Why iPad Sales Growth Has Been Slowing

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Apple’s (NASDAQ:AAPL) iPad essentially launched the tablet market when it was released in 2010. The device’s combination of slick design, strong functionality and ease of use have been key to its success, as sales rose from about 32 million units during FY 2011 (first full FY after launch) to around 71 million during FY 2013, making it one of the company’s fastest selling products. [1]  However, tablet demand has shown signs of cooling of late and Apple looks like it could be impacted more significantly by a slowdown than some of its competitors.  Although the iPad isn’t nearly as big a driver of Apple’s valuation as the iPhone, it accounts for about 11% of the company’s stock price, according to our estimates, and remains an important component of Apple’s ecosystem. In this note, we examine some of the key trends that are driving iPad sales.

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Q2 FY 2014 Decline, Slowing Market Growth: While global tablet shipments continue to expand, the growth rate has been declining. As of Q1 2014, tablet shipments grew by just about 3.9% and IDC forecasts that tablet shipments for the year will rise by just about 12.1% , compared to a growth rate of around 51.8% during 2013. ((Worldwide Tablet Shipments Miss Targets as First Quarter Experiences Single-Digit Growth, According to IDC, IDC, May 2014)) Apple still remains the tablet market leader, holding about 32% of the global tablet market as of Q1 2014. However, the company’s market share declined by around 8% year-over-year, while Samsung, the second largest player, has seen its share grow by around 5% to about 22.3%. [1]  In terms of shipments, FY Q2 2014 iPad sell-ins fell by around 16% year-over-year to about 16.3 million units due to a smaller need for channel inventory replenishments, while sell-through rates, which are a better indicator of end market demand, also declined by around 3%.

High Tablet Penetration In Developed Markets : The iPad is generally viewed as a premium tablet, which is more popular in developed markets where penetration is higher. For instance, in the United States, an estimated 42% of adults own tablets [2] and a bulk of these tablets are likely to be iPads, given the head start Apple has had in the tablet market. It seems unlikely that penetration will rise too significantly going forward, given that tablets are often shared among  users unlike mobile phones, which are viewed as more personal items. Additionally, there is a lack of interest among existing tablet owners to upgrade their devices frequently, unlike smartphones, where carrier subsidies and improving wireless technologies drive upgrade cycles.

Market For Low Cost Tablets Is Growing Fast, But Apple May Not Want In: The demand equation in the tablet market has been changing, with much of the growth coming from developing markets such as China and India, where lower-priced Android-powered tablets have been gaining traction. Consumer familiarity with the Android software (which powers a bulk of smartphones), coupled with low prices and aggressive marketing by companies such as Samsung and Lenovo have helped Android tablets gain significant market share at Apple’s expense. For instance, as of Q2 2013 (the most recent data available to us), Samsung’s tablet market share in China rose by 5% year-over-year to about 11%, while Apple’s market share shrank from around 49% to about 28%. [3] While Apple has a lower priced offering of its own in the form of the basic iPad Mini, which  retails at about $299 in the United States, most of the growth is likely coming from price points of $200 and below. It is unlikely that Apple will get into the lower end of the market, given the adverse effects that the iPad Mini has already had on its average selling prices and margins.

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Notes:
  1. Apple Form 10-K [] []
  2. Mobile Technology Fact Sheet, Pew Research, January 2014 []
  3. IPad’s China Market Share Plunges as Domestic Tablet Makers Gain, Bloomberg, August 2013 []