Apple’s iPad Faces Challenges from New Competition in Maturing Tablet Market

Apple (NASDAQ:AAPL) may have started to feel the effects of cheaper priced rivals in the tablet space, a niche market segment it helped spawn with the launch of the iPad almost two years ago. The iPad has not faced much competition so far, but some new tablets this holiday could give it some new reason to worry given huge discounts on Research in Motion’s (NASDAQ:RIMM) Playbook as well as new tablets such as Amazon’s (NASDAQ:AMZN) Kindle Fire and Barnes and Noble’s Nook tablet that are priced at significantly lower levels. Analyst Shaw Wu from Sterne Agee sees iPad 2 sales falling short of his earlier estimate of 15 million. ^[1]

However, he sees strong demand for the iPhone 4S, which continued its reign at the top of the three major U.S. carriers that sell the phone. ^[2] We estimate that the iPhone contributes around 53% of Apple’s price estimate; so on the whole, Apple’s stock is ok for now. But the rapidly changing tablet landscape, more so with the entry of Microsoft next year, will surely be more challenging for Apple the next holiday season.

See our complete analysis for Apple stock here

Increasing competition will decrease iPad’s market share

Microsoft’s Windows 8 launch next year ushers the entry of Apple’s long-standing foe in the tablet arena. The world’s largest software company also announced recently the launch of its Windows App store, where it plans to give a bigger chunk of profits to more successful developers than what Apple currently does. (see Microsoft Unveils Windows 8 App Store; Its Next Billion Dollar Business?) A big reason for the iPad’s success was that users were already familiar with the thousands of apps that were already available on the App store when the iPad was released. Should Microsoft manage to capitalize its huge existing customer base in the laptop and desktop market to promote its Windows-based tablets, Apple may have to contend with another big competitor next year.

Apple has so far managed to sell its iPad at high price points solely because of lack of competition to its hardware design and user experience. Even the Kindle Fire, which was launched to a rousing reception, has seen demand cooling off after the holiday weekend. ^[3] However, learning from RIM and Amazon, as more and more rivals realize that competing with Apple is possible only by offering huge discounts or offering cheaper alternatives to the iPad, Apple may find it tough to hold on to its market share lead in the coming years. In fact, iPad’s market share has fallen to around 68% in a market it had created in 2010. (see Apple Takes a Bigger Bite of Tablet Market Share as Android Slips)

Pricing declines

We are not suggesting that the iPad will die. We expect the iPad to continue to see high sales but as the market matures to include more price-conscious folks, Apple may have to decrease the prices of its tablet or possibly come out with a 7-inch cheaper version. Its strategy of decreasing the prices of older versions as it launches newer ones has so far mitigated the effect of cheaper rivals. However, it may have to take it one step further and reduce the prices of its new launches in the future.

The iPad accounts for around 12% of our $502 price estimate for Apple stock, which is about 30% above the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Apple: Sterne Agee Raise iPhone, Cuts iPad Estimate, Barrons’, December 7th, 2011 [↩]
2. iPhone 4S best-selling phone at three top U.S. carriers in November, Samsung sales strong, BGR.com, December 6th, 2011 [↩]
3. Amazon Kindle Fire already cooling off, study suggests, BGR.com, December 2nd, 2011 [↩]