Tapped out: A few reasons why Apple iPad sales have slowed

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(s aapl) 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.
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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.
Take Amazon’s(s amzn) 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(s goog) 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.