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Summary:

Typically a product that shows nothing but yearly growth, Apple’s iPad slipped in sales this past quarter, marking otherwise excellent results. Was the drop due to inventory management as Apple CEO Tim Cook suggests? Perhaps. Perhaps not.

iPadMiniRetinaSilver
photo: Apple

Among the many numbers shared during Apple’s second-quarter results announcement on Wednesday, one stands out: 16.4 million. That’s how many iPads Apple sold in the last three months, down from the 19.5 million sold in the year ago period, and a big drop from the 26 million iPads purchased in the prior quarter.

The quarter-over-quarter number isn’t too surprising: Apple often hits sales records during the final three months of the calendar year thanks to the lucrative holiday shopping period. You can see that for all Apple products in this sales chart from 2010 to present day.

The yearly period decline, however, is a noticeable glitch in an otherwise excellent quarter for Apple. So what’s the story with Apple’s iPad?

Apple says it’s just inventory management

Apple CEO Tim Cook knew investors would want an explanation for the iPad numbers and tackled the situation head-on during Wednesday’s investor call. Here’s the relevant conversation from the call transcript, courtesy of Seeking Alpha:

“First, in the March quarter last year, we significantly increased iPad channel inventory, while this year we significantly reduced it. Luca will go into more detail about this later.

Second, we ended the December quarter last year with a substantial backlog with iPad mini that was subsequently shipped in the March quarter, whereas we ended the December quarter this year near supply demand balance. We continue to believe that the tablet market will surpass the PC market in size within the next few years and we believe that Apple will be a major beneficiary of this trend.”

Cook’s explanation is a good one, but it still surprises me. I can’t think of another similar company that does a better job of managing its channel inventory than Apple.

It’s surely possible that Apple did over-estimate iPad demand in the holiday quarter, resulting in leftover inventory that affected production in the last quarter; after all, that’s the period when both the new iPad Air and iPad mini with retina display hit the market. Both impressed me greatly at the October launch event and I bought my own iPad Air on release day. Maybe I’m not a good representation of iPad sales success, however.

The urge to upgrade your tablet is less than that for phones

When I bought that iPad Air, it wasn’t exactly an upgrade as I had sold my prior iPad, a first-generation iPad mini, months prior. Instead, it was a newer tablet purchase for me. And truth be told, if I already had an older iPad that was 12 to 24 months old, I’m not sure I would have spent my money on that new iPad Air. I suspect there are many others in the tablet market that feel the same and if I’m correct, that could put some downward pressure on iPad sales.

ipad air wide

So why do people upgrade their phones on a more regular basis? For one reason, the phone market isn’t as similar to the tablet market as you might think. How many people, for example, purchase their handset in full, spending hundreds of dollars up front? Very few, at least in the U.S.

Instead, we’ve long been used to the subsidy model, where consumers pay perhaps a third of the total phone price and network operators pony up the rest in return for monthly service fees. Yes, the U.S. carriers are now removing subsidies but you can still finance a phone for zero money down and pay monthly installments.

Tablets, however, are generally sold at full price; I spent $729 for my 32 GB iPad Air with LTE, for example. It’s true that carriers offer tablets at lower, subsidized prices, but the bulk of tablet sales don’t come from these. Why would they when you can buy a tablet without an expensive, long-term contract and simply add the device to an existing data plan for $10?

Clearly, the markets are different. And after investing so much more — up front, at least — for a tablet, consumers may be willing to make do with the slate they have instead of buying a new model every year.

In March, research firm IDC suggested this very reason for a tablet slow-down, saying “In mature markets, where many buyers have purchased higher-end products from market leaders, consumers are deciding that their current tablets are good enough for the way they use them. Few are feeling compelled to upgrade the same way they did in years past, and that’s having an impact on growth rates.” Instead of following phone upgrade cycles, tablets may more closely mirror PC upgrades, which are often more than two-year cycles.

For most, phones come first, tablets come second

There is another key difference between the phone market and the tablet market. Since cellular voice is still a predominant communications method, phones are often considered a “must have” device while tablets are a “nice to have” device. That could change as technology migrates from traditional cellular calls to voice over LTE and VoIP, of course. Once voice calls are truly just another form of data, tablets will be able to replace phones for some. And of course, such tablets will need a mobile broadband connection for ubiquitous service; just two years ago 9 of 10 tablet purchases were Wi-Fi models. That’s changing, according to industry analyst Chetan Sharma who says shared data plans are boosting LTE tablet sales over Wi-Fi slates in the U.S.

Truphone dialer

Since we’re not yet at the point where all voice is data, demand for phones is still higher than the demand for tablets. Apple’s own sales figures show this: The company sold 43.7 million iPhones, or roughly 2.67 iPhones for every iPad sold last quarter. There are likely more iPhone upgraders than iPad upgraders and all things being equal, it’s a reasonable assumption that an iPhone is considered a primary device while the iPad is a secondary one.

The premium cost of an iPad compared to that of Android-based tablets is high for some

There will always be some who suggest that iPad is the best tablet on the market, bar none. In fact, if pressed, I’d be inclined to agree; that’s why I bought one. How much more value do you get from an iPad over a less-expensive Android-based tablet though? That’s a bit more difficult to quantify, mainly because we all have different needs and budgets.

When the original iPad debuted in 2010, it had no equal, so the comparison value question was generally a moot point. Fast forward to today and you can find a wide range of comparable tablets at lower prices.

HDX-family

Take Amazon’s Kindle Fire 8.9 HDX, for example. I found much to like about the tablet but my wife liked it even more, immediately spending $379 to buy her own after seeing my review unit. A comparable iPad Air would have cost her $120 more but she didn’t feel it was worth it; Amazon’s tablet provided her a great experience for the activities she wants. You could argue the same point with Google’s Nexus 7, a $229 tablet that compares favorably to the $399 iPad mini with retina display. Both are great slates and some will be happy with the less-expensive Android model.

Nexus 7Simply put, the tablet market of 2014 is not the tablet market of 2010. With more feasible options at lower prices, Apple’s iPad is feeling heat from the competition. In fact, it was just last year that Android tablets as a whole outsold Apple’s iPad: Of the 195 million tablets sold in 2013 worldwide, Android devices accounted for 62 percent of them.

What about the phablet’s big rise?

While some scoffed at Samsung’s original Galaxy Note with 5.3-inch display, the debut of that phone in 2011 started the move towards larger-screened phones that could also provide a tablet-like experience. For some, a “phablet” can be a dual-purpose device, which could also hurt pure tablet sales. In some markets, there’s already evidence of that happening. Look back to August of last year and you’ll see that in Asia, such devices outsold traditional tablets by a factor of two.

Again, IDC has the data, noting that “device vendors shipped 25.2 million phablets in 2013 Q2, compared with 12.6 million tablets, and 12.7 million portable PCs. Phablets made a significant jump, up by 100% quarter on quarter, and up 620% for the same quarter in 2012.”

Galaxy Note 3 gold red

Granted, such figures are for one particular market, but it’s a huge market. Look around in whatever market you live in however, and you’re bound to know someone that has a large phone but no tablet.

For now, phones still rule the mobile roost

Apple’s dip in iPad sales may concern investors, and perhaps even the company itself, but the fact that we’re generally a phone-first and tablet-second mobile society speaks volumes to the situation. The iPad is surely a great product. Heck, it essentially re-invented the tablet market that Microsoft envisioned but couldn’t quite deliver on for years.

The iPad isn’t a “must have” product, however; at least not yet and not when compared to the portability and power of today’s mobile phones. That will change over time as tablet capabilities improve and more people transition to a post-PC world; it just may take a little longer than Apple might have thought.

  1. I’d have to disagree and say the iPad is a “must-have” product. However, I also think that most people don’t appreciate this until they own one. So it’s kind of a catch-22. I challenge any iPad owner who’s had the device for a few months to give theirs up and simply walk away from tablet computing. There may be some outliers, but the vast majority I think would say “no thanks, I’ll keep mine, thank you very much.”

    Another factor, of course, is that an iPad is a big purchase. Most people want more than 16GB or storage, so they’re going to opt for a $600+ product, a lot to shell out when you sort of want one but are not sure you *need* one.

    Finally, I buy Tim Cook’s inventory excuse to a degree. I think there was pent-up demand for the iPad Mini, and an inventory was still catching up to the backlog during the previous quarter. This just-reported quarter they were all caught up. I’d be surprised if there was much of an uptick this quarter, but next quarter will factor in school and government purchases, and will see an uptick.

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    1. Shmintelligent Friday, April 25, 2014

      By your definition, a vacation home in the Hamptons is a “must-have” — for people who have already owned a vacation home there. Most of them wouldn’t be willing to walk away from the Hamptons, and from vacation homes.
      BUT this article was talking about the bigger — MUCH BIGGER — world population that sees a phone as a necessity. There are 7.2 billion phone subscribers globally. 2/3rds of them can’t even afford a smartphone, leave alone a $600 iPad to use with the broadband connection, which also they can’t afford.
      Apple has always played in the high-end and will have major challenges competing with Samsung and the overall Google and China ecosystems because Apple DOESN’T LIKE to make cheaper devices, and because their vertical development costs can only be subsidized across their own devices.

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    2. I would agree with OP. I actually bought a tablet before a smartphone and loved it. However my new smartphone (Nexus 4) very quickly displaced my tablet, it does all the “casual” computing and it’s always in my pocket. I still use my tablet: reading ebooks, showing holiday snaps, kid’s games.

      My ultrabook (the excellent super light touchsceen Vaio Pro) is used for more serious computing, tablets just don’t provide the environment I need for professional work.

      I see people struggling to tap out long emails on their tablets and I just can’t believe this is an optimal solution, but who am I to dictate other’s preference!

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  2. Edward Larrabee Thursday, April 24, 2014

    I purchased an iPad 2. I did not expect it to be a dead-end product, with no operating system or browser upgrades and a vendor who does not care about fixing bugs. My next tablet will certainly have an Android OS.

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    1. Steffen Jobbs Thursday, April 24, 2014

      You’re joking, right? There are plenty of Android tablets that have been orphaned within a relatively short time. Those things happen with any manufacturer. From what I’ve read, the iPad 2 will be supported until the end of 2014, so three years service is a relatively long time for a tablet. However, I think you should go to another manufacturer if you’re unhappy with what you have. That’s your choice.

      Occasionally, there are Android smartphones that lose upgrade support in a year’s time and they should be be supported for at least the length of the two-year carrier contract. These things do happen and not just with Apple.

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  3. 210 million iPads sold in four years. I think Apple is more than satisfied with sales of the iPad. Name another company that has grown a $20+ billion/year product in such a short time.
    I agree that smartphones remain as the most important post-PC device for most people. I also agree that the tablet replacement cycle will be longer than the smartphone’s.
    However, I am highly suspicious about Android tablet sales statistics. Usage metrics suggests the iPad continues to dominate the tablet market. This will be especially evident in the enterprise and education markets in the next few years. I very much doubt either the Kindle Fire or Nexus 7 will make much headway.

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  4. Steffen Jobbs Thursday, April 24, 2014

    I often wonder why everyone seems to consider Tim Cook a liar when it comes to his explanations. Is it because he hasn’t proved himself by coming out with new products or is it that his personality doesn’t instill confidence or trust? I think if Jeff Bezos were to say something about his company, investors wouldn’t question his explanations. Has Tim Cook been proven a liar previously for people not to believe him? I remember when the iPhone 5s went on sale and there was some dispute on how many iPhones were sold and some analyst (maybe Munster) said that Cook was lying about channel supply. I honestly don’t understand how an outside analyst can rightly call a company CEO a liar when he’s an outside party. I don’t think it was ever proven that Tim Cook was lying about channel supply.

    I’m trying to reason why Tim Cook would need to lie about new products being in the pipeline or whatever reasons he gives to analysts and investors. Apple doesn’t appear to be in any financial trouble, so why would they need to lie? One would think it’s risky for a CEO to lie and get caught in that lie. Is a CEO of a profitable company lying to investors a common happening?

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    1. I’m not suggesting at all that Cook is lying. If he says inventory management was an issue, it likely was but it doesn’t address the underlying cause of falling sales growth. I’m more interested in reasons why sales have stagnated which is totally different.

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      1. Well, don’t you think the market is pretty much saturated? Anyone that wants an iPad has an iPad. Part of the reason it is slowing is a testament on how well built iPads are. If you bought an iPad 2 when it originally came out it’s still usable and getting updates today. How man Android devices can you say that about. If you have an Android over 3 years old you pretty much have to load a custom ROM to update if you can even get that to work. iPad updating is still brain dead simple.

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  5. Short-term for me is 5 years not 3 months. And in my own short-term, I’ve found Apple’s analyses volumes ahead of anything from IDC.

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  6. A simple reason is competition. The iPad is losing market share every year and android is eating their lunch. Android can do anything an iPad can do and often, it can do better at a lower price point.

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  7. my Android phone and Windows laptop works great together. no Apple product in sight

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  8. The article forgets the iOS 7 “upgrade”. I’d like to have an iPad Mini, but the awful design and over-brightness stops me from buying.

    I’d consider an android tablet, but I don’t like 16:9 screens on anything that small — it becomes unusable to me in landscape orientation. I might consider 16:10, but apple still wins it with 4:3. Too bad about the iOS 7.x “debacle”.

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