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Sunday, May 04, 2014, 11:42 am PT (02:42 pm ET)

Apple's iPad business isn't collapsing, but the rest of the tablet industry sure is

When Apple announced its most recent quarterly earnings, the worst news out of Cupertino was that sales of iPads weren't greater than in the year-ago quarter, a fact that a few pundits have now jumped on to declare that "Apple's iPad Businesses Is Collapsing." That's wrong, here's why.

BSInsider


Ships that leak from the top



There's no way to spin facts to suggest that Apple didn't sell fewer iPads in the first calendar quarter of 2014 (Apple's fiscal Q2) compared to the year-ago quarter. Apple, the only tablet maker to report its actual tablet sales, volunteered the data showing that it shipped 3.1 million fewer devices in the March quarter.

Apple's chief executive Tim Cook did try to ameliorate the news by pointing out that, accounting for shifting inventory levels compared to the previous year, iPad sales were only down by about 3 percent, or essentially flat.

"iPad sales came in at the high end of our expectations," Cook told analysts, "but we realized they were below analyst estimates, and I would like to proactively address why we think there was a difference. We believe almost all of the difference can be explained by two factors. First, in the March quarter last year, we significantly increased iPad channel inventory, while this year we significantly reduced it.

"Second, we ended the December quarter last year with a substantial backlog with iPad mini that was subsequently shipped in the March quarter, whereas we ended the December quarter this year near supply demand balance."

Apple's corporate controller Luca Maestri backed up Cook's statement with details showing that Apple had sold more iPads to users (17.5 million) in Q2 than it had shipped into its global inventory channel (16.4 million), leaving the channel depleted by 1.1 million units compared to the beginning of the quarter.

That's the opposite of Samsung's "quite smooth" tablet report from 2010, when it claimed to have shipped impressive millions of tablets, achieved by only counting inventory "sell in" in order to obscure the fact that Samsung had actually seen no significant sales to users at all.

IDC, the same research firm that fell hook, line and sinker for Samsung's accounting back then, was similarly confused (perhaps willfully?) by the impact of inventory shifts on global shipments and sales in the most recent quarter.

Forget that Media Tablet nonsense; Windows netbooks are now tablets!



In addition to carrying on its schtick of being perpetually bamboozled by the difference between product sales and "inventory shipments," IDC has also introduced an entirely new accounting trick in its "Worldwide Quarterly Tablet Tracker" figures.

Like last year's accounting innovation of dumping kid's tablets and toys into its total figures in order to minimize record sales of iPads and portray Apple's "share" of the "market" as diminishing, IDC is now categorizing Windows 8.1 "2-in-1" netbooks as part of its tablet figures.



This is a reversal of its original "Media Tablet" shenanigans from the early days of iPads, when IDC, Gartner and others all suddenly decided to silo tablets that don't run Windows in their own product category rather than including them in PC sales—after years of including Windows netbooks and tablets in its PC figures, a tactic that helped to marginalize Mac market share.

Separating iPads from PCs helped prevent anyone from observing the troubling trend that IDC was most certainly aware of early on: iPads were indeed competing directly with conventional PCs, and they were increasingly winning over buyers, a trend that is today simply impossible to ignore. IDC didn't want anyone to know that, and hid the trend for as long as it possibly could. It simply can't hide that fact anymore.

So now IDC has reversed course and is including anything it possibly can in its definition of "tablet." Last year it was toys, and this year the emphasis is being placed on netbook-hybrids like the Asus T100 (below), an x86 notebook running the desktop version of Windows 8.1.

Asus T100


That's the very same kind of product that IDC and others once stridently argued were nothing like the iPad and other "Media Tablets" because Apple's iOS and Windows were so drastically different that they could not possibly be compared within the same market.

In the words of IDC-2011, any mobile products using "full PC operating systems," or in other words, Microsoft Windows, were not Media Tablets. The company expected Apple's iPad to compete only against products like Samsung's Galaxy Tab, predicting, "Media tablet market growth is expected to accelerate significantly in 1Q11 with new products from multiple high-profile device vendors, including Motorola's Xoom, based on Android 3.0 (Honeycomb), and RIM's BlackBerry PlayBook based on BlackBerry Tablet OS."

Instead of that happening, Google's Honeycomb, Motorola's Xoom and BlackBerry PlayBook all flopped along with Samsung's Tab. Just weeks after IDC's press release, Apple's Steve Jobs launched iPad 2, noting that the original iPad had sold over 15 million units, more than all the Windows Tablet PCs that had been sold over the previous decade. And it was clear users were buying iPads in place of PCs.



Unlike the eviscerating assault on PCs delivered by the millions of iPads that Apple sold in its first year, IDC's modern decision to dump Windows netbooks into its tablet figures isn't based on some new surge in netbook interest or an attempt to draw attention to a new popular trend toward "2-in-1" devices.

As noted by Jitesh Ubrani, IDC's Research Analyst cited in the firm's Worldwide Quarterly Tablet Tracker press release, "although its share of the market remains small, Windows devices continue to gain traction thanks to sleeper hits like the Asus T100, whose low cost and 2-in-1 form factor appeal to those looking for something that's 'good enough'."

By "gain traction," Ubrani can't possibly be referring to the Asus shipments he cited, because they decreased over the year-ago quarter from 2.6 million to 2.5 million, at least in the chart (above) that appeared next to those words in the press release. That's not "gaining traction," it's retracting gains.

Pay no attention to those figures behind the currents!



If you find the cognitive dissonance within IDC's own press release to be troubling, let's turn up the uncomfortable dial by looking at what IDC reported a year ago. Prepare yourself, because it's not the same as what IDC is now reporting that it reported a year ago.

IDC's Q1 2013 tablet shipments for Asus announced in May 2013 were 2.7 million (below). The very vendor that IDC is highlighting as having a "sleeper hit" is not only experiencing a decrease in shipments, but is decreasing faster than IDC is currently reporting it did.

That's not only bad news for Asus, but also for Microsoft and Google, because Asus is the manufacturer of both Google's Nexus 7 and the "sleeper hit" of the Windows 8.1 tablet/netbook world. And its total year over year tablet sales are not only flat, but tiny, even when you lump netbooks in to thumb the scales against iPad.

Asus isn't the only tablet vendor for which IDC retroactively recalculated its historical figures; Samsung was also reported to have sold 8.8 million tablets in Q1 2013 last year (below), but only 8.5 million tablets in this year's version of IDC's Q1 2013 numbers (above).



That's an "oops" big enough to give every female in Portland, Oregon a Samsung tablet, and then take them all back a year later. Even on sale, that would amount to $129 million worth of missing Galaxy Tab 10.1 units, or more than Judge Lucy Koh's jury determined Samsung should pay for appropriating Apple Data Detectors.

IDC's total tablet shipments for Q1 2013 were also retroactively lowered this year, from the original 49.2 million figure to 48.6 million this year. It's certainly possible that IDC, after consulting with its clients over the past year, has simply collected enough new information to determine that its year-ago shipment figures attributed to them were simply too high. However, IDC didn't have to adjust the estimated historical shipment numbers for the rest of the entire tablet and netbook industry; that number remained fixed at 15.5 million.

Of course, IDC's tablet numbers for Apple stayed the same because IDC doesn't have the creative license to reestimate them, given that Apple comes out and plainly reports how many were actually shipped (although that didn't stop Gartner). However, IDC's portrayal of Apple's year-ago tablet "market share" retroactively went up this year because of those disappearing Asus and Samsung tablets, making it look like Apple's share dropped faster year over year than even IDC's estimated numbers suggest. There is no statistic that IDC won't torture to draw attention to anything and everything other than the iPad.

Since the appearance of Apple's iPad, IDC has proven its ability change the definition of tablet back and forth, report inflated figures for Apple's competitors in order to create unflattering market share comparisons, then deflate those same numbers a year later to create unflattering growth comparisons. There is no statistic that IDC won't torture to draw attention to anything and everything other than the iPad.

And at no point does IDC (or the other firms that do the same thing, including Gartner and Strategy Analytics) ever draw attention to the number-play it uses to coax out its widely advertised analysis of the state of the tablet market. Nor does the tech media seem interested, curious or critical enough to investigate any of the claims or conclusions that these firms make.

Is Apple close to losing its dominance in tablet sales?



Jim Edwards, impressed by IDC's numerology, boldly stated to his Business Insider audience that "iPad sales today have declined to the level they were three years ago."

Three years ago, Apple sold 4.69 million iPads in Q2, so Edwards' statement is literally wrong. The 16.35 million iPads Apple delivered in its most recent Q2 is over 348 percent higher than three years ago. That's not a decline, any more than Asus selling fewer tablets and netbooks is an example of Windows devices "gaining traction."

But what about Samsung, which in IDC's estimates is now shipping 22.3 percent of the world's tablet inventory, compared to "only" 32.5 percent attributed to Apple? According to IDC's latest version of its figures, Apple's market share is dropping and Samsung's is increasing, causing Edwards to conclude that "Samsung is literally taking Apple's customers."

The key to understanding why this statement is also completely bonkers is to look at the definition of "customer," which involves a concept suspiciously missing from both IDC's figures and their blindly faithful regurgitation by a site that puzzlingly calls itself Business Insider: money.

Apple is not only the sole company to report unit sales of tablets; it's also the only company that reports its tablet revenue. It just reported having delivered 16.35 million iPads and collecting $7.61 billion dollars from iPad sales in fiscal Q2. Apple is not only the sole company to report unit sales of tablets; it's also the only company that reports its tablet revenue

Both figures are lower than the year-ago quarter, but unit sales were down more than revenues because, as Apple notes in its 10Q filing, "iPad ASPs [Average Selling Prices] increased approximately 4% during the second quarter of 2014 compared to the second quarter of 2013 primarily as a result of a shift in mix towards iPad mini with Retina display and iPad Air."

As Apple raised its iPad ASPs by embellishing its product offerings, its sales to end users remained flat as its inventories depleted, creating shipment figures that appeared to be down by 16 percent. In reality, Apple's iPad shipments and revenues essentially remained flat compared to the previous year.

At the same time, Mac sales were up 5 percent and iPhones were up 17 percent, so overall Apple earned over $1 billion more than in the year-ago quarter, despite spending more on employee compensation, strategic acquisitions, increased research and development and other investments.

Rather than collapsing, Apple's iPad business is refusing to collapse, even in the face of broad availability of much cheaper Android devices first launched years ago. Apple isn't in panic mode or it would be scrambling to introduce cheaper tablets, rather than fancier ones with higher price points supported by demand so great that it increased iPad ASPs over the previous year.

It would be hard to imagine a definition for "dominating" a market segment that is more powerful than Apple's top selling, price insensitive iPad standing on the face of a variety of alternatives that sell for a fraction of the cost.

Even IDC has to admit that Samsung's best shot at "selling" tablets amounts to giving them away, remarking that "Samsung continues to work aggressively with carriers to drive tablet shipments through attractively priced smartphone bundles."

Free Galaxy Tab vs Nexus 7


Samsung's signs of collapse



If Samsung were "literally taking Apple's customers," one would expect to see even better performance from that company, but Samsung Mobile (the unit that makes its phones, tablets and PCs) reported revenues that were down by $786 million (810 billion KRW) from its year-ago quarter. Its profits were down, too, by more than $77 million over the year-ago quarter.

However, Samsung's device shipments were up dramatically. According to IDC, Samsung pushed out 15.3 million more smartphones and 2.7 million more tablets in Q1 2014 compared to its latest version of shipment estimates for Samsung one year ago.

Strategy Analytics estimated that Samsung shipped nearly 20 million more smartphones than in the year-ago quarter, illustrating how absurd these marketing companies' various "estimates" are.

As for Samsung tablet estimates, Strategy Analytics wants $6999 for its report, offering for free only its line that "Apple iPad shipments were below expectations and iOS lost market share."

SA $6999


By anyone's estimates, while Apple's revenues from tablets came in solidly flat with a minor increase in ASPs, Samsung's smartphone and tablet ASPs were plummeting along with its revenues, taking down profits along with it. That sounds like the definition of "collapse."

And unlike Apple's increasing Mac and surging iPhone sales, Samsung doesn't have the profitable PC, netbook or premium smartphone sales to offset the fact that it is producing many millions of additional mobile products and bringing in less revenues and lower profits to show for it.

How will Samsung turn this around: by raising prices? By increasing the sophistication of its products? It tried to do that with the Galaxy S4 last year, but in that arena its premium sales remained flat as its customer base flocked toward cheaper devices that make no money.

Imagine clocking the overtime to build 32 percent more tablets and 22 percent more smartphones, but getting paid less. How long would you keep that job?

Now imagine how the rest of the tablet industry is coping with the world's second largest tablet producer dumping millions of its products into market for free. In the ad above, even Google's price-slashed AdWords promotion for Nexus 7 looks expensive when compared against the free Galaxy Tab 3.

Asus/Google Nexus 7, Amazon Kindle & Microsoft Surface tablets are also collapsing



Last May, IDC was praising the "350 percent" tablet growth by third place Asus, which it said "continued to see decent tablet shipment demand from the highly marketed Nexus 7 device," and "157 percent" tablet growth at Amazon, along with some cautious optimism for Microsoft's Surface.

One year later, IDC has not only retroactively toned down its "decent" view of Asus tablet shipments from last year (as noted above), but reported that Asus shipments in the most recent quarter were down even more. Asus just reported a 3 percent drop in net profits for the quarter compared to the year-ago quarter. Despite boasting a low price and ubiquitous (but apparently ineffectual) promotion through AdWords, Google's "highly marketed," Asus-built Nexus 7 not only failed to earn a profit, but failed to grow its shipments at all.

Despite boasting a low price and ubiquitous (but apparently ineffectual) promotion through AdWords, Google's "highly marketed," Asus-built Nexus 7 not only failed to earn a profit, but failed to grow its shipments at all. Or you might say "collapsed."

Amazon's Kindle Fire tablets similarly boasted a price advantage, but that wasn't enough to sustain its 1.8 million shipments from the year-ago quarter, when its Fire sales were a tenth the size of Apple's. Rather than remaining flat like Apple's iPad, IDC says Amazon's sales have dropped to 1.0 million. Or you might say, "collapsed."

Microsoft's Surface was estimated by IDC to have shipped 0.9 million devices in the year-ago quarter, but we now know from Microsoft's financial statements that the company has only continued to lose millions of dollars while sales haven't improved. With Microsoft now focused on delivering its best version of Office apps for iPad first, you might say the company's optimism for Surface ever selling at all has "collapsed."

The rest of the world's tablet producers, according to IDC, are made up of companies with fewer than 1 million shipments each. They have collectively increased their shipments by 11.5 percent, or perhaps have been joined by additional newcomers each producing smaller tablet runs than Amazon or Microsoft. Last year, IDC claimed that this group of "Other" had seen its shipments increase by a whopping 216.3 percent over Q1 2012, so this batch of tablet vendors, literally everyone else in the tablet business, has also seen its growth, well, "collapse."

other tablets


Apple continues to see tablets taking over PCs



Given that everyone else's tablet shipments are far smaller than Apple's, losing lots of money and seeing their historical growth rates plummet (even as IDC downgrades its estimates of what it previously reported as tablet growth), it now makes sense why Apple's executives are expressing confidence about the future of tablets and the iPad's role within the overall tablet market. "We continue to believe that the tablet market will surpass the PC market in size within the next few years," Cook told analysts last week, adding, "and we believe that Apple will be a major beneficiary of this trend." - Tim Cook

"We continue to believe that the tablet market will surpass the PC market in size within the next few years," Cook told analysts last week, adding, "and we believe that Apple will be a major beneficiary of this trend."

At the same time, while iPads are having a clearly erosive effect on the overall growth of conventional PCs, Apple also reported new growth in Macs.

Were Apple desperately afraid of the impact that lower margin, lower priced iPads might have on its Mac line, you might expect the company to widely differentiate iPads from MacBooks in price.

Instead, Apple just dropped its popular MacBook Air line by $100, leaving a price overlap between high-end iPads and low-end MacBook Airs. That suggests even more confidence at Apple that both of its product lines compete more with existing PCs than with each other.

The opposite of "collapse" might be "solidify into a powerful foundation"



The examples of iPad adoption cited by Apple's corporate controller Maestri also indicate that iPads are finding new customers in new use cases. Maestri said, "thousands of iPads are used at FedEx everyday. In an industry where efficiency is critical FedEx pilots and maintenance crews around the world use iPad to transform operational processes and save the company millions of dollars."

Maestri also drew attention to the U.S. Department of Veterans Affairs, which he said was "on its way to deploying iPads to 11,000 providers to transform the way doctors and patients interact. As part of this initiative, a suite of applications is being developed to allow quick access to real-time secure medical information."

Neither of those tasks would be served by existing Macs. Maestri also cited an example of iPads eating up office PCs, stating that "Eli Lilly has deployed over 20,000 iPads and 50 internal apps as part of a laptop replacement program that dramatically increased the productivity and capabilities of its employees."

Eli Lilly iPad app


Those three examples amount to only a fraction of a million iPads, but they represent an invasion by Apple into corporate and government markets that other tablet makers will have little hope to counter once iPads are established and those organizations standardize on custom iOS development.

Tablets are not smartphones



iPads are not like smartphones; they aren't tied to two year contracts, and in many corporate settings will be able to remain in functional use for much longer, with a replacement cycle closer to conventional PCs. They aren't "personal" in the sense of being tied to a single user's phone number, so companies and schools can buy fleets of iPads and assign and reassign them to employees or students as needed.

Further, iPads are fulfilling entirely new roles (from electronics flight bags to sales kiosks to merchandizing), not just replacing less capable, existing devices as iPhone did. iPads are therefore not going to see the same type of growth rates that iPhone did.

However, the simple fact that Apple sold over $7.5 billion worth of tablets in one of its historically slowest quarters within a "tablet market" where every other vendor has been completely unable to even approach Apple's tablet volumes at any price—even those like Amazon, Samsung, Google and Microsoft who are willing to lose millions of dollars just to buy fractional increases in market share—should embarrass the pants off of clickbait pundits and market researchers who continue to peddle a ridiculous story that Apple is in some sort of tablet trouble.