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One More Reason for Apple to Smile

By Joseph Gacinga – Mar 18, 2014 at 11:00AM

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Tablet ASPs, or average selling prices, are expected to fall by a much smaller margin this year than they did in the last two years.This will help leading tablet manufacturers such as Apple to maintain healthy tablet revenues, even as growth in tablet sales continues to slow down.

Leading tablet manufacturers such as Apple (AAPL 0.83%), Amazon, Google (GOOGL -0.15%), Microsoft (MSFT 1.05%), Samsung, Lenovo, and ASUSTeK Computer have all been experiencing shrinking tablet average selling prices, or ASPs, as tablet penetration across the world continues to accelerate. Apple has been feeling the heat the most, since it sells the largest number of tablets.

But IDC recently predicted that tablet ASPs will contract just 3.6% in fiscal 2014, compared to a high of 18.3% in 2012, and 14.6% in 2013.

Lower volumes, higher prices
Apple's iOS finished 2013 with a 15.6% overall market share compared to Android's 78.4%. Android also has a comfortable lead in tablet market share, with iOS and Microsoft Windows following a distant second and third, respectively.

Apple remains the largest tablet vendor, with 36% market share compared to Samsung's 19.1%.

Last year, industry tablet sales growth averaged 52%; with a growth rate of 142% in the first quarter. That tapered as the quarters rolled on to just 28% in the fourth quarter. Growth in fiscal 2014 is expected to be much lower than in fiscal 2013. This is a clear indicator that the market is quickly becoming saturated.

Apple's tablet sales growth has been below the industry average. For fiscal 2012, the company sold 58.23 million iPads, while in 2013 it sold 70.4 million units. That marked year-over-year growth of 21%, well below the industry average of 52%. There is a good reason why this is so.

Apple concentrates on selling to the high-end market, and the market here is close to becoming saturated. Android, on the other hand, caters to lower-end markets and the emerging markets. These markets are much bigger than those of the developed economies, and adoption of mobile devices, tablets in particular, is still low. This gives the platform more room for growth.

Last year, the average tablet ASP stood at around $360. A 3.6% drop in the ASP would lead to an ASP of $347. Global shipments are expected to grow 19.4% this year, down from an earlier estimate by IDC of 22%. If Apple's tablet sales this year grow around the industry average of 19.4%, then it will sell roughly 84 million tablets. Even if it were to sell those at the industrywide average ASP of $347, tablet sales should fetch the company $29.15 billion in fiscal 2014.

Microsoft to take a quarter of the commercial segment
IDC has also projected that the commercial tablet segment will grow relatively faster than the consumer segment and increase its share of the market from 11% in fiscal 2013 to 14% in fiscal 2014. Microsoft is expected to take a quarter of the commercial segment and gain a strong foothold in the consumer segment, thanks mainly to convertible adoption.

IDC did not give estimates of what share of the consumer segment Microsoft will grab, but its 25% share of the commercial segment works out to 3.5% overall market share. It will, therefore, not come as a surprise if the software giant doubles, or more than doubles, its overall market share from 2.1% last year to 4.2%, or more, this year.

PC sales are expected to continue shrinking this year, albeit at a slower pace. PC sales fell 10% last year to 315.3 million units. High tablet adoption rates are responsible for this decline. IDC expects PC sales to fall 6% this year, to 296.4 million units. This will put PC sales within striking distance of tablet sales, which are projected to be around 260.9 million units in the current year.

The slowing growth of tablet sales will be countered by a smaller decline in tablet ASPs. This will help Apple and other leading tablet vendors to maintain healthy tablet revenues in the foreseeable future.

Meanwhile, Microsoft's Windows platform is also expected to grow its tablet market share considerably, while PC sales are expected to decline at a much slower rate this year, and then stabilize in a few years' time. This should help to grow the overall Windows OS market share for Microsoft.

Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends, Apple, and Google. The Motley Fool owns shares of, Apple, Google, and Microsoft. 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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