reported its fourth-quarter earnings on Oct. 20, impressing
investors in all areas except for iPad sales. iPad shipments fell
year over year for the third consecutive quarter, dropping 13% to
12.3 million units. iPad revenue ($5.3 billion) also came in
lower than Mac revenue ($6.6 billion) for the first time in
Three days later,
, revealing that sales of its Surface tablets had
more than doubled
both year over year and sequentially, to $908 million. Microsoft
attributed that surge in demand to "strong interest from
students, professionals, and increasingly enterprises for Surface
Apple's iPad Air 2 (
) and Microsoft's Surface Pro 3 (
). Source: Company websites.
The decline of the iPad and the sudden rise of the Surface
highlights an interesting divergence between the tablets and
"laplets" markets. Let's look at what this market shift could
mean for both companies in the long run.
Why the iPad is falling
Demand for the iPad is waning for three main reasons: a longer
upgrade cycle, a lack of compelling new features, and its premium
iPhone sales are fairly predictable, thanks to two-year
carrier contracts that end with an inevitable upgrade. The iPad,
on the other hand, is upgraded in a mannersimilar to
PCs, meaning it is only upgraded upon becoming outdated.
Moreover, many customers are handing down their old iPads to
family and friends before upgrading, which throttles sales of
iPads to new customers.
On Oct. 16, Apple unveiled the new iPad Air 2 and iPad mini 3.
While the iPad Air 2 was slimmer, lighter, and had better specs
than its predecessor, the mini 3 has the same specs as its
predecessor, with bigger storage options (up to 128GB) and a
Touch ID sensor. This refresh, while expected, simply won't
convince customers to ditch their old iPads. Moreover, the iPhone
6 Plus will probably cannibalize sales of the iPad mini 3.
That brings us to the third issue: the iPad's questionable
ability to maintain its pricing power.
, for example, recently unveiled the
Yoga Tablet 2 Pro
, an impressive 13.3-inch Android tablet with a built-in
Pico projector, a subwoofer, and a 32GB hard drive, starting at
$500. That's the same price as an entry-level iPad Air 2, which
has a 9.7-inch screen and 16GB of storage. Granted, these two
devices appeal to different types of customers, but it's not hard
to see how the owner of an older iPad could be tempted by the
Yoga Tablet 2 Pro. Meanwhile, low-end Android tablets are now so
cheap that it's possible to buy two or three for the price of one
Lenovo's . Source: Lenovo.
These three problems have caused the iPad's global market
share to fall from 60% in the second quarter of 2012 to 27% in
the second quarter of 2014, according to IDC.
Why the Surface is rising
Microsoft's Surface had a rough start when it hit the market in
October 2012, but customers eventually realized the device was
more of an ultrabook than a tablet. Microsoft also heavily
marketed the Surface as a productivity device for students and
professionals, rather than going head-to-head against the iPad as
a consumer tablet.
Microsoft leveraged Windows' dominant market share of PCs to
give businesses a smoother way to upgrade their older computers
without abandoning legacy software or older network setups. With
the docking station ($200), the Surface can be converted to a
full desktop with a wired ethernet connection -- which can't be
accomplished by first-party means on an iPad.
In September 2013,
Delta Air Lines
announced that it would equip 11,000 pilots with Surface tablets
installed with paperless "electronic flight bags" with key
charts, reference documents, and checklists. Hospitals, including
Seattle Children's Hospital and the University of Pittsburgh
Medical Center, have also
deployed the Surface Pro 3
to help doctors seamlessly access electronic health records from
the patient's bedside and their desks. Some retail stores have
even installed the Surface in customer-facing kiosks that link to
their sales database.
More importantly, the arrival of the Surface has convinced
Microsoft's hardware allies (and competitors) to develop similar
convertible devices targeting both regular and enterprise
consumers. This helps Microsoft generate more revenue from
industrywide Windows OEM licenses, which are far more important
to its top line than Surface sales.
The tortoise and the hare
While many consumers like to compare the iPad and the Surface,
investors should remember that the two devices are designed with
two very different strategies in mind.
The iPad is focused on leapfrogging over legacy PCs and into
the future. That's why it eschews the microSD card readers and
USB ports that can be found on the Surface. The Surface is
developed as a more practical transition between PCs and tablets,
since it can fully replace traditional desktops and laptops
without forcing businesses to sacrifice legacy software and
Therefore, Apple might have jumped too far ahead when it
launched the iPad four years ago, which has now caused it to burn
out and lose momentum. Meanwhile, Microsoft built the Surface
with enterprise needs in mind, which is now helping it slowly,
but steadily, gain market share.
Forget the iPad, next hit Apple product
Apple recently revealed the product of its secret-development
"dream team" -- Apple Watch. The secret is out, and some early
viewers are claiming its everyday impact could trump the iPod,
the iPad. In fact, ABI Research predicts 485 million
of this type of device will be sold per year. But one small
company makes Apple's gadget possible. And its stock
price has nearly unlimited room to run for early in-the-know
investors. To be one of them, and see where the real money is
to be made, just
Why Microsoft's Surface Pro 3 Sales Soared as
Apple's iPad Sales Plunged
originally appeared on Fool.com.
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