Tablets - is the honeymoon over?

Since the iPad was launched in 2010, tablets have become an important product for companies such as Apple, Samsung and Microsoft. Tablets have proved extremely versatile – so much so that they have replaced many of the laptop’s roles and arguably provide a superior user experience in many cases. Games, movies, email, web browsing and social media all feel natural and easy to use on a 10″ screen, so it’s no surprise that consumers have flocked to buy them in droves.

Now that tablets have become ubiquitous, analysts expected that sales would follow the same ‘hockey stick’ upward trajectory of smartphones. Unfortunately, growth in the tablet market has stagnated, leading many to question whether consumers are losing interest.

In this post we explore tablet sales trends, and discuss how we think the market might evolve during the next few years.

Tablets suffer a slump in sales

According to ABI Research, global sales of tablets grew by just 2.5% in 2014. While there is still growth, this rise was much smaller than expected. NPD DisplaySearch claims that growth was even lower at just 2%, and that it will remain in single digit figures through to 2018. Is that a plateau or a flatline?

Unfortunately, this 2.5% rise is much lower than expected – 6 months earlier in the year, IDC estimated that the total tablet market (which includes 2-in-1 devices such as the Asus transformer range) was forecast to grow by a more respectable 19.4%. So what went wrong? From a predicated 19.4% to an actual 2.5% in 6 months – clearly earlier estimates were way off target.

The story across the major retail outlets confirms the trend – tablet sales are down and consumers are unwilling to replace their tablet every year.

“The tablets boomed and now are crashing.” – Hubert Joly, Best Buy (USA) CEO

Looking at the market leaders – Apple and Samsung, iPad sales fell 13% in the first half of 2014 while Samsung increased by 26%. Together, these two companies have a combined 70% of the market. But while overall tablet sales are on the rise there are definite signs they have reached a plateau.

Worldwide tablet shipments reached just 49.3 million units in Q2 of this year, considerably less than the holiday quarter in 2013. While Christmas obviously helped achieve those 76.9 million sales, between Q1 2013 and Q2  of this year shipments have remained decidedly unremarkable.

Can Apple maintain it’s lead in tablet sales?

As the current market leader, it’s worth examining Apple’s tablet figures in more detail as we’d expect Apple’s tablet slowdown to be reflected by the dozens of other tablet brands.

Over the last quarter, Apple generated $5.9 billion from iPad sales. That’s more than Amazon, Microsoft and Google have achieved from all of their tablet sales ever. However, Apple sold fewer iPads than in the year-ago quarter representing its second quarterly drop from last year.

In the March 2014 quarter, Apple sold 3.1 million fewer (16.1 percent) tablets year-over-year (falling from 19.5 million to 16.4 million), and in the June quarter iPads fell gain by 9.3 percent (down 1.3 million units, from 14.6 million to 13.3 million).

Apple’s CFO Luca Maestri stated in a recent earnings call, “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%.” He added, “This growth was more than offset by lower sales in more mature markets”.

So at least publicly, Apple is shrugging off its uninspiring iPad sales. In fact, the slowdown was partially attributed to the overlap between screen sizes for tablets, notebooks and smartphones.

It’s true that ‘phablet’ style devices (which have screens over 6 inches) could be cannibalising tablet sales. This might be true to an extent, but if so that will only worsen with the introduction of the iPhone 6 Plus. On the upside, Apple would no doubt be happy if that device cannibalises sales of the 7.9″ iPad Mini, because profit margins on the iPhone are much higher.

In terms of Apple’s product mix today, the situation is very different than it was 7 or 8 years ago before the iPhone became such a massive success story. Back then the iPod was the company’s most important product. But today iPod sales have nearly dried up and its two iOS based devices are its most popular products: the iPad accounted for 16.67% of Apple’s revenue in Q2 2014 and the iPhone more than 50%.

It’s not all doom and gloom for Apple however. Historically, its biggest sales by far have been generated in the Christmas holiday season, and it may be able to tempt users to the refreshed iPad lineup later this month – they are expected to include the Touch ID fingerprint sensor and the latest A8 CPU.

Furthermore, there are currently 12.3 million iPad users in the UK – just over 19% of the country’s total population and 50% of UK tablet users. Those users are likely to upgrade at some point; once you are hooked into the Apple ecosystem, it can be hard to escape…

Apple’s forthcoming October event (which, according to Re/code, will held be on Thursday 16th) is expected to confirm the existence of an iPad Pro with a 12 inch screen and more memory (2 GB) – this would improve the iPad’s ability run all those productivity apps that enterprise users love so much, and a rumoured side-by-side app view would please those that laud the same  capability in Microsoft’s Surface tablet and Samsung’s Galaxy Tab range.

Mimicking the trends that have emerged in the smartphone industry, Apple’s dominance in tablets is steadily being eroded on all sides by Samsung and cheaper Android alternatives. But to use my favourite fast food analogy – just because McDonalds sells the most hamburgers in the world doesn’t make them the best hamburger.

Why are tablets declining in popularity?

At least for Apple, declining tablet popularity can’t be attributed to customer dissatisfaction with the devices – the iPad Air and iPad Mini consistently achieve the highest customer satisfaction ratings of any tablet in surveys conducted by companies such as JD Power. Additionally, the iPad holds around 85% of the US education market – so clearly consumers are happy with the iPad’s capabilities and are using it in all sorts of ways.

Another sign that people are actually using their iPads (rather than letting them gather dust) is highlighted by the iPad’s share of web traffic:

So what are the reasons tablet sales are on the wane?

1) No incentive to upgrade

All the major manufacturers update their flagship smartphones at least once a year. Despite tablets receiving frequent updates to more powerful hardware, the incentive to upgrade every year isn’t as strong. How many people do you know that are willing to buy a new phone every year but only update their tablet every 2 years or even longer?

Another clue is that many smartphone owners are locked into two-year contracts, so there’s an incentive to upgrade only at the end of the contract. This means that every year there are millions of people who can obtain the latest device for a relatively minor outlay. This doesn’t apply to tablets, where the full cost is normally borne by the consumer.

2) Lack of subsidies

Unlike smartphones, mobile operators tend not to subsidise the purchase of tablets. Additionally, most people are happy to use their tablet on WiFi only; but even those with cellular data contracts don’t generate as much income for operators as smartphones do – they are more likely to pay for a low tariff or just use them at home. Due to this lack of subsidy tablets are, perhaps unfairly, perceived as expensive luxuries.

Paying a few hundred pounds every 2 years for a new smartphone doesn’t seem like a big deal, but paying several times that amount for a tablet is cost sensitive issue for many people.

3) Laptops making a comeback

PC sales have certainly slumped over the last few years, and the manufacturers like Dell and HP have suffered in the general downturn. Perhaps surprisingly, the PC market is starting to show signs of growth – cheaper laptops that run Chrome OS and reduced OEM licensing costs for Windows has resulted in a greater choice of powerful budget computers that sell for just a few hundred pounds.

Consumers that may have opted for a tablet are now spoilt for choice when it comes to laptops and PCs, and it’s hard to argue against a physical keyboard for getting any real work done…

What’s the outlook for tablets?

Tablets have become a daily part of our lives. But with much longer replacement cycles and expectations in terms of what you can actually do on a tablet, we shouldn’t expect the same kind of unlimited growth that smartphones have experienced. The market for tablets is still in its infancy, and it remains to be seen whether hybrid and 2-in-1 devices will eventually become the preferred form factor.

“Are tablets going away? Absolutely not. That’s just a function of the lifecycle. Tablets are going to become more important” – Rafe Blandford, All About Windows Phone

With companies like Tesco producing affordable and relatively powerful tablets such as the Hudl, there is still ample room for expansion. It seems unlikely that tablets as we know them are going away any time soon, but it’s up to the manufacturers to produce more innovative and versatile designs if they truly want to replace the laptop.

But for now, tablets are still the perfect coffee-table Internet devices and for me at least, the honeymoon is still going strong…

You can also listen to a heated and very entertaining debate about the death of tablets over at the 361 Degrees Podcast.