Aug. 24, 2014 12:43 p.m. ET
Apple's AAPL +0.74% Apple Inc. U.S.: Nasdaq $101.32 +0.74 +0.74% Aug. 22, 2014 4:00 pm Volume (Delayed 15m) : 43.49M AFTER HOURS $101.45 +0.13 +0.13% Aug. 22, 2014 7:59 pm Volume (Delayed 15m) : 691,817 P/E Ratio 16.26 Market Cap $606.69 Billion Dividend Yield 1.86% Rev. per Employee $2,214,380 08/25/14 How an Entrepreneur's Passion ... 08/24/14 Huawei Is Shaking Up the Smart... 08/24/14 Apple's Next Act for the iPad ... More quote details and news » next iPhone may hog the spotlight in coming weeks, but don't forget the iPad.
It is tempting to relegate Apple's tablet—its second-biggest business—to a sideshow, given stagnant growth. Unit sales have slipped in the last two quarters year over year and analysts expect a similar trend in the current period.
This is hardly peculiar to Apple. Tablet sales across the globe have slowed significantly, growing only 8.4% year over year in the second quarter versus 58.5% in the same period last year, according to IDC. Still, the recent trend seems like a rapid meltdown for the company that essentially invented the modern tablet market. But if this is a problem for Apple, it is a relatively high-quality one.
The company still has the largest market share in tablets, and takes an even larger share of the profits. IDC estimates that Apple accounted for about 28% of global tablet sales in the second quarter, with Samsung coming next at 18%.
Part of the reason tablet sales have declined is that, compared with smartphones, most tablets carry a higher price tag and have a longer replacement cycle. Analysts now model a three-to-four-year replacement cycle for tablets compared with a two-year cycle for smartphones. It also is worth noting that most tablets—iPad included—sell without the subsidies from wireless carriers that help keep gross margins on the iPhone at around an estimated 50%.
Apple has made clear it isn't giving up on tablets. Nor should it.
The company has essentially locked up the premium corner of the business, as evidenced by lackluster sales of nearly every other high-end tablet. Companies that have managed to take some of Apple's market share have done so at a cost, selling at much lower price points that leave those devices with thin margins.
For instance, Lenovo saw the sharpest unit sales growth during the second quarter in the tablet market, according to IDC. Its best-selling tablet on Amazon.com AMZN -0.40% Amazon.com Inc. U.S.: Nasdaq $331.59 -1.32 -0.40% Aug. 22, 2014 4:00 pm Volume (Delayed 15m) : 2.19M AFTER HOURS $331.85 +0.26 +0.08% Aug. 22, 2014 7:59 pm Volume (Delayed 15m) : 21,436 P/E Ratio 850.23 Market Cap $153.21 Billion Dividend Yield N/A Rev. per Employee $697,016 08/24/14 Amazon Can't Cage 'The Goldfin... 08/24/14 Apple's Next Act for the iPad ... 08/22/14 Amazon Preps a Challenge to Go... More quote details and news » is currently priced at an about 53% discount to the cheapest iPad with comparable specs.
Apple's premium pricing likely means its market share will continue to decline as more competitors flood into the market's low end. Apple and Samsung saw their combined market share decline in the second quarter, thanks in part to a strong uptick from so-called white-box manufacturers making inexpensive tablets for markets such as China, according to data from NPD DisplaySearch.
But Apple needn't control the market for the iPad be an important—and profitable—business. In fact, the average selling price for the iPad rose nearly 2% year over year in the June quarter despite a 9% decline in unit sales in that time. UBS estimates total iPad gross margins reached 30% in the quarter compared with 25% in the December period.
For Apple, the iPad is about more than just unit sales, as the device also provides an important extension for the company's iOS platform. Revenue from iTunes, software and services grew 14% year over year for the nine-month period ended June 28—Apple's fastest-growing segment in that time.
Morgan Stanley estimates that Apple's platform generates about $1 of revenue per user a month, with gross margins that are now accretive to Apple's overall margin. This means the bigger end-goal for Apple is likely going to be drawing more revenue out of users, rather than just relying on design tweaks to boost hardware sales.
Apple is already rumored to be producing its next iPad for a potential launch this fall, and is also working with IBM IBM -0.43% International Business Machines Corp. U.S.: NYSE $190.41 -0.82 -0.43% Aug. 22, 2014 4:01 pm Volume (Delayed 15m) : 1.92M AFTER HOURS $190.42 +0.01 +0.01% Aug. 22, 2014 7:13 pm Volume (Delayed 15m) : 16,320 P/E Ratio 11.97 Market Cap $197.87 Billion Dividend Yield 2.31% Rev. per Employee $229,711 08/24/14 Apple's Next Act for the iPad ... 08/22/14 Google Fiber Is Fast, but Is I... 08/21/14 Chinese Gadgets Signal New Era... More quote details and news » to develop apps and services geared to businesses. Chief Tim Cook said on the company's most recent earnings call the tablet category is still in its early days, and the company plans to bring "significant innovation" to the iPad.
That may give the pioneering tablet another turn in the spotlight.
Write to Dan Gallagher at dan.gallagher@wsj.com
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