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 The iPad, on the other hand, is upgraded in a manner similar to PCs, meaning it is only upgraded upon becoming outdated.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.
The author doesn’t seem capable of understanding what removable storage is for by business people hence why it matters so much.
I will have to dismiss most of this article based on that paucity of understanding.
Surface Pro 3 is great! I use at as a powerful little laptop but also as a tablet to read documents, pdfs, etc so I don’t need to carry around my books. I recommend it to all!
I miss the TV adverts with young hipsters dancing on tables and clicking keyboards with their Surface tablets. </sarc>
shouldn’t this be posted in the Religion forum?
RE: I miss the TV adverts with young hipsters dancing on tables and clicking keyboards with their Surface tablets. </sarc>
The latest one for Christmas is just as annoying with several people singing (badly) WINTER WONDERLAND ( with different words extolling the virtues of the Surface Pro ).
The hardware is straightforward but the OS changes are probably a tall order, which is why we haven't seen such a device yet.
I think Apple slowly is trying to merge iOS and OS/X, and then it will happen.
While not feature-complete (that won't be until around mid-spring 2015), Windows 10's basic emphasis on the Desktop user interface means people now running Windows 7 or earlier can migrate to Windows 10 much easier.
Apple has its head up its collective arse. The shortcomings of the iPad are evident. Wouldn’t be hard at all to have a full-fledged word editor and other features commonly found on laptops. It would not have hurt them to add removable/upgradable memory either.
Let Apple learn, or perish
“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. “
No, the reason that the iPad doesn’t have USB ports and micro SD card readers is that Apple sucks, and would rather force its customers to pay extra cash for add-on accessories to provide these basic functions.
Apple is slowly sinking into the quicksand as more and more consumers are tiring of their high prices, constant forced OS upgrades and purposely inflexible products. I have a MacBook from 2007 that still works fine while I’ve had countless technical problems with a more recently purchase MacBook Pro and iphone. Broken CD drives, noisy fans, broken switches and on and on.
Charging premium prices for shoddy gear is not a sound long-term strategy for any company.
After all of the tech blogs screamed about hating OSs “designed for touch”, and not wanting all of that app junk on a real computer.
Apple themselves had said they think the idea of a touch OS hybrid like Windows was a stupid idea.
Apple’s fans ran around for months mocking the Surface for every reason under the sun.
But in the usual fashion, Apple will now rush the same thing to the market, and all of their fans will say that Apple waited so that it can be “done right”.
Did Apple learn nothing from Windows 8?
The surface also has a really high degrés of accuracy in handwriting recognition. That is more useful in mamy ways Than its keyboard.
LOL!!
“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.”
Just their usual tech blog sycophants, and firms that love to talk up Apple stock. The same people that Apple reaches out to be their cheerleaders masking as supposedly objective journalist because they dont want to lose their access to Apple’s products.
People that will actually pay over 300 dollars for a watch of dubious usefulness? I doubt it.
I bought an iPad when they were first released a few years ago. I’m just NOW thinking of getting a new one.
ALL of the versions between then and now didn’t offer enough of a difference from the original that I bought to justify/compel me to pay $800-$900 for another one. I’m contemplating a Samsung Tablet, given how well one would integrate with my home theater system(all Samsung hardware).
The real reason - The Surface is a real, full function PC capable of being a business-ready machine. The iPad is a media consumption device.
I don’t personally get the attraction of a watch doing more than a good Timex watch. Everything else, I can use my cell phone.
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