On October 23rd, Apple announced the widely expected iPad mini. The company also surprised most by also introducing a faster “4th generation” iPad, swiftly replacing the one launched on March 7th this year, seven and a half months ago.
That same day, Tim Cook proudly proclaimed a an iPad milestone: 100 million shipped since its April 2010 debut. Impressive.
No less impressively, Wall Street analysts quickly did their subtractions and concluded Q4 iPad shipments — to be officially announced two days later — were going to miss expectations.
They were right.
Where seers expected somewhere between 15 and 16 million iPads, the actual Q4 number was 14 million. Using the Average Selling Price (ASP) we’ll discuss in a moment, a “miss” of 2 million units translates into more than $1B in missed revenue.
Compared to the 17 million iPads shipped in Q3 (ending in June), Q4′s 14 million units look like a steep decline. This isn’t in keeping with the fast growth the iPad had shown since its 2010 beginning. On a “Quarters After Launch” basis, the iPad used to grow faster than the iPhone. Now, we see a decline from the 15.4 million units shipped in Q1 (ending December 2011), and only a modest 26% increase from last year’s Q4. Where are the go-go days of 70% or even 100% year-to-year growth?
Two days later, at the October 25th Earnings Conference Call, Apple’s CEO tried to put a better face on that strangely anemic 26% growth. As noted by Horace Dediu, Tim Cook pointed to a different number: sell-thru, units actually delivered to customers, grew by 44%. Not great, but not as tepid as 26%.
(See Philip Ellmer-Dewitt’s detailed explanation here. In essence, when product ships, it “changes hands”: the channel partner “takes title”, meaning it moves from Apple’s books to the reseller’s. For Apple, the items thus shipped count as revenue, even if they’re not sold-thru, that is sold to end customers. When the volume of products Apple ships to retailers is less than the volume sold-thru, channel inventories decline, more sales out than shipments in. This is how Apple sees revenue go up by 26% while sell-thru increases by 44%. A likely explanation for last quarter’s depletion of channel inventory is making room for the two new iPad models.)
Resorting to sell-thru numbers as a way to put iPad numbers in a better light could be habit-forming, it could force Apple’s management to provide more detailed inventory numbers more regularly.
On the end-customer demand side, Apple execs attributed the low Q4 iPad number to several months of intense and detailed rumors ahead of the iPad mini launch.
So, the iPad story could look this: Last year, the yearly iPhone refresh moved from June to October; as a result, Q4 iPhone shipments disappointed; but fast growth resumed once the new model shipped; the pattern now applies to the iPad as well.
No, the iPhone and the iPad behave more differently than in the above scenario. I went back to SEC filings and extracted data for the following graph tracking iPhone and iPad ASP’s for the past eight quarters:
The iPhone ASP is stable. Carriers keep indulging in (wooden) saber-rattling, complaining about “excessive” iPhone subsidies. Here, subsidy means the difference between the price carriers pay for a handset and the typical end-user price: $199 for the phone with a two-year contract. In such a $199 arrangement, for the past five years, Apple has been able to extract more money from carriers than any of its competitors. Paraphrasing Horace Dediu, the explanation for such an enduring advantage is a simple one: For carriers, the iPhone is a better salesman, it generates more revenue, a higher ARPU (Average Revenue Per User). As a result, carriers pay the iPhone salesman a higher commission, meaning a higher handset price. (And they sound like the grouchy bosses who complain their star sales person makes too much money…)
For the iPad, there is no such arrangement, no two-year contract, no subsidy. For example, AT&T will sell an iPad with a no-commitment, month-to-month wireless data contract. Without a two-year commitment, carriers have no incentive to sell the iPad at a particularly attractive price, causing customers to face the price without a subsidy fig-leaf. (One might argue smartphone contracts lead customers to borrow money, the $400+ subsidy, at usurious rates, but such habits are hard to break. Rare is the carrier that will offer a cure, a lower monthly contract if you pay full price for the phone.)
How do iPad customers react to the cold price truth? All we know is the ASP has been falling for five quarters. And we can also surmise price figures more actively in competitive situations than it does with smartphones. Or, for that matter, with notebooks and desktop computers: ASP for Macs is stable or growing a little, from $1282 last year to $1344 last quarter. These prices don’t prevent Apple from being number one on desktops and notebooks in the US — as Tim Cook reminded everyone on October 23rd.
The surprise iPad refresh can be seen as a reaction to competitive pressures, existing or upcoming ones. And, for the iPad mini, we have an interesting combination: premium price and an avowed lower gross margin, ‘significantly below our cooperate average‘ says Apple’s CFO during the October 25th Earnings Conference Call.
The iPad definitely behaves differently, neither a bigger smartphone, nor a smaller PC, thus confirming it belongs to a new category whose rules are still being established. The next few quarters will be even more interesting than recent ones: Google, Amazon and Microsoft have new products worth watching, they all intend to fight for a dominant role in the new space.
Related columns:
- iPad Thoughts TweetLet me start with an important caveat. For this I’ll refer you to a post from my favorite high-tech blogger, David Pogue. “Don’t pass judgment until you’ve tried it!” Wise counsel: three years ago, industry sages “knew” Apple had no business making a phone. Normal humans voted with their wallet. Customers come in two categories: [...]...
- iPad Mini: Wishful Thinking? TweetOr another killer product? Or, on the pessimistic side, a loser defensive move showing Apple’s fear of competitors such as Amazon, with its Kindle Fire, and Google’s 7″ Nexus tablet? Recent leaks from purported sources inside Apple’s traditional suppliers have ignited a new frenzy of speculation. And not just from the usual blogging suspects — [...]...
- Catching The iPad Wave: Seven Thoughts Tweet1. Design The iPad is all about design, and interface expectations. From a graphic design standpoint, with the iPad, the quantum leap is its ability to render layouts, typefaces, page structure. No more web HTML lowest common denominator, here. What comes out from an art director gets WYSIWYGed on the iPad — if the implementation [...]...
- Fun AT&T numbers Tweetby Jean-Louis Gassée AT&T can’t seem to catch a break. A couple of weeks ago, at All Things Digital, an industry conference, Randall Stephenson, AT&T’s Chairman, got the audience to snicker and roll eyes. The conference is held by the Wall Street Journal, led by its digital guru, Walt Mossberg and, “by invitation only”, $5K [...]...
- iPad 2 Launch Notes TweetA little over a year ago, on January 27th 2010, Jobs gave the first iPad keynote. (YouTube has many clips such as this one.) Back then, the tone was more searching than assertive. As a “third device” between a PC and a smartphone, between a MacBook and an iPhone, the iPad was looking for its [...]...
19 Comments
> The surprise iPad refresh can be seen as a reaction to competitive pressures, existing or upcoming ones
Do you remember when Apple pulled out of the Macworld Expo because they didn’t like the constraint of timing product releases to an external schedule? I think a lot of their behavior since then has been an attempt to buy independence from external suppliers. The PowerPC was probably a turning point, when they not only hitched their wagon to a losing technology but could not call the shots. So now they do things like run their own stores, buy factory equipment and design their own chips. If the market needs a new iPad, but the A6 will not be ready, then they design a stop-gap chip without worrying what a company like Intel might think. Voila the iPad 3. Releasing the iPad 4 would be a simple question of knowing when the A6 would come online and when a new model would come in most handy. And so we get an announcement just in time for the holiday season. Can anyone really think that the iPad 4 was not entering pre-production even as the iPad was hitting the market? I imagine this roadmap was in place one year ago. Apple controls its destiny in the mobile space to a far greater degree than they do on the desktop. This independence comes at a price but also brings huge competitive advantages. We just saw some sexy new iMacs, but the wait was almost criminal.
As for the iPad Mini, it might well be a reaction to the competition, but it might also be a sign that certain voices inside Apple have greater say now that Jobs is gone.
Personally think the iPad update was mostly motivated to cement the switch to the new connector across the product line. Pull a band off quickly. Now all current generation devices are on Lightening. Done. Also the iPad flagship tablet got updated to the faster processor in the iPhone 5. That seems like Apple being aggressive. Good for them.
Ave sales price went down because there is now a $400 iPad that is fine for many people and institutional purchasers. It will continue to drop with the Mini putting pressure on it.
All of that is good if it keep’s iPad marketshare stable and the offering competitive.
I personally don’t understand why Apple does not want wireless companies to offer a subsidy on a device with a wireless modem. If a consumer is going to use it consistently on a wireless plan and the carrier wants to subsidize, why should Apple not allow that? Especially when competitors do allow subsidies.
Jean,
One reason (looks like everyone I read missed this one) iPad sales have slowed is due to the launch of Google’s Nexus 7 in July. I think the Nexus 7 sales could have been potential iPad sales. Also Amazon’s much earlier announcement (than shipping date) regarding their new (and much improved) Kindle Fires plus Microsoft’s surprise Surface announcement in June may be other reasons iPad sales are below expectations. iPad now faces much more ‘real’ competition than ever before and the tablet market will not be just an iPad market any more.
In order to sell into Education market, ipad2 has been sold
as three year lease.
ipad mini is mainly for those same education institutes.
So aside from given as gift for holidays and graduations,
ipad is mainly an education play. This is why Amazon is
so scared of ipad min that they are advertising a comparison
on their home page.
Problem with education is that it the ultimate fashionable gadgets
that will rescue the crippling American education system meanwhile
Obama gets big donations from 1% to create more charter schools
to destroy public system. but then again Steve hated the teachers union the most.
It seems to me that the obvious next step from this (excellent) analysis is that the player with a subsidized business model (i.e. Amazon, which is using Gillette’s razor blade business model) will win barring surprises. This makes its machinations (e.g. siccing anti-trust folk on Apple for daring to compete in ebooks) even more alarming.
@Tonio Loewald wrote, “a subsidized business model…will win [,] barring surprises.”
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Depending on what you mean by “win,” of course. Amazon has a lot at stake with its tablets: if e-reader-only devices have saturated their intended market (as I kinda think because a 40-hour battery life is too small an advantage for most to cover other missing features), and so customers switch to multi-function tablets, Amazon has burned through a compelling (disruptive) competitive edge before it has amortized all its development costs. On to multi-function tablets, where they have no great advantage of software, usability, media or apps.
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Hence, the “Gillette” model that presumes that they will sell blades at a profit. This is unlikely. Selling the Fire at the cost of its parts ignores expenses for R&D, for support and for marketing. And the effort at mass numbers of devices (to cover fixed costs and incent app developers) flies contrary to focusing on its most media-hungry customers who will actually buy lots of blades — make more than $100 total media rentals/purchases. That’s ascribing all the profits that used to be attributed to media, to the tablet, and still only breaking even overall.
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Of course, none of us gets to see actual financials, not even sales numbers, so there’s a certain amount of SWAGging here. Still, we can make guesses based on developers’ comments about market sizes, etc.
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So I think Amazon, if it’s successful in reaching a decent share of tablet usage, will have many years of low profitability, starving the company of its ability to innovate in other areas. They have some very nice businesses that are also subject to the disruption that they are attempting to hit Apple with.
@JLG, I’ve commented elsewhere on the PC sales numbers, that they are subject to MANY forces: the mobile revolution, the slow economic growth, Windows’ release dates, etc.
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And I likewise think that iPads’ numbers are showing many of these effects. The combination of Android and loss-leader pricing makes up for what’s still a large gap of usability/attractiveness, in my mind. To get the next ten-fold sales jump, Apple is going to have to keep up the rate of innovation that they averaged over the past 5 years, rather than the very nice (love my iPhone5!), but incremental changes they’ve released in the last year or two.
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I don’t know what those will be, but even as they keep focused on the consumer, they could make big gains with substantial initiatives in education and the Enterprise.
“I don’t know what those will be, but even as they keep focused on the consumer, they could make big gains with substantial initiatives in education and the Enterprise.”
Whatever hopes Apple has on being successful in the Enterprise will be lost due MS Surface tablets or other Windows 8 tablets. Enterprises want 3 key things;
1. backwards compatibility with their custom apps
2. MS Office
3. Smooth integration with back-end servers
Apple’s products do not provide the first two and the only integrates with Exchange, even that, not always reliably. Once the Surface Pro comes out I don’t see Enterprises moving to iOS devices.
Plus don’t forget the fact that many of .Net developers will be able to transfer the coding skills nicely over to the Windows 8 / RT platform.
Bleh…
Such a misleading graph in your article.
Trying to create some sensation where there is none?
Please redo the graph so that the y-axis starts at $0 and you’ll see a different picture.
Bram
i need some ideas for a blog. i already do poems and surveys on it but i wanna talk about something..
Andradez
I agree with French. Apple needs to innovate. The new nexus phone is every bit as good as the iPhone, and better in so many ways when you consider the cloud services – maps, docs, YouTube, camera + location, voice search. Also, there is no way that the vast majority of the world can afford an iPhone and the ridiculously high data fees. Add a data fee for an iPad? Who can afford that, especially when a phone such as nexus is capable of acting as a mifi? This is just a way for apple and the carriers to extract value from consumers even though a single device should be able to provide data connectivity. Finally, an expensive mobie apple device has a life of two years. Again, who can continue to afford that over a life time? it feels like apple is now struggling to stop the android tsunami and the next generation innovations needs to happen soon.
Agree with Gadget. Highly likely iPad sales slowdown is directly related to the appearance of Nexus7 and Kindle Fire.
Cooks’ explanation blaming it on edu purchase cycles etc., just doesn’t ring true in this case.
er… the reason why I haven’t bought a new ipad since the iPad2 is because I can’t justify spending another $499 on another tablet, despite the beautiful Retina display, and now twice as fast A6X processor. My iPad2 serves all my tablet computing needs sufficiently.
I have put in a purchase for a iPad mini because I’m excited by the new form factor. It’s lighter and feels perfect for reading during commutes.
A lot of my friends already own 2-3 apple products at minimum, sometimes as many as 5-6 products. There is a very real Apple product fatigue. People can’t just keep spending all their disposable income every year on the latest and greatest from Apple.
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me. Anyways, I’m definitely happy I found it and I’ll be book-marking and checking back frequently!
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[...] What happened to the iPad? | Monday Note "The iPad definitely behaves differently, neither a bigger smartphone, nor a smaller PC, thus confirming it belongs to a new category whose rules are still being established. The next few quarters will be even more interesting than recent ones: Google, Amazon and Microsoft have new products worth watching, they all intend to fight for a dominant role in the new space." [...]