Apple by the numbers: How is the iPad doing, really?

Jared Newman
27 November, 2013
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Keeping track of how Apple is doing as a company is hard. The stock price goes up, the stock price goes down – often without any apparent reason. We hear one set of marketshare numbers for smartphones, tablets and computers one day, and an entirely different set the next. Apple is doing well, says one group of analysts, while another says Apple is doomed. So how is Apple doing, really?

To get some sense of the company’s health, we asked four writers to dig into four different sets of numbers: the ones that Apple itself publishes every quarter, as part of its required financial reporting, regarding the sales of its four principal product lines – MacsiPhones, iPads and (yes, still) iPods. We asked those writers to look at those numbers over as long a period as they could, to see if they could extract some long-term signals from those short-term trends.

The bottom line: Apple is doing just fine, thanks, but it is also facing some very definite – and very dangerous – threats in each of those four product lines. Those threats make this period – the spring and summer of 2013, when the company is announcing and ship new products in at least three of its lines – one of the most crucial in the company’s history.

 

THE iPAD

In three short years, Apple’s tablet revolutionised the PC industry. With that work done, the iPad is taking a breather. Although it was once the fastest-selling electronic device of all time, sales have slowed considerably over the last year and they actually declined year-over-year in the third quarter of 2013. Here’s how Apple got to this point, and what the slowing sales mean for the company going forward.

iPAD IMPACT ON APPLE

When Apple introduced the iPad in January 2010, the rest of the industry was miles behind. Despite many months of rumours about an imminent Apple tablet, no other tech company was prepared to match Apple’s sleek, $600 app-consumption machine. Early Android tablets like Samsung’s Galaxy Tab and Motorola’s Xoom were flops, critically and commercially.

When Google finally released a version of Android designed for tablets, it was buggy and slow, with few tablet-optimised apps available for it. Apple’s iPad wasn’t just the best tablet on the market, it was the only one worth considering.

Apple reaped the rewards. In its 2010 fiscal year, Apple sold 7.5 million iPads, and in 2011, sales more than quadrupled to 32.4 million. With every passing quarter, year-over-year sales doubled or sometimes tripled. The last fiscal year – which ended in September 2012 – Apple sold 58.3 million iPads, pulling in net revenues of US$32.4 billion. The iPad seemed to be on track for the same explosive growth that the iPhone has enjoyed for years.

Even better for Apple, the iPad was slowly representing a bigger slice of the company’s revenues, reaching 26.2 percent of net sales revenue in Q3 2012. When iPad sales doubled or tripled, the tablet’s revenues doubled or tripled nearly in lockstep.

But Apple’s quarterly earnings statements show a drastic change in the fourth quarter of its 2012 fiscal year, which covers July through to September. Year-over-year sales increased by just 26.2 percent, and revenue jumped by only 9.3 percent. The next two quarters were better, with unit sales up by 48.1 percent and 65.1 percent year-over-year, but slower revenue gains of 65.1 percent and 32.7 percent showed that average selling prices were falling.

Then came the 2013 third quarter’s unit sales decline, from 17 million units to 14.6 million units year-over-year, along with a 30.5 percent drop in revenue. The pattern of growth that once mirrored that of the iPhone had come to an abrupt end. “Our view is that the iPad is being accepted faster but likely will not be as important as the iPhone over time,” UBS analyst Steven Milunovich wrote in a research note that was shared with Macworld.

What’s behind the sudden sales drop? Partly, it’s just a matter of timing, as Apple shifted its launch of new iPads from autumn to spring and didn’t benefit from the usual new hardware sales spike. Milunovich, in his research note, offered a few other theories, such as longer upgrade cycles for tablets compared with smartphones, and faster market penetration and narrower appeal than smartphones in general.

PRICE DROPS A CLUE

But none of those theories explain the drop in the iPad’s average selling prices. Sameer Singh, an analyst best-known for his accurate cost estimates of Apple products, has suggested that Apple’s shrinking revenue growth was a result of the iPad going mainstream. When Apple began selling the iPad 2 in the autumn of 2012, it provided a lower entry level for new customers. The iPad mini lowered the entry-level cost even further, at the expense of Apple’s profit margins.

“Early iPad buyers may have opted for models with higher storage, but the market began moving to consumers looking for a ‘good enough’ tablet,” Singh said in an email interview.

It’s also worth noting that when Apple dropped the price of the original iPad as the iPad 2 debuted, the company didn’t feel the need to permanently offer an iPad at that price point, because the company still didn’t have any noteworthy competition.

Everything changed, however, when cheap tablets began to flood the market. To blame slower iPad sales on hardware cycles and late adopters would be to understate the profound impact that cheaper tablets are having on Apple’s business.

 

COMPETITIVE LANDSCAPE

After more than a year of futile attempts to mimic the full-size iPad, Android tablet makers finally found a better angle of attack: 7in slates like the Samsung Galaxy Tab II and the Amazon Kindle Fire undercut Apple on price and were more portable than the full-size iPad. Although they didn’t receive the same critical praise as Apple’s iPad, their $200-and-up price tags proved an effective lure.

These iPad alternatives started getting traction in late 2011, when Amazon debuted the Kindle Fire and Barnes & Noble launched the Nook Tablet. According to IDC, Apple’s rivals grabbed 48.3 percent of the market during that holiday quarter.

From there, Apple’s rivals began experiencing the kind of dramatic growth that the iPad had enjoyed in its early days, with year-over-year shipments increasing by at least 100 percent in nearly every quarter. In the quarter ending December 2012, iPad alternatives were finally on top, with 29.6 million units shipped, compared with 22.9 million iPads sold.

A theory circulated, shortly after Amazon’s Kindle Fire launched, that these cheap tablets were like fruitcakes: because Kindle Fire shipments tended to crater after the holiday season, pundits wondered whether these were the kinds of tablets that you bought as gifts but would never use yourself.

That theory isn’t holding up as strongly anymore, as Android has matured and tablets like Google’s Nexus 7 have launched to critical acclaim. According to IDC, Apple’s rivals shipped 29.7 million units in the first quarter of 2013 – a narrow gain over the previous quarter. The post-holiday cratering of Android tablet shipments has ceased, and last quarter, while iPad sales were falling, Apple’s rivals shipped 30.5 million units – a gain of 169.9 percent year-over-year.

If you can put a positive spin on this trend for Apple, it’s that the iPad mini now looks like a brilliant defensive move.

Rhoda Alexander, senior manager of monitors and tablets for IHS iSuppli, said that the iPad mini represented 60 percent of iPad sales last quarter. IHS projects that the mini will represent 61 percent of iPad sales in all of 2013. The market has shifted toward smaller, cheaper tablets – and it’s a good thing Apple was ready.

Sameer Singh says that if Apple hadn’t introduced the mini, the iPad’s sales probably would have been far worse than they are today. “I think it’s now clear that the full-size iPad’s market position wasn’t sustainable given the influx of low-cost devices,” he wrote in an email.

The other upside for the iPad is that it continues to outshine its rivals in usage share. Despite Android’s marketshare gains, people don’t seem to be using those iPad alternatives as much.

“Research suggests a substantial buyer remorse for low-cost tablets,” UBS’s Steven Milunovich wrote in his research report. “Apple might be right about its superior user experience luring Android customers to switch over time, and growth will reaccelerate.”

Apple’s success with the 9.7in iPad also puts the company in a better position than Android tablet makers, who have struggled to sell tablets with larger screens.

IHS iSuppli’s Alexander believes that the market will swing back to larger tablets – perhaps even larger than 10in – in 2015 and 2016, as people seek to derive more productivity from their tablets.

“The challenge for Apple and the Android players in the market will be, if you want to move this product to a larger screen size, you have got to make a use case that makes it compelling for users,” Alexander said in an interview.

In the meantime, look for Apple to recalibrate. Gone are the days of magic and revolution – and the extraordinary sales that came with it – but the iPad still has room to grow.

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