When Apple released their Q1 earnings in late April, they reported sales of iPads were down substantially over last year’s same quarter. Apple CEO Tim Cook stated part of the reason for a decline in iPad demand this year is, in Q1 of 2013, there was pent-up demand for the iPad mini and a backlog from the holiday quarter that got filled during this period. He went on to say while they did not sell as many as the financial analysts had projected during the last quarter, Apple was happy with their unit sales that met their own internal predictions.
But something is going on in the market for tablets that suggests our love affair with them may have cooled down — or at least the market for tablets has started to mature. Of course, Apple faced serious competition in 2013 from competitors like Google, Samsung, Amazon and many others who followed in Apple’s footsteps and created very competitive products in the seven and ten inch range of tablets. In many cases, these were cheaper than Apple’s iPad line. The competition in tablets contributed to the overall market for tablets growing but it also impacted demand for iPads.
There seems to be three key dynamics now shaping the future of tablets. The first is in mature markets, where tablets have now been shipping since 2010, the consumer audience has figured out what a tablet can do and the need to refresh them yearly or even semiannually no longer drives their thinking. Indeed, we are already seeing people with 2 and 3 year old iPads or similar products that are very happy with what they have and it would take a dramatic new design or new features to get them to buy new models.
Another thing we are seeing is most folks have figured out tablets are highly shareable devices. This is especially true in families. Although there are a some families where each person has a tablet of their own, many homes have one or two that are shared among the family. They too seem to be holding on to them and not in a great hurry to upgrade. But there is one other dynamic coming up in our research that is interesting. While tablets at first were exciting to many, it turns out their smartphones really sit at the center of their digital universe. As screens on smartphones have been getting larger, they find they can do pretty much what they need or want to do on a tablet on their smartphones. Now screens that are five inches to six inches meet a lot of their tablet needs.
This doesn’t necessarily mean they won’t buy a tablet too but they seem to be scaling back on how much they are willing to pay for a new tablet. Or, instead of upgrading to multiple tablets for the home, they just buy one top notch brand and share it. It also seems the tablet market has matured in developed markets faster than many expected and are starting to develop more traditional refresh cycles. While PCs are now refreshed every four to five years, it is not clear what the refresh cycle is for tablets. Our research suggests it is every two years but we are also seeing many keeping current tablets longer than that before upgrading.
While consumer demand for tablets has seemed to stabilize or flatten out in developed markets, the second dynamic and a bright spot is businesses and enterprises have finally figured out how tablets can fit into their IT program and we are seeing a real upswing for tablets in these markets. What is interesting is in this market, while somewhat price conscience, IT managers do not buy cheap tablets. In fact, their pricing sweet spot for tablets hovers around $600-$800. They also tend to buy the larger 9-10” tablets and are using them for all types of business applications. This is very good for Apple since today they own the tablet market and ultimately pricier tablets help their overall bottom line. And the recent news Apple and IBM will partner to bring iOS devices to the enterprise can only help Apple gain broader acceptance, especially with the iPad in IT. However, the IT market for tablets will become more competitive as Microsoft and Samsung bulk up their business class tablets. They have no interest in letting Apple own this market without a fight.
The third dynamic shaping the future of tablets is happening in emerging markets. In these markets, the smartphone rules the digital world. However, in most of these markets smartphones have been low end models with not a lot of features and, in many cases, small screens. Two things are happening in these markets that suggest the real growth, especially in consumer tablets, may be with tablets in the 6-7” range. What we have found is in emerging markets low end smartphones have actually introduced many to the world of computing. Once they buy a smartphone, they begin to realize what it can do and for many they find they want it to do more. Five years ago, that would have perhaps meant an interest in something like a small, cheap laptop. Now it means they most likely will graduate to a tablet instead. It is true cheap tablets have been big hits in emerging markets since most were in the $79 to $99 USD range. But they were cheaply made and at best served more like a portable media player for most. Most have stopped working or been put aside as useless beyond simple media consumption.
Now we are seeing real interest for tablets in emerging markets that deliver more processing power and a bigger screen that lets consumers do more. They are willing to buy tablets in the $129-$199 price range. They will never use a laptop or have to use mouse. Instead, this generation of users will be driven by touch input and, potentially, things like gestures and voice will become their UI. This is a big deal. For them, their window to the world of real computing could come through tablets. For many, this could be the only device they will use if they should want to do things that include productivity beyond their consumer consumption needs.
The other product they could buy that would impact tablet growth in emerging markets is just a larger smartphone that is coming down in price and becoming more affordable in these markets. Known as “phablets” they are are 5.5″ or 6″ in size and, since a lot of consumers overall don’t use smartphones or tablets for productivity, these phablets could be all they ever need.
I doubt our love affair with tablets is actually over. In some markets, it has just matured and for many in emerging markets it will become sort of a PC. But it does seem the meteoric rise of tablets over the last three years is over and we will probably just get to the point where tablets will sell around 350+ million per year steadily in the future.