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How the Apple Inc. iPhone Is Destroying the iPad

By Ashraf Eassa – Feb 1, 2016 at 1:30PM

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A look at how Apple's most important product is marginalizing its once-promising second most important product.

In Apple's (AAPL -3.00%) most recent 10-Q filing with the Securities and Exchange Commission, it offered an explanation for why iPad unit shipments once again tanked to the tune of 25% during the company's fiscal first quarter. Apple claims that a combination of cannibalization by Apple's other products (i.e., iPhone) as well as a "longer repurchase cycle" for iPads are driving these discouraging results.

I believe Apple is right on the money with these explanations, but what it doesn't detail in the 10-Q is that this "longer repurchase cycle" for iPads is very likely highly linked to the cannibalization by iPhone that's going on.

Allow me to explain.

Thinking like a consumer
I consider myself a fairly typical Apple customer: I like well-made, high-quality products that just work and I don't mind paying a premium as long as I feel that I'm getting value for the significant amount of cash that I hand over for my Apple products.

Previously, when iPhones only came in "small," there was a very clear reason to want to have -- and extensively use -- an iPad. There are just some things that a bigger screen is better for such as video playback, surfing the web, and more.

Once the iPhones got larger, though, the value proposition of the iPad was immediately affected. Although something like the iPhone 6s Plus doesn't have as large of a display as an iPad mini or an iPad Air, it's large enough so that doing some of the things that were frustrating on a 4-inch display are actually quite enjoyable.

What does this ultimately mean for Apple?
I suspect that part of the reason that Apple is seeing such a rich mix of iPhones (average selling prices hit a record $691 last quarter, even with significant currency headwinds) is that customers view their iPhones as their "one device to rule them all."

If paying a little extra for, say, a Plus iPhone model with maybe a higher storage tier than what the customer would have done in a world with only small iPhones means that she doesn't have to upgrade her iPad this year, then Apple sees a win in its iPhone business and the customer saves money.

Now, that customer may very well value having an iPad (there's still a world of difference between a 5.5-inch device and a 9.7-inch one), but since that iPad gets used for fewer things, there's far less pressure for someone to buy a new one.

Another thing that doesn't help iPad's case
There are ways in which the iPad of a given generation is superior to its iPhone contemporaries. The highest-end iPads get the faster/more powerful "AX" chips as opposed to the less powerful "A" chips inside the iPhone. iPad also seems to get more system memory than current-generation iPhones.

However, in many ways, iPhone is the superior device. The displays on iPhones tend to be sharper (higher pixel density) than the comparable iPads, and the cameras are of substantially higher quality. The iPhone also gets the "new" features first like Touch ID (iPhone 6s/6s Plus have a second-gen Touch ID while iPad Air/Pro only have the first gen), 3D Touch, and so on.

Part of the reason for this can be attributed to the fact that iPhone is simply a more important product to Apple than the iPad is (as evidenced by the revenue levels), but it's worth noting that iPhone average selling prices tend to be much higher, so Apple has more headroom in the bill of materials to add top-quality components. 

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. 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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