Apple’s
quarterly earnings report,
released yesterday, highlighted a trend that was slightly unexpected.
Although profits grew to $10.2bn from $9.9bn the year before, the engine
for this growth were, surprisingly, the newer iPhone 5S and 5C models
which posted year-on-year growth of 17%. iPad growth, by contrast,
screeched to a halt with year-on-year sales
down 16%.
How has this occurred, and what does it mean in the long term? The
perfunctory reasoning of Tim Cook, Apple’s CEO and Luca Maestri, their
CFO was that Apple’s channel inventory (the amount of products they make
available for purchase by resellers) had declined over the period but
this ignores the fact that even with these adjustments factored in
(about a million units) it still constitutes an overall decline in
year-on-year growth and that Apple’s forecasts themselves predicted
year-on-year
growth for their iPad range.
The real reason for these declining sales may be simpler: Competition
and saturation. Although Android tablets competing with Apple in the
tablet space have existed for a while now, Apple had a first mover
advantage that essentially fused its brand with the word “tablet”.
Indeed, they essentially invested the consumer-ready tablet and it gave
Apple a kind of marketing narrative of being “the tablet company” that
worked on its own, even alongside premium pricing. The increasing
availability of not just Samsung Android tablets, but Android (and
increasingly Windows) tablets from a wide variety of manufacturers is
cutting into a consumer base that would have instinctively gone to Apple
a few years ago for a tablet.
Moving on to the more important matter of consumer saturation. Most
analysts predict the tablet market will grow by 50% this year in the
United States (its main market by a long margin). This seems overly
generous. The level of market saturation in the US for tablets (42% of
adults) is at a level now where we can expect to see some tapering off
of growth. Indeed, to be more bold about it, it’s looking increasingly
likely that the whole of the “post-PC” market of smartphones, tablets
and phablets are looking at long term “stagnation”, that is to say, slow
growth and diminishing returns from a mature consumer market. This is
already
well documented in the smartphone space where existing consumers simply see no reason to upgrade anymore.
This is partly why yesterday’s announcement was surprising in that
very few people in tech journalism or market analysis saw it as part of a
broader trend, they expected tablets to be immune from stagnating
smartphone growth when in fact the two types of product are only
different by incremental differences in screen size now. IDC’s
first Q1 2014 report, released in January, predicted this exact outcome by stating that the
”signs for slower growth are clear” and warning against extravagant expectations.
This shouldn’t be viewed as a “crash” however, the fact of the matter
is that app store revenues across the App Store and Google Play are
going to grow and increasingly establish themselves as huge e-commerce
centres in spite of this. Which leads on to the final point:
The only way hardware growth of mobile devices in developed markets
is going to see the sort of huge figures it did in 2010-2012 is with
innovation. For the past few years we’ve seen incremental improvements
to existing principles which is, of course, understandable and perfectly
fine. But incremental improvements in the form of better SoCs, more RAM
and so on cannot drive growth to the extent a truly disruptive device
can. A question device manufacturers need to be asking themselves is
“What can I do on an iPad 4 that is truly different to what I could do
on an iPad 3?” Therein lies the increasingly common pattern of consumers
holding onto devices for longer periods of time now. There is, as
already mentioned,
no real reason why consumers should upgrade.
What’s most interesting about this is that the floor is open to any
challengers who think they can change the market with something truly
disruptive, and realistically this could come from anywhere.
