You'll Never Guess Which iPad Is Still the Most Popular!

On Wednesday, Apple (AAPL -1.18%) sent out invitations for a special event that will be held on Oct. 16. Apple followers expect the company to introduce its new iPads on that day.

New iPad introductions always generate considerable interest from Apple fans as well as the media. However, consumers don't seem to care as much. iPad sales have slowed dramatically in recent quarters.

The iPad Air didn't stimulate as much demand as originally hoped. Photo: Apple

Even more shockingly, the newest iPad models are nowhere near being the most popular in terms of usage. In fact, the most popular iPad model is still the three-and-a-half-year-old iPad 2.

What bulls want to see
In the smartphone market, Apple has seen steady growth in unit sales each year. Moreover, a large majority of people buying new iPhones pick the newest model. As a result, by the end of a "model year," the newest iPhone model always has the highest usage share among all iPhones.

For example, in early September -- prior to the launch of the iPhone 6 -- the iPhone 5s accounted for 28% of all iPhone usage, according to Fiksu. Another 9% came from the iPhone 5c. The previous year's model, the iPhone 5, had a 26% usage share, and each successive older model had a lower usage share.

This indicates that iPhone customers generally want the latest technology, and it also shows that the overall market is growing. This bodes well for Apple's long-term earnings power.

A whole different ball game
The situation is completely different for iPads. Ever since Apple decided to keep the iPad 2 around when it launched the third-generation iPad, older-model iPads have been surprisingly popular. Here's how the seven existing iPad models ranked in terms of usage for the first week of this month:

Source: Fiksu SDK

The iPad 2 still accounts for more than one-quarter of all the usage tracked by Fiksu. The new models introduced last fall -- the iPad Air and the iPad Mini with Retina Display -- together accounted for just 20% of all usage. Indeed, the more popular of the two (the iPad Air) is still only the 4th most popular iPad, despite having been on the market for nearly a year.

What's going on here?
To some extent, the relatively low adoption of Apple's newest iPads can be explained by Apple's decision to keep selling older models at lower prices. Most notably, the original iPad Mini price was cut to $299 in time for the 2013 holiday season, and several retailers tacked on gift cards for Black Friday, lowering the effective price to $199-$249.

Apple aggressively marketed the original iPad Mini last holiday season. Photo: Apple

However, the low usage share for last year's iPads can't be downplayed as an artifact of strong demand for the older, cheaper iPads -- because more generally, iPad sales have stumbled.

In Q1 of FY14, Apple's iPad unit sales rose 14% -- although iPad revenue only rose 7% due to lower average selling prices. By Q2, iPad unit sales had gone into reverse, falling 16% year over year. In Q3, unit sales fell 8% year over year. In total, iPad sales were down by more than 1 million units through the first three quarters of the fiscal year.

One possible cause of the weak demand for iPads in the past year could be the iPad Mini Retina's disappointing screen. The continuing popularity the iPad 2 suggests another issue: long replacement cycles.

The iPad Mini with Retina Display has experienced particularly sluggish demand. Photo: Apple

Whereas most iPhone owners replace their devices every two years or so (due to device subsidies, decreasing battery performance, etc.), people are keeping iPads around longer. Earlier this year, Consumer Intelligence Research Partners concluded that the typical iPad replacement cycle could be two to four years or even longer. This certainly fits with the iPad 2's high usage share.

With lower upgrade demand, Apple has been forced to find a steady stream of new customers to keep iPad sales growing. It's not surprising that this is becoming challenging given the growing saturation of high-end markets and the widespread availability of cheap Android tablets.

Turnaround time?
Some tech analysts have become fatalistic about the iPad, assuming that sales will remain slow for the foreseeable future. After all, the iPad updates coming this fall aren't expected to be nearly as radical as last year's improvements.

However, whereas the slow iPad replacement cycle has held Apple back until now, it could become a tailwind soon. Take a look at Apple's iPad unit sales in the fiscal years ending between September 2011 and September 2013:

Source: Apple 2013 10-K, p. 27 

If iPad replacement cycles run two to four years, then the number of iPads up for replacement will rise rapidly in the next year or two. Of the tens of millions of iPad 2s sold in the second half of FY11 and throughout FY12, most still appear to be in use -- but they are ripe for replacement.

Higher iPad replacement demand going forward should help stabilize iPad sales. This will ease investors' worries about Apple's No. 2 product line. It will also cause the iPad 2 to finally cede its position as the most popular iPad.