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.
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.
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.