iPad sales came in lower than expected
Apple (AAPL) sold 13.3 million iPads in the June quarter, much lower than Wall Street’s expectations of 14 million. Apple had sold 14.6 million iPads in the June quarter of last year. This means that unit sales declined by about 9%. Apple mentioned that the main reason for the decline in iPad sales was channel inventory changes. Plus, iPad sales declined quite a bit in mature markets but were partially offset by healthy growth in emerging markets.
Another factor that’s causing iPad sales to decline is the softness in the overall tablet market. Let’s analyze why that’s happening.
Why the overall tablet market is showing slow growth
According to a report from IDC, the overall tablet market increased by only 11% in the second quarter of 2014 compared with the second quarter of 2013. The tablet market declined by 1.5% sequentially. The main reason for this decline is the increasing popularity of smartphones with bigger screen sizes, which makes smaller-sized tablets almost redundant. Bigger-sized smartphones also help people avoid carrying two devices with them. Another reason for the slow tablet market growth is that tablets have a higher shelf life, which means they don’t need to be replaced frequently.
Consumers usually replace smartphones due to contracts with telecommunications providers, especially in developed markets such as the U.S. You can buy an iPhone from Verizon (VZ) or AT&T at a highly subsidized price with a two-year contract. Once the contract expires, you need to replace your smartphone with the latest model and, once again, enter into a contract. This helps mobile vendors increase their sales as well. But the tablet market works differently. There are no contracts with tablets. So, consumers are free to use their device as long as possible. This leads to a higher replacement cycle for tablets than smartphones.
iPad’s web traffic is huge
Although Apple has lost share in the tablet market, a Chitika report suggests that 81% of web traffic use on tablets in North America comes from iPads. Amazon (AMZN) and Samsung each have market share of less than 7%, while Google (GOOGL) and Microsoft (MSFT) each have market share of less than 2%. This shows that although people are buying fewer iPads, they’re using them a lot more. This high web traffic helps Apple generate more revenue not only from application downloads, but also from higher mobile web-advertising income.