Posted on 12/11/2014 9:23:14 AM PST by SeekAndFind
Apple (NASDAQ: AAPL ) reported its fourth-quarter earnings on Oct. 20, impressing investors in all areas except for iPad sales. iPad shipments fell year over year for the third consecutive quarter, dropping 13% to 12.3 million units. iPad revenue ($5.3 billion) also came in lower than Mac revenue ($6.6 billion) for the first time in years.
Three days later, Microsoft (NASDAQ: MSFT ) posted its first-quarter earnings, revealing that sales of its Surface tablets had more than doubled both year over year and sequentially, to $908 million. Microsoft attributed that surge in demand to "strong interest from students, professionals, and increasingly enterprises for Surface Pro 3."
Apple's iPad Air 2 (L) and Microsoft's Surface Pro 3 (R). Source: Company websites.
The decline of the iPad and the sudden rise of the Surface highlights an interesting divergence between the tablets and "laplets" markets. Let's look at what this market shift could mean for both companies in the long run.
Why the iPad is falling
Demand for the iPad is waning for three main reasons: a longer upgrade cycle, a lack of compelling new features, and its premium price tag.
iPhone sales are fairly predictable, thanks to two-year carrier contracts that end with an inevitable upgrade. The iPad, on the other hand, is upgraded in a manner similar to PCs, meaning it is only upgraded upon becoming outdated. Moreover, many customers are handing down their old iPads to family and friends before upgrading, which throttles sales of iPads to new customers.
On Oct. 16, Apple unveiled the new iPad Air 2 and iPad mini 3. While the iPad Air 2 was slimmer, lighter, and had better specs than its predecessor, the mini 3 has the same specs as its predecessor, with bigger storage options (up to 128GB) and a Touch ID sensor. This refresh, while expected, simply won't convince customers to ditch their old iPads. Moreover, the iPhone 6 Plus will probably cannibalize sales of the iPad mini 3.
That brings us to the third issue: the iPad's questionable ability to maintain its pricing power. Lenovo (NASDAQOTH: LNVGY ) , for example, recently unveiled the Yoga Tablet 2 Pro, an impressive 13.3-inch Android tablet with a built-in Pico projector, a subwoofer, and a 32GB hard drive, starting at $500. That's the same price as an entry-level iPad Air 2, which has a 9.7-inch screen and 16GB of storage. Granted, these two devices appeal to different types of customers, but it's not hard to see how the owner of an older iPad could be tempted by the Yoga Tablet 2 Pro. Meanwhile, low-end Android tablets are now so cheap that it's possible to buy two or three for the price of one new iPad.
Lenovo's . Source: Lenovo.
These three problems have caused the iPad's global market share to fall from 60% in the second quarter of 2012 to 27% in the second quarter of 2014, according to IDC.
Why the Surface is rising
Microsoft's Surface had a rough start when it hit the market in October 2012, but customers eventually realized the device was more of an ultrabook than a tablet. Microsoft also heavily marketed the Surface as a productivity device for students and professionals, rather than going head-to-head against the iPad as a consumer tablet.
Microsoft leveraged Windows' dominant market share of PCs to give businesses a smoother way to upgrade their older computers without abandoning legacy software or older network setups. With the docking station ($200), the Surface can be converted to a full desktop with a wired ethernet connection -- which can't be accomplished by first-party means on an iPad.
In September 2013, Delta Air Lines (NYSE: DAL ) announced that it would equip 11,000 pilots with Surface tablets installed with paperless "electronic flight bags" with key charts, reference documents, and checklists. Hospitals, including Seattle Children's Hospital and the University of Pittsburgh Medical Center, have also deployed the Surface Pro 3 to help doctors seamlessly access electronic health records from the patient's bedside and their desks. Some retail stores have even installed the Surface in customer-facing kiosks that link to their sales database.
More importantly, the arrival of the Surface has convinced Microsoft's hardware allies (and competitors) to develop similar convertible devices targeting both regular and enterprise consumers. This helps Microsoft generate more revenue from industrywide Windows OEM licenses, which are far more important to its top line than Surface sales.
The tortoise and the hare
While many consumers like to compare the iPad and the Surface, investors should remember that the two devices are designed with two very different strategies in mind.
The iPad is focused on leapfrogging over legacy PCs and into the future. That's why it eschews the microSD card readers and USB ports that can be found on the Surface. The Surface is developed as a more practical transition between PCs and tablets, since it can fully replace traditional desktops and laptops without forcing businesses to sacrifice legacy software and hardware.
Therefore, Apple might have jumped too far ahead when it launched the iPad four years ago, which has now caused it to burn out and lose momentum. Meanwhile, Microsoft built the Surface with enterprise needs in mind, which is now helping it slowly, but steadily, gain market share.
Forget the iPad, next hit Apple product revealed
Apple recently revealed the product of its secret-development "dream team" -- Apple Watch. The secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors.
I agree with this. The only way my iPad Air (company owned) or my iPad 2 is remotely usable as a serious business-capable device is to have both paired with Bluetooth keyboards/keyboard cases. Even then, without remote desktop capabilities with the office, the devices revert to their native state, media consumption.
“But one small company makes Apple’s gadget possible.”
What company?
LMAO!
Ahh, for that, you’ll have to subscribe.
And they want you to watch the video :
Apple has a very dedicated following, but it isn’t growing very much. I believe that the Surface is doing very well but I have yet to meet someone who actually owns one.
I like android tablets.
Yes. It’s the tease.
I think I actually read it before, but forgot.
I’m asking you if you know the name.
Apple will resist removable memory because they want to maintain control of the copyrighted media libraries stored on iPads. Those libraries are often worth more than the device, and Apple does not want people swapping them around.
Walmart is running that new HP ultralight for $200. The main problem that one has is the OS — Windows 8.1. Crawls compared to its competition, which is running Android.
The fact is, iPad sales slumps are due to the other reasons cited, and not due to the Surface — the sales of the Surface are to people who can’t see the screens of their smart phones (any brand) and want a more normally sized computer with more capability than their phones.
I've used both. They're both overpriced. ;-)
Does anyone know if there’s a convenient way to run a Linux distro with support for the touch-screen interface on a Surface or Surface Pro?
They are very nice hardware, the keyboard and stylus being great improvements over the competing iPad — I used one to check something on the internet at a kiosk hawking them at a mall in Seattle — but I still hate Microsoft’s operating system and software generally. (I use Macs at home and Linux at the office, and I think the only Microsoft code running on any of my machines is Silverlight since some sites have the bad grace to link their video content to its use.)
Right now with the watch being really just another interface for the phone there’s really isn’t much attraction other than being alpha-nerd. In a couple of generations when the watch BECOMES the phone...
BFL
I went from Win7 to Win8.1 - the latter waaay better in terms of speed and stability. Light years better, actually.
Actually, now that I think about it, I don't see why Apple couldn't in the short-run make a MacBook Air Touch that just runs both OS's with a shared storage area for user files. Detach the keyboard and iOS loads automatically - reattach it and OS/X comes back. It might be slightly cumbersome in some ways, but I imagine such a device would still sell very well. I'd buy it. :)
The surface is a hybrid product, its a laptop that can kind of function like a tablet when you absolutely need it to..
That’s its market, and that’s where it will stay.
Its an option for folks who need an ultrabook, but also at times may need some tablet functions.
It is not a direct competitor for the iPad, and that’s why it flopped so badly in its first few renditions because MS tried so damned hard to sell the thing as a tablet, its not... its an ultrabook with a different form factor.
Well, rumors are that both a 12” iPad and 12” MacBook Air are coming. Put the processing on the display half, and the physical interfaces on the bottom half, make ‘em detachable, and add the iOS/OSX auto-switch - there ya go.
There will be some early adopters, no doubt, and a series of improved products, just like every other Apple product, along with lower prices. The first iPod was 5 gigs and cost $399.
I think they're going to catch on, although I won't buy one for a while. Think of it as a front end for the phone in your pocket and the ear bud in your ear. Read a text or see who is calling or pick another song without pulling out the phone. Just taps on the wrist. I predict that in ten years they'll be ubiquitous, whether made by Apple or competitors.
ipad is just a step to make all use of computers subscription based. no pay no access to YOUR data.
cloud BS
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