It is certainly big, but will Apple's iPhone 6 Plus hurt iPad sales? Source: Apple
Another Apple (AAPL 0.01%) event is in the books. By hosting the event at Cupertino, California's Flint Center, Tim Cook harkened back to Apple's storied history -- the center witnessed Steve Jobs announcing the Mac thirty years ago and the device that Jobs used to turn around the company in late '90s, the iMac, was also introduced on that stage.
This time, the company rolled out two new phone iterations -- the iPhone 6 and iPhone 6 Plus -- a payment system dubbed Apple Pay, and its first Post-Jobs product -- Apple Watch. Lost in the shuffle was Apple's second-largest revenue driver -- which was interesting considering multiple leaks suggested the iPad Air would get an update -- and if anything, the larger form factor iPhone 6 Plus has the potential to cannibalize sales from the iPad line.
iPad sales are slowing
Apple's iPad is an important product for Apple. As previously mentioned, the device is Apple's second-biggest revenue driver -- over the last four quarters, Apple's iPad represented 17.5% of sales. Obviously it isn't as big as the iPhone that came in at 55% of sales, but the product is important.
With that being said, the product line is slowing. Over the last four quarters, iPad sales are down 5.4% from the four prior. Plagued by a slower-than-expected upgrade cycle and competition from lower-priced units sporting Google's Android operating system, the product has seen better days.
And perhaps things will get worse for the line. According to Localytics, the 7.9-inch iPad mini form factor -- the iPad Mini and Mini 2 -- command a combined 25% of its iPad market. Now with a larger, 5.5-inch iPhone Plus as a part of Apple's arsenal, the cannibalization argument once again rears its ugly head.
Is cannibalization a bad thing?
Well, yes and no. Although usually conditioned that way, cannibalization isn't necessarily a negative for investors. Apple's actually a textbook case of "positive cannibalization" by iPhones stealing iPod market share. As investors traded in their lower-margin iPods for higher-margin iPhones, the company exhibited increased gross margins. Those increases filtered down the income statement leading to higher earnings per share.
And while we don't currently know how investors will react to the larger phone, here are some things we do know. First, Apple's iPhone line is considered its highest-margin product by multiple third-party analysts. In addition, we also know that Apple's larger iPhone 6 Plus is a higher-priced product than its iPad Mini -- a 16GB iPad Mini retails at $399 while a 16GB iPhone 6 Plus retails for $749. The iPhone has a built-in advantage by carrier subsidies lowering the out-of-pocket costs for consumers.
So the economics are will increased margins and the higher-than-previous-iteration price tag from the iPhone 6 Plus outweigh any potential loss of iPad Mini sales.
And here's where we're all getting ahead of ourselves
I think analysts are getting ahead of themselves here by declaring this a bad thing. In addition to cannibalization perhaps not being a negative, we simply don't know how investors will react. The difference between the iPad Mini's screen -- 7.9 inches -- and Apple's iPhone 6 Plus' screen -- 5.5 inches -- is still significant. For perspective, Apple bears hammered the company for having a much smaller screen size than Samsung's Galaxy line. At that time Apple's screen was four inches and Samsung's is 5.1 inches.
Next, Apple's iPad line appears to be positioning itself for the enterprise market if a recent Bloomberg report is to be believed. By adding a possible 12.9 inch model and partnering with IBM for more business-centric features, the company opens itself up to an entirely new customer.
Final thoughts
Apple's iPad should become a smaller part of Apple's revenue going forward. With the addition of new revenue drivers, Apple Watch, Apple Pay, and its Beats Acquisition, Apple's broadened its product base. As these new revenue drivers come online, each product should contribute a smaller percentage to overall revenue.
Does the iPhone 6 Plus have the potential to cannibalize iPad sales? Yes, but that should be a positive for the company considering the iPhone is historically a higher-margin product. Looks like Apple still has some tricks up its sleeve.
