iPad's $5.9 billion quarterly "lull"
Over the last quarter, Apple brought in $5.9 billion from iPad sales. That's more money than Amazon, Microsoft and Google can attribute to their sales of tablets, ever. However, Apple sold fewer iPads than it had in the year-ago quarter, its second quarterly drop from last year's figures.
In the March quarter, Apple sold 3.1 million (16.1 percent) fewer tablets year-over-year (slipping from 19.5 million to 16.4 million), and in the June quarter iPads were again down, by 9.3 percent (slipping 1.3 million units from 14.6 million to 13.3 million).
According to IDC, the rest of the global tablet market grew over both of those two quarters, albeit only by 3.9 percent (less than two million new units overall) in the March quarter and then 11 percent (less than five million new tablets sold) for the quarter ending in June. In the U.S. and in Western Europe, where Apple appears to sell most of its iPads, IDC noted that overall tablet demand had declined during the quarter, with the U.S. market specifically down 5 percent.
The back-to-back "bad news" for iPad was accompanied by IDC slashing the tablet "quarterly market share" it apportions to Apple down to nearly 25 percent of global "tablet shipments," enabling websites along the lines of Business Insider to depict a purported collapse in iPad "share" using IDC's statistics (above).
IDC's flexible tablet numbers
One very troubling problem with IDC's statistics is that after the company publishes its estimates on the tablet market, it revises them after the fact. There's only one company's tablet numbers that don't ever change: Apple's. That's because IDC (like other research groups) constructs its tablet estimates around Apple's iPad figures, the only sales data that is ever reported publicly.
In May, for example, IDC's tablet estimates for Q1 2014 were compared against a year ago quarter where Samsung was estimated to have shipped 8.5 million tablets. A year ago, however, IDC reported that Samsung had shipped 8.8 million tablets in Q2 2013. That's a statistical "oops" that in terms of $349 Galaxy Tabs would have incinerated about $105 million worth of "lost" tablets.
Similarly, if IDC hadn't retroactively erased (below) 1.1 million "other" tablets it had counted (above) in Q2 2013 (reducing the output of "others" from 17.5 million to 16.4 million), it would be reporting that "others" tablet shipments grew by 25 percent rather than by more than 33 percent. Without such shifting numbers, IDC's current assessment of 11 percent global tablet growth would fall by 18 percent.
These types of vast, multi million dollar shifts that occur in IDC's estimated tablet shipment figures strongly suggest not only that IDC isn't very confident in its ability to estimate shipments, but also that its estimates are penciled in to arrive at a desired conclusion, rather than being hard data worth drawing significant conclusions from.
This harmonizes with comments made by a former IDC analyst who described the process of market estimates to Philip Elmer-DeWitt of Fortune as being a "sausage-making process" driven by the mantra "preserve the growth rates; to hell with the actual numbers."
Tellingly, he added, "the fudge is in the 'others' category, which is used as a plug to make the numbers work out."
It appears that various market research firms are fudging the tablet shipments attributed to "others" entirely to create an illusion that iPads shipments are lower than they should be, because no significant numbers of legitimate tablet sales can actually be attributed to any real company.
IDC's statistics also appear to intentionally obscure important, relevant context. First: Apple's iPad sales are more cyclical than its competitors.
Second: the rest of the tablet market is performing very poorly and largely offers products that do not directly compete with the iPads Apple is selling.
Third: Apple has a long term strategy that isn't simply targeting shipment volumes in an effort to impress the same tech pundits and market researchers who thought netbooks were going to have a lasting impact on the PC industry.
First: Apple's cyclical iOS sales
Notably absent in the handwringing (or more accurately, Schadenfreude) about Apple's iPad "collapse" as reported by market "research" and "insider" groups is any recognition of the fact that Apple sells most of its tablets in the winter holiday quarter. This is not a new phenomenon. Apple has long sold far more iPods and iPhones in the winter quarter, too.
Recall that Apple's critics used to pounce upon the company's cyclically slower iPhone sales in the spring or summer as if the company's low period were evidence of an impending mass migration to Android (and before Android, Symbian or Java Mobile). That line of attack has been pinched off as Apple's iPhone sales remained high this entire year even during the company's historically slow season, thanks to broader distribution--particularly in China--that has helped smooth out the Western holiday cycle.
iPad sales remain highly cyclical, but buying patterns are changing as Apple builds its presence in China and other developing nations, introducing iPads and Macs to new audiences behind the iPhone.
Apple sold 26 million iPads in the December quarter, an increase of 13.5 percent (3.1 million additional units) over its previous record holiday sales quarter. If rather than fixating on Apple's slow quarters, you instead step back and look at the last annual cycle of four quarters, Apple sold 69.7 iPads, compared to 71 million iPads over the previous four quarters.
That's a difference of 1.3 million fewer units compared to the previous year, or effectively a rounding error when considering that Apple maintains 4-6 weeks of inventory, and that Apple has consistently sold on average 1.3 million iPads per week over the last year, and that it ended the last quarter with a half-million unit reduction in iPad inventory. While Apple's iPad sales are not growing globally over its year-ago sales, iPads are flat, not contracting and certainly not "collapsing."
Second: Tablet competition failing to materialize
It's actually pretty remarkable that Apple's sales are not "collapsing," given that Samsung has long been liberally giving away its tablets while others in the tablet industry (notably Amazon, Google/Motorola and Microsoft) have actively lost lots of money from their tablet adventures, without selling enough devices to even appear in IDC's top five vendors for the quarter. That's a pretty low bar considering that Asus brings up the rear with shipments of just 1 million units.
Again: fifth place Acer and at least 22 "other" tablet vendors who collectively make up over 46 percent of the global supply that IDC counts as "tablets" are ostensibly being sold by companies who sell fewer tablets in three months than Apple sells in its average week.
Over 46 percent of the global supply that IDC counts as "tablets" are ostensibly being sold by companies who sell fewer tablets in three months than Apple sells in its average week
Without any real tablet competitor left to draw attention to--and Samsung has definitely failed in that regard, even when ignoring profits and only looking at unit shipments--IDC is again forced to pit Apple against the collective tablet shipments of the rest of the world, where "other" is a bunch of unnamed companies whose production is impossible to verify because none of these companies announce figures for how many tablets they are selling.
Also, note the contrast between IDC's global tablet focus and its (factually incorrect) U.S.-only portrayal of Macs. An interesting selection of data to call attention to, to say the least.
While Apple would obviously like to see its iPad sales grow, the fact that iPad sales are not slipping in the face of desperate, money losing competitors literally dumping their products in the market is not the only remarkable bit of data that market researchers are distracting attention away from.
Third: Apple building iPad as a new business
iPad clearly achieved the "third platform" goal that Apple's Steve Jobs described for the new tablet almost five years ago. Rather than an unsustainable bubble of hyper-growth that Acer's netbooks achieved in 2009 at the painful expense of eating into conventional PC sales and profit margins, Apple's iPad has grown into a business larger in both units and revenues than the Mac.
And rather than cannibalizing its Mac sales to achieve this, iPads appear to have helped Apple to expand its Mac sales via a halo effect, attracting new customers to OS X via iOS, a practice Apple is doubling down on with new Continuity features in its upcoming OS releases.
If Apple had to choose between growing its Mac or iPad sales, the most ideal scenario would be to maintain iPad sales at their current high rate (greater than the next three tablet makers' reported shipments combined) while seeing Mac sales grow by a significant amount. That is exactly what happened in this quarter. Global Mac sales were up 13 percent, nearly tying up Mac ($5.5 billion) and iPad ($5.9 billion) sales in terms of revenue.
The way Acer achieved its temporary surge in netbook sales back in 2008 was to slash prices and deliver a poor quality product very cheaply. That strategy gained standing applause from many pundits, but it did not work well long term. Apple could, like Acer, blow out cheap iPad models that turn people off to the whole idea of buying a tablet ever again.
Instead, Apple is selling as many high quality tablets as it can, a strategy that has made it by far the world's largest maker of tablets (as well as the only significantly profitable tablet vendor) and given it a new product category that sells alongside Macs without suffering any significantly apparent cannibalization.
Half of iPads sold to new buyers
Speaking of iPad as "the category that we created," Apple's chief executive Tim Cook noted during the quarter's conference call that in "a little over four years, we have now sold 225 million iPads, which is I think probably a larger number than anyone would have predicted at the time and including ourselves, quite frankly."
"We still feel that category as a whole is in its early days and that there is also significant innovation that can be brought to the iPad and we plan on doing that" - Tim Cook
He added, "we still feel that category as a whole is in its early days and that there is also significant innovation that can be brought to the iPad and we plan on doing that.
"When I look at the top level numbers, I get really excited when I see that more than 50% of the iPads that we're selling are going to someone who is a first time tablet buyer. I get excited when I see that our retail share according to NPD in the month of June was 59% of units and over 70% in terms of dollars. And of course, Luca has mentioned in his preamble that our education share is 85%."
Unlike Acer's netbooks, Apple created a product people will want to buy again, even if they don't plan to repurchase every new iPad model each year. Apple is not only lining up repeat iPad customers, but it is maintaining its current pace of sales by selling half of its iPads to new buyers.
Media handwringing about "longer replacement cycles" for tablets seem to miss the fact that Apple managed to sell more than 6.6 million iPads to new tablet buyers in a cyclically slow quarter. Apple's new iPad buyers alone outnumbered the total tablet buyers IDC estimated for Lenovo, Asus and Acer. And of course, Apple sold another 6.6 million iPads to its repeat buyers in the quarter, along with 4.4 million Macs.
That explains why Cook also said that "iPad sales met our expectations but we realized they didn't meet many of yours," an allusion to the perpetual growth percentages that analyst dream up without really articulating how such rosy numbers could possibly be achieved without causing unintended side effects, ranging from giving up dollar share in the market, to destroying Mac sales, to erasing any demand for Apple's tablets in the future.
Were Apple being run by analyst-pleasing salesmen, short term demands for ever faster growth might likely have the same detrimental impact on the company's long term viability just as it did with Acer's netbooks, with the Android 2.x tablets Samsung rushed to market in 2010, and with the Old Apple's Performas and Mac Clones back in the 1990s.
Long term Apple vs Short term Google
That same kind of short term thinking is apparent in Google's more recent efforts to dump its super cheap Asus-built Nexus 7 tablets onto the market in a bid to "grab market share."
Google not only failed to create substantial short term sales and a sustainable long term tablet hardware business, but also demonstrated how little value there is in Google web ads, which heavily promoted the Nexus 7 throughout the holiday season without moving the needle on sales enough to notice in IDC's data.
In stark contrast, Apple has promoted sustainable, organic growth in iPad sales from multiple directions, including the carefully considered creation of a new mobile computing platform relevant not only for consumers watching movies or browsing the web, but also for retail, government, education and corporate markets.
Cook noted that Apple's iPad is represented in "virtually all Fortune 500 companies--we are in 99% of them to be exact--and 93% of the Global 500. However, when we dig into the business market deeper, though our market share in the U.S., in the commercial sector is at 76% -- this is according to IDC; the penetration in business is low. It's only 20%. And to put that in some kind of context, if you looked at penetration of notebooks in business, it would be over 60%. And so we think that there is a substantial upside in business. And this was one of the thinkings behind the partnership with IBM that we announced last week."
Those comments expose Apple's intent to continue building a long term, sustainable iPad business, rather than simply shipping inventory to stores in the hopes that something will stick. Really, while Google's Android partners led by Samsung furiously throw their tablet spaghetti at every wall, Apple is heaping all of its iPad pasta on plates and delivering it to appreciative, paying customers who will be back to visit again. That's just a smarter way to run a restaurant.
If iPad sales are flat, where is tablet growth coming from?
If you review IDC's figures over the past four quarters, a series of false hopes spring out as would-be iPad killers before collapsing, forgotten. Last October, IDC was touting Samsung's 123 percent growth, Acer's 346 percent growth, and Lenovo's smoking 420 percent growth in tablets. Those impressive numerical increases rapidly began to peter out over the next few quarters.
Instead of ever surpassing Apple (as commodity producers did in PCs and in smartphones), the combined shipments of the top three tablet vendors behind the iPad amount to fewer tablets than Apple on both a quarterly and annual basis. As AppleInsider previously observed, Apple's tablet sales are maintaining peak sales levels while all of Apple's recognizable tablet competitors are either failing to catch up (Samsung, Asus, and Lenovo) or falling off the charts entirely (Microsoft Surface, Google/Motorola, Amazon Kindle Fire).
Over the last quarter, IDC says Samsung's tablet shipments have also flattened out, but at a level that's just 60 percent of what Apple is selling in its lowest quarter. Unlike Apple, Samsung doesn't release one or two annual new tablet models, but instead offers a steady stream of scores of different tablet options throughout the year. Given that Samsung sells more than twice the number of smartphones than Apple while earning less than half as much, Samsung's flatlining tablet sales, despite all the free offers, indicate Samsung isn't earning very much at all from tablets.
In the most recent quarter, IDC had to resort to padding "other" shipments in order to achieve negative market share shift for Apple. As the firm's Worldwide Quarterly Tablet Tracker Research Analyst Jitesh Ubrani explained, "Until recently, Apple, and to a lesser extent Samsung, have been sitting at the top of the market, minimally impacted by the progress from competitors. Now we are seeing growth amongst the smaller vendors and a levelling of shares across more vendors as the market enters a new phase."
In other words, there are no recognizable competitors IDC can legitimately compare against Apple in a favorable light, so it must now statistically invent dozens of small firms that ship tiny batches of devices that can charitably be defined as "tablets." According to IDC's latest numbers, 44.4 percent of "tablet market shipments" are now being credited to firms smaller than Acer, which shipped an IDC-estimated 1 million tablets.
Again: in order to "estimate" that global tablet sales were up 11 percent in the June quarter, IDC had to credit "other," a series of at least 22 firms--each smaller than Acer-- that each shipped less than one million tablets in the quarter.
It's almost as if the USSR had collapsed and the military industrial complex tasked with perpetuating military sales had to invent a new kind of guerrilla enemy that fights without a flag just to keep threat levels raised high enough to support a blank check budget for war, except that in the tablet market there is no actual Al Qaeda. Nobody is actually selling threateningly large numbers of tablets, and absolutely nobody apart from Apple is earning any significant profits from their tablet sales. Apple, on the other hand, brought in $5.9 billion from iPad sales in just the last quarter.
Bad news for iPad doubters
Apple's ability to make tons of money from its iPad sales--while outselling its next three competitors combined--is a daunting problem for research firms tasked with creating numbers that denigrate and marginalize the iPad. In the smartphone and conventional PC markets, Apple has always held minority market share in terms of units shipped but has consistently earned the lion's share of the profits in each industry.
In tablets, Apple is not only taking the profits but is leading in shipment figures so decisively that IDC can't point to any other specific company as a worthy competitor. Even when mentioning Samsung, Ubrani was forced to qualify the Korean conglomerate's participation in the tablet industry as being "to a lessor extent" than Apple because Samsung can't even give away tablets at a rate approaching Apple's iPad sales.
Further--as is the case with smartphones and conventional PCs--IDC's estimated "shipments" of tablets don't--by themselves--provide much information about what sort of devices are being counted. IDC's Ryan Reith noted to AppleInsider last year that the firm began counting devices that were really "kids tablets or toys" just to beef up the "other" numbers.
At this point, the convoluted logic presented by IDC, Gartner and Strategy Analytics to explain why Apple's runaway iPad success should actually be best thought of as a burning house sliding down the side of mountain sounds an awful lot like Russia Today inventing plausible reasons for why an airliner shot down over Ukraine can't possibly have anything to do with the fact that President Putin is arming rebels with the only sophisticated weapons in the area capable of doing just that.
In both cases, the originator of the news reports is intimately entangled with the benefactors of fooling as many people as possible by creating massively fraudulent propaganda. It's that simple.
Putin on the BRIC
Speaking of which, recall when President Putin announced that he (in a move later copied the Communist Chinese government) was afraid of Apple's iPad being used to "spy" on him and was therefore going to buy Samsung Android tablets rather than iPads? Despite being reported by (ahem) Business Insider prior to the beginning of the June quarter, there did not seem to be any discernible reflection of this in IDC's tablet numbers.
While Business Insider found the idea of iPad sales in Russia momentarily intriguing, it appears to lack even a shred of curiosity about how iPads are actually selling on a regional basis, the same way it ignored the cyclical nature of iPad sales to jump on Apple's mid-year sales nadir as evidence of the iPad's "collapse."
If only there were some public data available on how well iPads had sold on regional basis! Oh wait, there is that data Apple graciously volunteered for the most recent quarter.
Apple's chief financial officer Luca Maestri noted, "iPad sales grew overall in the developing markets with particularly strong year-over-year growth in the Middle-East, where iPad sales were up 64%, in China where they grew 51%, and in India, where they were up 45%." However, he added, "This growth was more than offset by lower sales in more mature markets."
So as it turns out, the sum total of global iPad sales hide interesting hills and valleys. Pundits have tried to paint iPads as a "media tablet" toy with no relevance in the enterprise and priced out of the reach of users in developing countries. As it turns out, this is completely backwards.
Pundits have tried to paint iPads as a "media tablet" toy with no relevance in the enterprise and priced out of the reach of users in developing countries. As it turns out, this is completely backwards.
Affluent users in developed countries are continuing to buy higher end Macs at a rate that continues to outpace the conventional PC industry (despite IDC and Garter failing to correctly estimate this in their own market research tracking PC sales in the most recent quarter). At the same time, Apple is noting that iPad is seeing its fastest sales growth rates in developing countries.
And actually, at the same time Apple also reported "strong double digit growth" in Macs not only in affluent Western countries including the U.S., Canada, the UK, Germany, France and Australia, but also in Mexico, China, India and the Middle-East.
Somehow, the collective researchers of IDC, Gartner and Strategy Analytics are observing both Apple's growing sales of premium Macs around the world (up 13 percent globally in the most recent quarter) as well as the rapid growth of iPads in developing countries and the only bit of news they wish to share is that global iPad sales are in a cyclical trough and being outnumbered by small batch craft tablets. That, and misstating Apple's double digit U.S. Mac growth in a flat-to-declining PC market.