Peak tablet: How will Apple sell even more iPads?

In January 2010, as Steve Jobs showed off the first iPad, the question that many asked was: what is it for? Why would people want a tablet that couldn’t run Windows desktop apps, as Microsoft had assumed they would when it first pushed the form factor in the early 2000s?

Four years later, the answer seems clear - though the answer might not be much comfort at first to Tim Cook, Jobs’s successor. In many cases, tablets including iPads have replaced the TV set, becoming a mobile form of entertainment that’s a lot more convenient than a portable DVD player, and with a far better screen.

Overall, tablet ownership has rocketed from a standing start. In the US, 44% of households had one in January 2014, according to Pew Internet; Ofcom found the same figure at the same time.

But shipments have stalled. After enjoying 78% and 68% growth in 2012 and 2013, tablet shipments have slowed dramatically, so that Apple has seen year-on-year falls in tablet shipments in the first six months of 2014, and is likely to report another for the three months o the end of September when it reports results later this month. As a market, tablet sales are forecast to grow only 6.5% in 2014, according to IDC, a research company.

So as Cook prepares to unveil the successor to last year’s super-thin, light iPad Air, questions are being asked about the entire tablet category. Gartner, another research company, reckons that this year tablets will have made up less than 10% of device sales - mobile phones, PCs and tablets.

In part that’s because mobile phone sales are so gigantic - 1.8bn total including basic featurephones. Tablet sales are forecast to be 229m this year, up from 207m in 2013, rising to 272m in 2015; that would put them past “traditional” PCs (desktops and laptops), which Gartner says will shift 276m this year and fall to 261m in 2015.

By Gartner’s measure, though, sales of PC-like “ultramobiles” - like Microsoft’s Surface, with detachable keyboards - will rise from 37m to 64m in the same time, which gives the total “PC” market a lead over tablets. This depends on definitions; IDC, a rival research firm, puts ultramobiles into “tablets”, and so has them overtaking PCs more quickly.

It’s not only Apple that is struggling. The tablet market has been brutally competitive from the start, but only Apple and Samsung – which supplied the screen for the first iPads and was among the first to market with Android tablets in autumn 2010 - have maintained significant share. It’s not clear how well Samsung is faring financially: at the launch of its latest top-end tablet, executives intimated that if this didn’t sell well, they would instead begin chasing the low-end market.

For the rest, much of the market is consumed by low-priced Chinese-made “white box” tablets, which appear largely to be used to watch video content – either on YouTube, or “sideloaded” from computers. That would bolster the statistic quoted at Google I/O by Sundar Pichai, who said that Android tablets made up 42% of YouTube viewing - in line with the installed base of tablets.

“The tablet market is separating into two - the branded side, which is slowing, and the low-cost which is continuing to grow,” says Neil Mawston of Strategy Analytics, a global research company. “The branded side is struggling because it’s already taken the low-hanging fruit of people who had netbooks, who moved swiftly to tablets.”

The question of what people do with tablets seemed to be answered, at least in part, by Ofcom last week, in a report which found that tablets were replacing TVs in the bedroom, with a third of children having their own, and over 60% having access to one at home. Half of those tablets were iPads, according to eMarketer.

That speaks to a dramatically fast uptake of tablets. According to data collected by Horace Dediu, who runs the Asmyco consultancy, tablet adoption in the US has been faster than for any previous technology, including the smartphone, refrigerator or car.

But the problem facing Apple, and evident in its sales statistics, is that tablets don’t wear out as quickly as PCs, and if they’re principally used to watch video, they’re not as susceptible to forced upgrade cycles: social network apps and YouTube work as well on a four-year-old tablet as a brand new one.

“People have worked out what they want really do with tablets, and whether they really need one,” says Francisco Jeronimo, smartphone and tablet analyst for IDC. “The thing is, if you’ve got a big smartphone, it’s running the same apps, then the tablet is the same except in most cases it hasn’t got a mobile connection. There’s no real way the tablet can really replace the laptop.” That leaves growth at the cheaper, smaller-screened segment, where parents and schools buy for children, he suggests.

Apple isn’t, however, interested in cutting prices and hence profit margins in order to retain its market share. Instead, it is looking around for new customers that are willing to pay its prices. The most obvious untapped ones: businesses.

Big Blue deal

So far, consumers’ eager adoption of tablets hasn’t been matched by businesses, where tablet uptake has been slower as they consider the possible benefits of products like the Surface, with its detachable keyboard and desktop chip. But Cook has a plan there: in the summer Apple announced a deal with IBM, where “Big Blue”, usually known for mainframes and services, will begin pushing iPads and iPhones together with custom software as part of full service deals with its bigger customers.

“Apple has done well in terms of persuading some board-level executives in various companies to adopt iPads, and the price point makes it easier for enterprises to afford than a low-income consumer,” says Tim Coulling, senior analyst at Canalys. “With IBM, I expect they will go after vertical markets - specialist uses such as healthcare, retail point of sale, and so on.”

But, Coulling adds, it’s still early days for the tablet in the business world. “Businesses are always slow to adopt new technology - look at how slowly they’re moving with Windows.” Indeed, the PC market’s uplift earlier this year was largely ascribed to companies replacing machines running Windows XP, last updated in 2008.

Won’t those enterprise customers want something special? Such as a larger tablet? Rumours that Apple will make a bigger tablet - up to 12in diagonally - have swirled for months. As is standard, the company hasn’t commented, but expectations of a “Pro” tablet have some interested, even as others question whether it would take sales away from the Macbook line of computers.

JP Gownder of Forrester Research says: “an improved iPad Air is a certainty, and a 12.9” iPad would be a competitor to the Microsoft Surface Pro 3 - and to the Mac.”

Cannibalising the Mac

Would Apple introduce a tablet that might hurt its laptop line? It’s never been reluctant to cannibalise its own lines: the iPad arguably subtracted from Mac sales, but Apple executives have repeatedly argued that there are more PCs to steal sales from than Macs (which have a 5% share of PC sales, though steadily rising as that market shrinks). The “phablet”-sized iPhone 6 Plus with its 5.5in screen will surely subtract from sales of the 7in iPad mini - but Apple won’t mind, because it makes more profit on the 6 Plus, and gets a customer who is likely to go for a two-year replacement cycle, rather than the three years of a tablet. So the possibility of a bigger iPad - and perhaps productivity enhancements such as split-screen apps - seems strong.

Even so, as Cook prepares to take the stage in California to announce the new tablets - and new notebooks, and perhaps some entirely new category - the tablet market is in the doldrums for two simple reasons: most of the consumers who want one already have one, and businesses aren’t sure yet if they want one - or one thousand, or none.

“I don’t see the IBM deal having much impact before next year,” says Jeronimo. “Apple will need to do something unique, perhaps tying it in with the Apple TV [set-top box], doing something in software and services. But this is definitely a very difficult time for Apple.”

Steve Jobs might have thought that explaining the benefits of the iPad was tough. But four years after the first one, it seems that explaining the benefits of a replacement iPad - or a new one - could be even tougher.

http://www.theguardian.com/technology/2014/oct/16/apple-peak-tablet-ipad-ipad-air-pro