iPad Pro: Apple, Inc.'s Response to Slowing Tablet Sales?

"Apple Chief Executive Officer Tim Cook is working to shake up the iPad line," said Bloomberg earlier this week. How so? Apple (NASDAQ: AAPL  ) will launch a 12.9-inch iPad in early 2015, according to a report from Bloomberg that cited "people with knowledge of the matter." With Apple's iPad business facing year-over-year declines in unit sales for two quarters in a row, investors are hoping Apple can find a way to rekindle growth in the segment. Could the so-called iPad Pro be the answer?

Searching for new growth channels
In Apple's fiscal 2014 third-quarter, the trend of declining iPad sales continued. Apple reported a 9% and 8% decline in iPad unit sales and revenue, respectively, from the year-ago quarter. While the decline was better than the double-digit year-over-year comparison in Q2, the trend still has some investors concerned. After all, Apple's iPad business accounts for around 17% of Apple's revenue -- bigger than any other segment except iPhones.

iPad Air pictured in Apple's Your Verse marketing campaign. Image source: Apple.

The ever-active Apple rumor mill seems to be in consensus that the tech giant has an iPad Air and iPad mini refresh in the pipeline for a launch later this year. But will a simple refresh be enough to re-energize growth? While the likely inclusion of Touch ID could provide meaningful incentives for upgrades and new iPad buyers, Apple might be looking to the iPad Pro to help with the sluggish segment.

The iPad Pro, likely to come at a price point well above the $499 starting price for Apple's current flagship iPad Air, may turn out to be too pricey to help boost unit sales. But it could aid the segment's revenue growth as well as possibly even fatten up iPad gross profit margins, which analysts believe to be considerably slimmer than those Apple boasts on the iPhone.

A 12.9-inch iPad Pro would undoubtedly cannibalize some Mac sales, particularly sales of Apple's smaller Macbook Airs and Macbook Pros. A 12.9-inch iPad Pro would be larger than Apple's 11-inch Macbook Air and nearly the same size as its 13-inch Macbook Air and Macbook Pro. But as a fresh, new product to Apple's product line, an iPad Pro's contribution to revenue would likely be greater than the resulting cannibalization of the Mac line. Historically, cannibalization has almost always worked to Apple's benefit.

The iPad Pro could be particularly attractive for enterprise solutions -- especially for businesses where it could replace some PCs as well. Indeed, this might be exactly the target market Apple has in mind with the iPad Pro. Cook hinted at targeting this market with a future iPad product during the company's third-quarter earnings call .

I just think we have to do some more things to get the business side of [our iPad segment] moving in a faster trajectory and I think we're now on to something that can really do that. So as I look at it and sort of back up from the ninety-day clock kind of thing, I'm incredibly excited. I'm excited about the plans that we have on the product side and also on the go to market side, and in particular the IBM announcement.

But is Apple's tablet line really suffering?
Cook has been defensive of the iPad segment's recent dip in sales on several occasions. Most recently, Cook told Re/code's Walt Mossberg that he was optimistic about iPads.

iPad Air. Image source: Apple.

"We couldn't be happier with how we've done with the first four years of the iPad. I'd call what's going on recently a speed bump, and I've seen that in every category," Cook said.

During Apple's Q2 call earlier this year, Cook put this "speed bump" in perspective of the bigger picture. And the bigger picture is, indeed, quite optimistic.

And so, if you really look at it in just four years after we launched the very first iPad, we've sold over 210 million, which is more than we or I think anyone thought was possible at that period of time. And it's interesting to note that that's almost twice as many iPhones that we've sold in a comparable period of time, and over seven times as many iPods as we've sold in the period of time. 

Cook is right that several quarters of declining sale shouldn't automatically lead to the conclusion that the category has officially hit a ceiling. While investors shouldn't count on any significant double-digit growth in unit iPad sales, there isn't yet enough substantial evidence to conclude that greater innovation in the category couldn't lead to meaningful growth in the coming years.

The rumored iPad Pro could be our first look at what this innovation could look like. Sure, Microsoft is doing something similar with the Surface -- and there isn't much hope yet that the strategy is working. But if Apple launches a 12.9-inch iPad Pro, it will bring with it a robust ecosystem of complimentary products, software, services, experience, and leadership in the tablet category, and possibly key innovations.

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