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Investors yawn as new iPads fail to impress

Aaron Pressman
Apple CEO Tim Cook holds an iPad during a presentation at Apple headquarters in Cupertino, California October 16, 2014. REUTERS/Robert Galbraith

After Apple’s (AAPL) underwhelming new iPad introductions today, sales of the devices are unlikely to rebound much from their recent slump. But that may be just fine for Apple and its shareholders, as many customers are shifting their attention – and dollars -- to higher-priced phones and computers.

Apple introduced two new iPads and a new iMac at the event held at its Cupertino headquarters. A slimmer iPad Air 2 upgrades last year’s iPad Air with better cameras, faster processors and the fingerprint sensor, TouchID, carried over from the iPhone line. A new iPad Mini 3 was almost unchanged from last year’s model, though it also got the TouchID sensor and will be available in a gold colored body now. Apple will also continue selling older models at lower prices, a strategy borrowed from the iPhone line.

The lack of major improvements in the iPad Mini seemed to be almost an admission that many customers who might have considered the smaller tablet in the past will be purchasing an iPhone 6 Plus -- which has a 5.5-inch screen -- instead this year.

But while the new iPad mini 3 starts at $399, the price of the iPhone Plus starts at $749 (and even though some customers pay hundreds less for the phone when they sign a two-year mobile contract, the mobile carrier makes up the difference to Apple). Customers who choose an $899 and up Macbook Air laptop instead of an iPad provide an even bigger boost.

Reflecting the lack of exciting or potential “game changer” new products, Apple’s shares, which have slumped about 2% since the day before the iPhone 6 announcement, were unchanged after Thursday's iPad news. The 2% drop isn’t bad, however, as the overall market as tracked by the S&P 500 Index has lost 7% over the same period.

Apple’s iPad sales have declined on an annual basis for three of the past four quarters and analysts expect more of the same next week when the company reports results for the latest period.

That’s because the tablets haven’t had any earth-shattering new features that would cause enough owners of prior models to upgrade more frequently than the three to four year replacement rate seen of late. And after the rapid growth of the early years, there are many fewer households that don’t own a tablet but plan to purchase one.

More than 60% of U.S. households with broadband Internet service already own a tablet, and 70% of those households with income over $100,000 already own both a tablet and a smartphone, according to a survey by Parks Associates. The iPad's share of households with tablets dropped to 37% this year from 46% two years ago.

Apple’s iPad sales slide is deeper than the overall tablet market, which has seen sales growth continue, if at a slower pace than in prior years. Samsung (005930.KS) and Amazon (AMZN) tablets running versions of Google’s (GOOG) Android software are next leading sellers in the United States, but worldwide some of the toughest competition is coming from much cheaper models from Lenovo (0992.HK) and other Asian manufacturers. Worldwide, tablet sales are expected to increase 11% this year after jumping 55% last year, according to Gartner.

The once-promising iPad accounted for only 16% of Apple’s revenue last quarter, down from 17% in the first quarter. That’s left the company increasingly dependent on iPhone sales, which at least so far, continue to grow strongly. At today's event, CEO Tim Cook said sales of the newest iPhones were up "by a whole lot" compared to prior years.

Corporations and other large institutions are perhaps the only remaining under-exploited niche that could boost iPad sales, notes Parks Associates analyst Tejas Mehta. Apple struck a deal with IBM (IBM) earlier this year to try and bolster enterprise sales.

“There is a lot of potential growth here,” says Mehta. “The key is to extend the functionality of the iPad, so it’s not just used for access and entertainment.”

New applications designed by IBM for specific industries like finance and health care could help. So might the long-rumored iPad with a laptop-sized screen. Reports of a 12.9-inch iPad have surfaced from time to time over the past year, but the phantom device remains just that.