal with the device market collapsing in on itself a bit. Phablets and improved phones make it less necessary to carry a phone, a tablet, and a laptop. In a world where customers pick any two of the three, it's important to offer a broad set of devices across all categories. Microsoft is doing that already. It appears that Apple will soon be on board. Samsung is not a PC player but Android users are generally used to integrating with a PC or Mac as there are very few PCs offered running Android.

It was inevitable that the tablet market hit a saturation point where growth slows down. The challenge for the manufacturers is to offer as broad a line as possible while offering reasons to purchase multiple devices. 

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Daniel Kline is long Microsoft. He owns at least four tablets but no phablets. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com, Apple, and Microsoft. 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.

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