Tablets – The long goodnight

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The latest releases from Apple are unlikely to reignite growth.

  • The tablet market has been the fastest market to go from birth to rapid growth to commoditisation to maturity.
  • After a few short years of stunning growth, this segment already looks very mature with just 4% growth expected this year after 44% in 2013A.
  • I think that there are three main reasons for this:
    • First. It is the smartphone that is the driver of the digital ecosystem not the tablet. I have long held the view that a tablet enriches Digital Life and skews user behaviour more towards media consumption and gaming but it is not the defining device. Therefore the tablet is a nice accessory to have but it is not a must have. Users would rather have a smartphone.
    • Second: A lot of users who only consume content (browse, email, watch and listen) have purchased a tablet instead of a laptop. For these users this device makes much more sense and this shift has been a trend over the last few years. I see this trend coming to an end and consequently the demand for tablets has slowed.
    • Third: The creation by Samsung of a segment of the market with very large screens has eroded the bottom end of the tablet market.
  • The net result is that the market is likely to stagnate from here on and Apple’s refresh of the iPad on Thursday is very unlikely to change that outlook.
  • Furthermore, I suspect that Apple will not refresh the iPad Mini as the iPhone 6+ could really cannibalise demand for this product.
  • I expect that the new iPad Air to be lighter, thinner, with longer battery life and a faster processor but that’s about it.
  • The iPhone 6 is a big deal for Apple as it addresses what has long been a major gripe with earlier devices. Hence I can see strong replacement demand and switching from large screen Android products.
  • The new iPad Air is likely to be simply a slightly better version and consequently unlikely to trigger meaningful replacements or ecosystem switching.
  • Hence, I am looking for the next two quarters to be almost entirely driven by the iPhone 6 where Apple looks extremely well placed.
  • Although the longer term margin issues persist at Apple, the short term is looking healthy and I am happy to be in this one until at least the end of January.

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.