Apple's Deal With IBM Is Even More Important Than You Think

Apple's (NASDAQ: AAPL  ) iPad sales over the past couple of quarters don't exactly paint a pretty picture for the once piping-hot product category. iPad unit shipments during Apple's fiscal second quarter came in at 16.35 million units, a drop of over 3 million units from the same period a year earlier. During Apple's fiscal third quarter -- that's the most recent -- Apple yet again saw iPad sales stumble year over year, dropping from 14.6 million units to just 13.3 million.

Though Apple's biggest revenue and profit driver, the iPhone, continues to do well, investors would probably feel more at ease if the company's iPad product line could be counted on as a meaningful long-term growth driver.

That's where Apple's recent deal with IBM (NYSE: IBM  ) comes in.

What is this deal?
Apple recently signed an exclusive agreement with IBM, whereby Big Blue would develop over 100 industry-specific enterprise solutions for both the iPhone and the iPad. Further, IBM will handle the distribution of both iPhones and iPads equipped with these solutions, which Apple and IBM claim will be industry-specific.

Given that Apple's iPad seems to be the tablet of choice for enterprise usage, as Apple and IBM claim that 98% of Fortune 500 companies and over 92% of Global 500 companies use iOS devices in their businesses, this opens up a choice portion of the enterprise-focused tablet market to IBM.

IBM, on the other hand, is a leader in the key areas that cover this deal -- security, analytics, device management, and cloud services -- which will enhance the already strong value proposition that the iOS platform brings to the table for enterprise use.

It really looks like a win for both parties.

But why enterprise?
Apple has traditionally been a consumer-focused company, but that hasn't stopped both the iPhone and iPad from being widely adopted for corporate use. However, Apple's focus on solidifying iOS (and, by extension, the iPad) as the tablet platform of choice may reach beyond simply going for an easy incremental opportunity.

See, the problem Apple faces with its iPad line is simply that, while carrier subsidies lend an incentive to fairly frequent purchases of high-margin smartphones, tablets are generally purchased at full price. These higher upfront prices discourage consumers from replacing their tablets every two years, and, in fact, the replacement cycles for tablets are likely to prove similar to those of PCs -- about four to five years.

In the enterprise world, refresh cycles of PCs are also fairly long, which would imply something similar for tablets, but the following corporate buying dynamics seem to be positives for Apple:

  • Enterprise tends to buy a richer mix. In the consumer tablet market, many customers will gravitate toward lower-cost, lower-storage option models, but enterprises are likely to buy higher up in the stack to ensure that these tablets have both performance and longevity, as well as adequate storage space for large apps and data. A greater mix of enterprise-focused tablets could be a material positive for both the top line and gross margins.
  • Enterprise is sticky. The applications IBM will be providing for iOS will be Apple-exclusive. However, in addition to these, many firms write custom applications for their platforms of choice. Once Apple is "in" a particular enterprise, and once the in-house software development efforts are squarely focused on iOS, it will be very hard for competitors to displace Apple, at least to a greater extent than it is in the consumer space.

A potentially richer mix and more predictable market share within the corporate portion of its iPad sales both seem like real wins for Apple if it can capitalize early on the enterprise tablet opportunity.

Foolish bottom line
With the tablet market showing signs of saturation, it's more important than ever for Apple to broaden its customer base for iPad. If Apple can ultimately have a significant share of the enterprise tablet market, this would be a lucrative long-term win for the company, particularly as a large enterprise presence would smooth out Apple's iPad revenue base over the long haul.

All told, the deal with IBM is a fantastic step toward securing iPad's long-term future, and it'll be very interesting to see how it affects Apple's iPad sales over the next several years.

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Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

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