Apple's iPad. Image Source: Flickr user John Karakatsanis.
Although Apple (AAPL +1.16%) is sitting near all-time highs, with a market capitalization approaching $730 billion, it would be incorrect to say everything is going right for the company. When looking at business lines, Apple's increasingly becoming tethered to iPhone sales, as the product's tremendous year-on-year revenue growth of 58% and 55% during the first and second fiscal quarters, respectively, have offset lower sales growth in other products.
On the other end of the spectrum is Apple's beleaguered iPad. After shocking analysts by becoming Apple's fastest-selling product, selling 100 million units within two-and-a-half years, sales have noticeably slowed during the last year. As a matter of fact, on a year-over-year basis, iPad revenue has fallen during the last four quarters as the greater tablet market is under pressure from slowing demand, with Apple under added pressure from low-cost competitors. For a visual representation of Apple's iPad revenue performance, see the chart below:
Source: Apple's 10Qs. Apple Revenue as % of Total calc: [iPad Revenue/(Total Revenue Ex-iPad + iPad Revenue)].
As previously stated, this is not just one company's struggles, but rather the reality of a slowing, mature tablet market. For example, Business Insider's BI Intelligence found the total tablet market shipments declined 6% year on year in Q1 2015.
That's not as drastic as Apple's falloff, but does not portend a positive path forward without changes. Apple, however, just may have found a powerful catalyst for its beleaguered iPad with its iTunes 3.0 update.
When life gives you a mature market, you make specialized solutions
Many investors fear mature markets, but that's a myopic way of thinking. Although mature markets are typically beset with risks for investors -- most notably, the aforementioned slower growth with generally lower profit margins -- the latter isn't always the case. Shrewd companies can grow profits in mature markets by offering specialized solutions.
Also, mature markets can discourage new entrants, and force current competition out of the market. These developments are generally positive for profit margins. More recently, it seems Apple is focusing on the enterprise market in order to grow iPad sales and profits, as it recently partnered with IBM for business-specific apps. This specialization should help it grow the iPad's enterprise dominance that was as high as 81% of all tablet activations last quarter.
iTunes U is an enterprise-focused solution, specializing on academia
Continuing in this vein, Apple is using its software again to monetize hardware sales with the reboot of iTunes U 3.0. The updated app has a host of new features, including allowing students to "hand in" their homework assignments, and annotate PDF assignments directly within the app.
In the introductory email, the rebranded app was positioned as an iPad-focused one, which makes sense as a larger screen would make lessons and PDF assignments easier to read. Apple's new service is shaping up to be quite a competitor to privately held educational technology leader Blackboard's Learn software.
Apple's moves into academia haven't been without controversy, however. Last year, Los Angeles' Unified School District superintendent resigned after his signature technology initiative, a $1.3 billion iPad-for-all program, was heavily criticized by the U.S. Department of Education. And while Apple wasn't directly faulted, some questioned the use of a premium unit while there were cheaper options available.
However, if Apple is able to continue to improve its iTunes U app, and present a comprehensive learning solution that replaces the textbook, manages classroom paper workflows, compiles and delivers grades, and helps teachers better understand individual and classroom learning gaps, it well could be worth the additional cost.
For example, the bipartisan Leading Education by Advancing Digital, or LEAD, Commission found in 2012 that moving to a digital model for student textbooks would save schools about $250 per student per year if fully implemented. Remember, this is only the cost savings from replacing textbooks, and does not count the savings associated with increased productivity and additional replaced functions.
Apple reinvigorating its education efforts seems like a win-win -- educators have access to a comprehensive solution and it shows Apple is working on building out a market for the struggling iPad.
