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Why Rumors Of “Peak iPad” Are Greatly Exaggerated – The ‘Book Mystique

Truly revolutionary, paradigm-busting, game-changing products don’t come along all that often. That Apple came up with two of them within a three year time span is phenomenal –– a feat not likely to be matched anytime soon by anybody, including Apple. Consequently, it’s not remarkable or surprising that there’s been something of a “cooling-off” in iPad sales for several months now, compared with the blistering pace of the past four years which no one could have reasonably imagined would be sustainable.

Seeking Alpha’s Benedict Evans has compiled a collection of graphs showing a flattening of Apple’s iPad revenues over the past year in several contexts.iPad unit sales have dropped year-over-year in two of the past four quarters, and increased only marginally up in a third.

Indeed I’m surprised the lull took this long in coming. With seven distinct iPad versions (including the two minis) released in just four years (a short interval compared with typical personal computer upgrade frequency), a bit of a breather was due.

For one thing, the low–hanging fruit has been picked, and the novelty of tablet computers has considerably worn off (although the amount of computing power and functionality they pack into such a small package still blows me away). Most everyone in developed markets with an inclination to acquire a tablet computer now probably has one in hand, a large percentage of them being iPads — to the (i)tune of 210 million units so far. Another reason for diminished iPad revenues is introduction of lower-priced models like the iPad mini and the recently re-released 4th generation full sized iPad for $400, which shrinks per-unit profit, and sales revenues receding from from $8.7 billion in Q213 to $7.6 billion in Q214.

In Apple’s second quarter financials conference call last week, CEO Tim Cook noted that the iPad has been the fast growing product in the company’s history, and the only product the Apple has ever made that was instantly a hit in three key markets: consumer, the enterprise and education. And while the 16.35 million iPads that shipped in Q214 w as a metric 16 percent from the 19.48 million units sold in the same quarter a year earlier, even that slightly more modest sales volume isn’t exactly chopped liver.

Mr. Cook pointed out that Apple enjoys a 95 percent share of the U.S. education tablet market in the U.S., and that the iPad is making inroads in education markets far beyond U.S. borders. Turning his focus toward the enterprise market, he noted that virtually all — 98 percent — of Fortune 500 companies use iPads, with the latest metrics from Good Technologies indicating that 91 percent of tablets in the enterprise have been iPads, with many companies writing proprietary apps for the platform.

As I discussed here in ‘Book Mystique last week, I think the iPad has plenty more unrealized potential for attracting productivity oriented users, but needs some power user features added like multiple window multitasking, user access to the file directory, a real USB port and perhaps other tweaks that would increase its appeal and lower the aggravation factor for productivity-oriented users. These need not be activated by default, so that the simplicity of the iPad experience is sustained for those who prefer keeping it simple, but they should be available to those of us who need them.

It’s my impression that typical iPad upgrade cycles will likely settle into more the personal computer upgrade pattern of three-to-five years than they will smartphone replacement intervals, which in my estimation gives iPad a better-value purchase profile than an iPhone (although they’re differently-purposed products selling in different dynamics, so it’s only a relative comparison). iPads are more utilitarian, general-purpose devices closer to the role that was until recently the domain of laptops, as opposed to being a functional fashion accessory like the iPhone. For example, my own iPad 2 is nearly three years old, and only recently has begun to manifest functional limitations to a degree that I’m seriously in the upgrade hunt. Heck, Apple continued to keep it in production for more than three years, during which it sold robustly up until late 2013, thanks to the fact that it continued to offer very respectable performance. Indeed Apple is still marketing that same level of performance in the non-Retina price-leader original iPad mini.

Mobile phones also tend to lead harder lives than iPads customarily do, are more frequently lost, stolen, or damaged, and upgrade cycles are typically influenced by mobile carrier service contract terms. Many iPhone users upgrade their handsets every 1-2 years, and typically pay for their phones by monthly payments in often carrier-subsidized plans, rather than laying down several hundred dollars up front as is usual with iPad purchases.

Nevertheless, with $170.910 billion in revenues generated in 2013, compared with $13.931 billion in pre-Intel Mac, pre-iPhone 2005, Apple remains the most valuable company on the planet, and despite continued global economic doldrums, increased its profits in its fiscal 2014 second quarter that ended March 29. The company posted quarterly revenue of $45.6 billion and quarterly net profit of $10.2 billion, or $11.62 per diluted share. That compares to revenue of $43.6 billion and a net profit of $9.5 billion, or $10.09 per diluted share, in the 2013 second quarter. Gross margin was 39.3 percent compared to 37.5 percent in the year-ago quarter, even with the forfeit of an annualized $8 billion, give or take, due to making OS X and the iWork productivity suite free.

Compare that to performance of other tech companies — let’s say Microsoft — which in the same quarter recorded revenue and a small decline in earnings of $.68 cents per share, down from $.72 per share in the same quarter a year ago and near-flat revenue — down slightly at 220.4 billion, as opposed to 20.70? million in 2013. And Microsoft is still definitely charging for Windows.

Or how about Samsung Electronics Co. Ltd.? According to Reuters’ Se Young Lee, Apple’s strongest competitor in the smartphone market and South Korea’s largest company by market value reported a second consecutive quarterly profit decline this week, attributed to weakness in flat-screen panel orders and a maturing high-end smartphone business weighing on Samsung’s earnings in the January-March 2014 quarter.

Reuters reports that Samsung’s operating profit fell 3.3 percent year-over-year to 8.5 trillion won ($8.2 billion, with profits from its mobile division of 6.43 trillion won in the quarter, 1.2 percent lower than a 6.51 trillion won profit a year earlier. Reuters notes citing analysts’ forecasts that Samsung’s mobile business faces uncertain prospects for the rest of 2014, with its broad range of low-end phones are being overtaken by, improving quality of lower-priced Chinese-made competition, while the large-screen advantage of its top-range phones and phablets could soon be under pressure from new larger-screen iPhone models from Apple.

Meanwhile, the iPad, despite the sales pullback, still accounted for about 20 percent of Apple’s revenue in Q214, but it’s indisputable that the iPhone is currently the brightest star in Apple’s product constellation, consistent with industry trending in general. The iPhone represented 56 percent of Apple’s revenue in the first quarter of its 2014 fiscal year. Apple sold 43.7 million iPhones in Q214, or approximately 2.67 iPhones went out the door for every iPad moved in the quarter. According to market research authority IDC, roughly one billion smartphones were shipped globally in 2013, up 38 percent year-over-year. Those hoping that wearable computers will be a next big thing out-of-the-park home run for Apple are likely going to be disappointed. As I noted above, the iPhone and iPad have been extraordinary phenomena.

And ones that will keep on giving. Quartz’s Christopher Mims noted in a weekend blog that essentially, the post-PC era has moved along into a new stage, and a lot sooner than anyone had anticipated, we are now truly into the “age of mobile,” pointing to a jaw-dropping Facebook four-quarter revenue trend graph.

Last week, Bernard Lord, president and CEO of the Canadian Wireless Telecommunications Association, said that the industry he represents is anticipating data growth of a whopping 900 percent over the next five years. Addressing the Halifax, Nova Scotia, Chamber of Commerce members at a luncheon April 24, Mr. Lord, who bought his first cellphone in the early ‘90s and in 1999 at age 33 became the youngest-ever premier of the province of New Brunswick, told his audience that “If we were talking about the automobile, it would be like going from four-lane to 36-lane highways in five years.”

Presuming that commensurately similar growth rates will be experienced in the U.S. as well, Apple, with the iPhone and iPad the class of their fields respectively, perhaps soon augmented by an iWatch, should be well-poised to take advantage of the mobile era. The latest smartphone sales data from Kantar Worldpanel ComTech, for the three months to March 2014, shows Apple performing strongly in the first quarter of the year, with sales bouncing back in Europe, Japan and Australia.

As for the bloom allegedly being off the iPad rose, as it were, Apple’s Mr. Cook pointed out that Apple enjoys a 95 percent share in the U.S. education tablet market in the U.S. and is making inroads in education globally, that no other tablet has a 98% customer satisfaction rating, also observing that virtually all — 98 percent — of Fortune 500 companies use the iPad, and according to latest Good Technologies metrics, 91 percent of tablets deployed in the enterprise have been iPads. The iPad also utterly dominates online mobile traffic. He also observed that in terms of practical reality, the iPad transcends its official 46 percent domestic tablet market share in the sense that it is being arbitrarily lumped together with a lot of product he personally wouldn’t put in the same class or category.

Longtime iPad enthusiast Ben Bajarin noted this week that the iPad is the quintessential Jack of all trades and master of none, observing:

“The source of my optimism for tablets is rooted in the unique combination of form and function. The larger screen makes it more capable, as well as more diverse, in its function than a smartphone. The lack of a clamshell design with attached keyboard makes it more portable/mobile than a traditional PC. This combination allows the device to be extremely varied in its supported uses. Specifically, the iPad is the most general purpose computing device I’ve ever studied. It can be so many things to so many people and do a wide variety of things well…”

Indeed, Bajarin allows that the iPad may well be too good of a general purpose device for its own good, being that it lacks a preferred or specific use case that cannot be performed as well or better on any other device, albeit perhaps not as portably or comfortably.

Here’s another incisive observation that helps penetrate the fog of iPad negativism. M.G. Seigler points out that were Apple’s iPad operation a standalone business, based on its last 12 months of revenue performance it would be among the top 100 companies in the Fortune 500.

As an aside, another metric that emerged in Apple’s Q214 financials, and brought a smile to this abiding Apple laptop fan, is that about 4.1 million Macs were sold in the quarter — up five percent year-over-year, and that on the heels of posting an even more impressive 19 percent sales growth in the previous quarter. Apple Daily Report’s Dennis Sellers notes that while PC sales in general remain becalmed in the IT horse latitudes, the Mac continues to gain share, having exceeded overall PC growth and gained overall in 31 of the last 32 quarters. For example, Sellers cites Needham Analyst Charlie Wolf reporting in February that Mac shipments grew 18.1% in the December 2013 quarter, outpacing overall PC market by 24.7%, and that Apple has gained market share versus Windows PCs in all quarters since 2005 but one (the first Intel-powered Macs were released in January, 2006), and have been on an almost unbroken roll ever since. Those proposing that “peak iPad” has been passed might well ponder those Mac metrics as a comeback exemplars.

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