In its most recent earnings report,Applereported that iPad revenue and unit shipments -- which have been declining for quite some time -- had fallen another 29% and 23%, respectively. This suggests not only weakening demand but a shift toward lower cost iPad models.
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Part of this steep decline, according to Apple, was that the company reduced channel inventory by about one million units, suggesting that sell-through to end customers was better than unit shipments. However, even if we add back one million units to the 12.62 million iPads that Apple reported shipping last quarter, that is still a unit decline of 16.7% year-over-year.
During the conference call, CEO Tim Cook admitted that iPad sales are being affected by both the success of the iPhone as well as the Mac.
Cannibalization happens -- Apple just deals with it
As fellow Fool Evan Niu pointed out all the way back in 2012, Steve Jobs was well known for saying that, "If we [Apple] don't cannibalize ourselves, somebody else will."
Tim Cook, like Steve Jobs before him, seems to fully subscribe to the idea that Apple should not be afraid of cannibalizing some of its own products.
"We're clearly seeing cannibalization from iPhone and on the other side from the Mac. And, of course, as I've said before, we've never worried about that. It is what it is. That will play out and, at some point, it will stabilize," Cook commented during the earnings call.
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With that said, it is certainly easier for Apple to accept cannibalization when a higher margin product like the iPhone eats away at what almost certainly is a lower-margin product like the iPad.
The iPhone cannibalization was widely expected, but the Mac not so much
It was widely believed that there was risk that larger iPhone models could significantly dull the value proposition of a new iPad. After all, if you just bought an iPhone 6 Plus -- which is by no means an inexpensive or small device -- you might be inclined to put off upgrading your iPad.
What I found interesting, though, is that the Mac is cannibalizing iPad sales as well. It is well understood at this point that the growth in tablets shifted consumer dollars away from PC sales. That trend, at least within the Apple product portfolio, is showing signs of reversing.
There are several plausible hypotheses as to what might be going on here. It could simply be that customers who have been spending money on iPads like them enough and prefer to invest in their Macs that are long overdue for upgrades.
Another potential explanation is that devices such as the MacBook Air and the new MacBook now exhibit many of the qualities that people had traditionally valued in tablets (thin and light, long battery life, etc.) but with the added functionality that comes with a full PC.
Finally, notice that over the last several quarters, the Mac unit growth has outpaced revenue growth -- implying more aggressive pricing. In Mac, Apple is gaining share in a market expected to decline about 4.9% this year, according to research firm IDC. In contrast, IDC reports that Apple is losing share in a tablet market that also appears to be contracting.
What can Apple do to reverse this?
During the call, analyst Shannon Cross asked Cook about what it would take to "reaccelerate" iPad sales. Cook pointed to "continued investments in [Apple's] product pipeline" (i.e., new iPads) and potential growth in enterprise as key long-term drivers for iPads.
"I believe that iPad is an extremely good business over the long-term," said Cook. "When precisely it begins to grow again, I wouldn't want to predict, but I strongly believe that it will."
While I do agree with Cook that iPad sales and shipments will begin to register year-over-year growth in the future, whether iPad sales will exhibit growth off of a base worth talking about is another question entirely.
The article Apple Inc: Tim Cook Admits That the iPhone 6 Plus and Mac Are Hurting iPad Sales originally appeared on Fool.com.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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