The iPad raises interesting questions in terms of Apple strategy. A product that carries so much brand relevancy that it still represents the entire tablet market now finds itself the leader of a category that has lost all momentum as other product categories marginalize the tablet form factor. Although Apple is still selling more than 10 million iPads per quarter, there is something about the iPad that just doesn't sit right with me. We have gotten to the point that the status quo will likely lead to the iPad and the modern-day tablet becoming irrelevant over time. A new direction for iPad is needed based on a fundamental rethink of tablet computing.
The Current Tablet Market
The tablet market is in complete disarray. Only five short years ago, the iPad helped jumpstart the category, ushering in multi-touch computing and the modern-day app revolution to large-screen devices. Today, there has never been a time when the tablet market faces so much unknown.
A quick look at iPad and tablet shipment data would show that things have gotten bad in recent quarters. However, in reality, things are much worse than quarterly shipment data would suggest. The seasonality found in the tablet segment makes it difficult to see these long-term problems. A much better way at understanding what has been taking place is to look at the year-over-year change in shipments on a trailing 12-month (TTM) basis, highlighted in Exhibit 1. This smoothing effect highlights that the iPad and tablet have been on the decline for years and things continue to worsen with the overall tablet market hitting negative territory for the first time. All momentum has been lost.
Exhibit 1: Change in Trailing 12-Month (TTM) Tablet Market and iPad Shipments
After kicking off the tablet market in 2010, Apple went on to sell a cumulative 84 million iPads in just two years. The iPad's initial success was simply unprecedented, with unit sales outpacing the iPhone's relatively "slow" start by 2.5x. I suspect Apple wasn't just caught off guard by the iPad's success, but was led to believe that the iPad represented the future of computing. Many thought the iPad would outshine the iPhone.
In relatively short order after launching the category, Apple uncharacteristically expanded the iPad line to include a completely different form factor known as the iPad mini. The motive was primarily based on price, making sure there wasn't a repeat of the Windows vs. Mac battle from the 1990s in the tablet market due to Apple letting competitors underprice iPad. The iPad mini was soon called the best tablet ever, evidence that the larger form factor was losing a bit of its luster in just two years. Many didn't see it, but tablets were quickly turning into content consumption devices where price was a leading purchase decision.
We now find ourselves with a tablet market where Apple and Samsung are losing share to "Others," which is represented by dozens of firms selling mostly generic tablets used to consume media, depicted in Exhibit 2.
Exhibit 2: Global Tablet Market Sales Share
On a profit and mindshare perspective, Apple continues to lead the way. Instead of wishing for smart television sets, the future of TV watching is taking place with $99 tablets.
When looking at iPad's declining ASP trends, consumers continue to choose older, less costly iPads, another indicator that tablet computing is shaping up to be something different than we have been led to believe. A product category with a use case summed up by Netflix watching is quite problematic since it is that much harder to sell a differentiated product, leading to a rush to the bottom in terms of pricing, quality, and features.
Momentum is not on the side of iPad. Larger screen iPhones have been in the market for only 10 months. The latest Macbook, which effectively gave us a look at where the MacBook is headed, has been out for only a few months. These two products are game changers not just in their categories, but for tablet computing. It is becoming that much easier to recommend an iPhone or Macbook over an iPad.
Tablets Are Being Used for Consumption
When the iPad first started to show signs of trouble, many market observers were shocked, thinking Apple must be losing to low end Android tablets. In reality, one reason sales momentum was slowing was iPad owners weren't upgrading their device. Using Fiksu data and my own estimates, consumers have held onto their iPad, on average, for three years, which is longer than the iPhone's 2.6-year upgrade cycle. Since the tablet category is still young, the iPad's three year upgrade cycle is still extending and will likely go out as far as 5-6 years. The theory that a longer upgrade cycle was impacting iPad sales began to be used in the press and conference calls.
Exhibit 3: Current iPad Mix (model and model year)
While there is nothing inherently wrong with a long upgrade cycle, as seen with the Mac, which continues to report solid sales momentum, the reasoning behind holding on to tablets for years is much more troubling. There are currently approximately 3 million units of the original iPad still in use, or 20% of the devices Apple sold. For the iPad 2, it is possible that close to 60% of the units Apple sold are still being used. These two devices are not superior tablets. The initial iPad lacks a camera, while the iPad 2 has a mediocre camera. When compared to the latest iPads, these first two iPads are simply inferior tablets with slow processors, heavy form factors, and inferior screens. But none of that matters with owners. This is problematic and quite concerning, suggesting that many of these tablets are just being used for basic consumption tasks like video and web surfing and not for the productivity and content creation tools that Apple has been marketing.
There are signs that Apple believes there may be some kind of iPad revival around the corner. Since the average iPad upgrade cycle is three years and counting, does this mean that Apple may benefit from some sort of upgrade cycle? I'm skeptical. Why would someone upgrade an iPad that is just being used to watch video?
Potential Isn't Reality
On the surface, the iPad's declining sales momentum is difficult to comprehend. There seem to be so many use cases for larger-screen multi-touch computing devices across a number of industries. We hear about "iPads in the classroom," new and interesting enterprise apps resulting from the Apple/IBM partnership, plenty of anecdotal evidence of children loving to play games on iPad, and of course, iPads replacing desktops, laptops, and televisions. Apple has consistently referred to superior iPad satisfaction rates on earnings calls which support the idea that people love their iPads. Yet in the face of all this potential, we are just using iPads for Netflix and YouTube.
On closer examination, there are cracks in the iPad story. School districts have seen mixed results with iPad adoption programs. We have seen a few high-profile disasters where the combination of a lack of curriculum built for the iPad, along with high costs, made the iPad not the magical device in the classroom once thought. The idea of replacing student books with iPads never materialized due to poor incentives in the textbook industry, not to mention technological limitations found with the device.
The scope of iPad in enterprise still remains mostly a dream. We are seeing more stories about enterprise embracing Macs, not iPads. Meanwhile, consumer usage on iPad has moved away from content creation apps. Take a look at the iPad App Store to see the lack of compelling apps for larger screens for additional evidence of iPads being used much more for basic content consumption.
Things are Getting Worse, not Better
Back in October 2014, I wrote a post titled "Thoughts on iPad," in which I explained the iPad's ultimate sales trajectory would be much more modest as Apple was selling large-screen iPhones and thinner Macs. While I received an incredible amount of pushback at the time, trends have largely materialized as I expected. The continued migration of smartphone manufacturers to 5+ inch screens was not just a game changer for the smartphone market, but will come to represent a watershed moment for the tablet market. Many of the use cases once destined for the iPad are permanently gone, now taken up by the iPhone and MacBook.
Another consequence of growing large-screen smartphone popularity is that it is becoming increasingly difficult for Apple to market the iPad Air and iPad mini. Features such as cameras and even Touch ID simply don't make as much sense on a device that can't be comfortably held in one hand or carried in a pocket. Apple has tried to position the iPad as a mobile device, emphasizing its ability to take photos and video on the go, but it's not realistic to assume people will prefer an iPad to an iPhone in such settings.
Not only are tablets being used for more rudimentary purposes, but smartphones and laptops are crippling the odds of tablets being used for much more. The iPad market is in trouble and if there are no changes made to the lineup, Peak iPad is on the table. Peak iPad is a simple concept driven by the belief that underlining structural changes to the tablet market would result in the iPad losing most of its value propositions, leading to a permeant decline in sales. For example, Peak iPod is alive and well as even though Apple is still selling iPods, the product category will never reach record quarterly sales. Meanwhile, while some argued that we had seen Peak Mac, we instead were just in a sales slump that quickly reversed itself with a revamped product line. The Mac's value propositions were still alive and well. In a world where smartphones are getting larger and laptops are getting smaller, the Peak iPad theory is starting to look more likely as time goes on. Something needs to be done to create new tablet value propositions, redefining its role in the mobile revolution.
Apple's Plan for iPad
It is time to fundamentally address the problems with multi-tech tablet computing. The answer is to introduce a new product subcategory at the high-end of the tablet market. With video consumption taking over at the low-end, it becomes that much harder to sell a differentiated product at a low price. Apple has better chances of pushing the tablet market forward by looking at the high-end of the market where a superior experience is able to be sold at a premium price.
By selling a device that is truly designed from the ground-up with content creation in mind, the iPad line can regain a level of relevancy that it has lost over the past few years. In every instance where the iPad is languishing in education and enterprise, a larger iPad with a 12.9-inch, Force Touch-enabled screen would carry more potential. Simply put, the iPad needs to stand out from the iPhone and Macbook. The iPad Air and iPad mini aren't doing it.
Education. Instead of pushing the idea of every student having an iPad, which is difficult when considering costs and the fact that most students already have a smartphone and laptop at home, school districts could set up "iPad Plus" rooms with 20-30 of the larger iPads reused throughout the day by various classes. A new larger iPad with nearly 80% more screen real estate than the iPad Air, dedicated accessories like a smart pen, and better covers and stands can go a long way. It can become part of art and design classes, not to mention a number of different disciplines, including those where writing is involved. Writing a term paper on an iPad mini or even iPad Air is not fun. A larger tablet with full-size on-screen keyboard using Force Touch to resemble the haptic feedback of a real keyboard may be a game changer.
Enterprise. A larger iPad could be positioned as a laptop replacement whereas today's iPads are stuck in a weird place as a secondary computer. Any design-oriented field would instantly see value in using these larger iPads while traditional industries such as finance and banking would see a much easier adoption rate if legacy products like Excel are made that much more easier to use.
Consumer. A large iPad could continue down the path of replacing old laptops and desktops, becoming a user's primary computing device. The much easier ability to type means that nearly every possible computing use case would be covered. This 12.9-inch iPad Plus will begin to look much like the Mac in terms of sales with a slow and steady sales uptick, followed by an orderly upgrade cycle. The key for such a device will be once again redefining where a tablet should sit in someone's product portfolio. We know everyone will have a smartphone. The question would be if a new type of device can exist between an iPad Air and MacBook.
Over the years, we have come up with differing degrees of the "perfect combo" for computing. It used to be an iPhone and iPad. Then it became an iPhone and iPad mini. Now many say iPhone and MacBook. The question will be whether or not a product can be created that will serve as a high-end creation device that compliments an iPhone.
What Does Success Look Like with a New iPad?
An iPad Plus does not need to sell like an iPhone or even like an early edition iPad to succeed. As long as the product has use cases that are sheltered from other products, Apple would be able to reposition the iPad line for a more sustainable path not just for growth, but ultimately for outright survival. If the end goal is to ship devices that help solve users' problems, Apple will have a winner on its hands. A more capable iPad Plus has a much better chance of becoming relevant in a world where the iPhone is already the all-powerful device everyone owns. The early days of the iPad era provided many opportunities to see how the definition of work is changing. A new tablet subcategory that does a better job of pushing the definition of work forward is needed. Tablet computing has a much brighter future than just being used to watch Netflix and YouTube.
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