The tablet market's problem is Apple, not the other way around

Is the sky falling over the once-hot tablet category?

Yes, Apple’s (AAPL) iPad sales dropped 16% in the first quarter, while International Data Corp. says sales of all tablets worldwide climbed only 4%. But look closer and it’s clear iPad sales are slipping for a couple of reasons that don’t apply to the market as a whole. As the tablet market has expanded quickly to include more mainstream consumers, Apple’s full-featured and lower-priced competitors largely caught up to the iPad. And after introducing the iPad Mini in 2012, Apple  failed to adapt its winning strategy with the iPod, not keeping up as entry-level prices dropped further.

Apple so dominated the tablet market a few years ago that its slowing sales have skewed the overall picture. In the first quarter, Apple’s sales of iPads dropped 16% from a year earlier to 16 million devices, while the rest of the market increased by 17% to 34 million, according to IDC. The disparity was even worse for all of last year, when iPad sales rose just 15% to 70 million while the rest of the market more than doubled to 125 million, according to Gartner.

That wasn’t just booming sales of no-name tablets in emerging markets making Apple look bad. Apple’s share in markets including the United States, the United Kingdom and France has steadily eroded as well.

Cook's excuses

CEO Tim Cook, talking to analysts about the first-quarter decline, was ready with excuses, citing shifting inventory pressure and the rapid growth of iPad sales in earlier years. But with iPad growth trailing the market for about a year now, the real answer seems to be straight out of Harvard Business School Professor Clayton Christensen’s famous book, "The Innovator's Dilemma." Apple grabbed an early lead with an innovative new product, only to fade as competitors eventually caught up with cheaper, “good enough” products. Just as General Motors (GM) ignored Toyota’s (TM) crummy little cars and Lucent didn’t see how Cisco Systems' (CSCO) less capable network gear could compete, Tim Cook now seems oblivious to cheaper tablets.

Apple’s efforts to improve the iPad, with faster processors or thinner cases, haven’t been compelling enough to convince consumers they can’t meet their needs with lower-priced gear. It’s true, for example, that Apple’s custom-designed “A7” processor is more powerful than the chips in competing products. But consumers don’t yet see a need for all that horsepower. After all, almost no one’s running the full blown version of Photoshop on a tablet, and typical gaming apps seem to run fine on devices that cost half the price of an iPad.

That was less of a problem a few years ago, when the market consisted of less price-sensitive early adopters. Tablet buyers in 2011 shopped more based on their preferred brand in 2011, according to research by Gartner. By last year, design and price were the key traits for tablet shoppers. These newer buyers have also proven less likely to upgrade their tablet as frequently as early adopters, slowing the replacement rate for the entire segment.

"We're seeing a bit of the natural adoption cycle going on with tablets," says John Barrett, an analyst with Parks Associates. "Early buyers want lots of features, which is Apple's forte. The value shoppers come later and they're more willing to make trade-offs for price."

The second Apple issue is related to the first. At the low end of the market, tablets costing a few hundred dollars or less, Apple has left a so-called price umbrella for competitors. Apple lowered its entry price from $499 to $329 at the end 2012 with the iPad Mini. But since then, it has only cut the price of the Mini by $30 while competitors including Samsung, Google (GOOG) and Amazon (AMZN) have gone much lower. Samsung’s new Galaxy Tab 4 sells for $200 and Amazon is selling tablets for as little as $129.

This is in contrast to Apple's iPod strategy. By releasing cheaper and cheaper models, even though they were also increasingly less capable, Apple kept iPod buyers in its ecosystem and helped the category-defining music player to maintain an iron grip on the market for over a decade.  When a consumer was ready to move up and spend more, they were already in Apple’s camp. And if an existing high-end iPod customer wanted to buy another, cheaper model, maybe for a child, Apple was ready.

To be sure, the situation is complicated by apps. Playing music is a relatively simple function and any iPod from cheapest to most expensive could take advantage of a customer’s entire music library. Apps are more complex and Apple generally doesn’t want to make life difficult for developers by introducing incompatible models that would require too many different versions of apps. But Apple maintains separate app stores for iPhones and iPads. And Apple is rumored to be working on a phablet, one of those devices with a 6-inch or so screen that fits between a phone and a tablet, so perhaps that's how it will address the price gap.

Some Apple defenders have argued that the iPad sales slowdown has nothing to do with competition, because other tablets can’t substitute for the iPad and its rich ecosystem of apps and media. They say the iPad slowdown is just part of the whole tablet market slowing. Fewer people than analysts expected may want a tablet, as consumers are relying on their smartphones or personal computers, these defenders say.

Such analysts probably haven't spent much time watching salespeople at wireless carriers and electronics stores pitching non-Apple tablets to iPad-hunting customers, but there may be some truth to the argument. Still, smartphone sales growth has also slowed sharply, again led by Apple, and computer sales remain in decline, providing little evidence of a shift away from tablets. And Apple competitors such as Samsung and Lenovo are continuing to see strong tablet growth, despite the iPad’s hiccups. Also, Google searchers increasingly are looking to compare all tablets rather than just iPad models.

Either way, many consumers are buying other tablets instead of an iPad.

Faulty evidence

The evidence cited to show other tablets aren’t bought as iPad replacements is in certain usage statistics. If people buy the iPad for some uses and other tablets for completely different uses, the argument goes, the two markets are distinct. But the usage evidence doesn't make the case.

For example, about 77% of tablet-based website traffic comes from iPads, down only slightly from 81% last year, according to the Chitika advertising network. That is likely a backward-looking indicator reflecting Apple’s lead in the early years of tablet sales. A similar statistic was often cited to defend slipping iPhone market share a few years ago, but traffic from phones has since evened out.

And even with the current imbalance, Web surfing only reveals one small way in which tablets are used. For online video watching, the stats are more even. And consumer surveys have found over and over again that the most popular activities on tablets include email, gaming and social media, along with watching video and listening to music. Gartner’s consumer surveys have found owners of various tablets including those sold by Apple, Samsung and Google are about equally likely to engage in those activities.

To get iPad sales growing again, Apple may just need to listen a little more closely to its customers.