Long replacement cycle drags down iPad sales

Tablets aren't in trouble, but slower upgrade tempo causes another decline for Apple

Apple on Tuesday announced it sold 13.3 million iPads in the second quarter, a year-over-year drop of 9%, the second straight quarter of declining numbers, and blamed a slowdown in developed markets.

"iPad sales met our expectations but we realized they didn't meet many of yours," said CEO Tim Cook in a statement he read at the beginning of the quarter's earnings call with Wall Street. "Our sales were gated in part by a reduction in channel inventory and in part by market softness in certain parts of the world (emphasis added)."

Analysts had expected a down quarter, coming up with an iPad sales average of 14.4 million, which would have represented a more modest 1.3% downturn.

It was the first time that Apple acknowledged that declines in iPad sales had been caused, if only in part, by a soft market. In both earlier instances when iPad sales dropped, Cook blamed Apple-directed inventory changes or the timing of new model launches, or both.

The drop in iPad sales wasn't out of the blue: In May, IDC lowered its forecast for tablet shipments for 2014, saying then that the year would see growth of 12% -- down from a March prediction of 19% -- and dramatically off 2013's explosive 52% gains.

Even so, the slide triggered plenty of headlines. "Is the Curtain Falling on Tablets?" asked the Wall Street Journal (subscription required). "Apple's iPad Problem" said Slate.

Some analysts, however, decried what they called "handwringing" over Apple's tablet fortunes, countering that the news, while bad for the Cupertino, Calif., company, was not disastrous.

"No, I don't think they are in tablet trouble," said Jan Dawson, chief analyst at Jackdaw Research, in a Wednesday interview. "The user base is growing, the business is still enormous -- it would be a Fortune 100 company all on its own -- and it's very profitable."

In an analysis published on his blog Tuesday, Dawson was more explicit. "I believe the much-discussed death of tablets has been greatly exaggerated," Dawson wrote, echoing others' comments over the last two years about the decline in personal computer sales.

Van Baker of Gartner was noncommittal when asked the same question. "I don't know if it's in tablet trouble," Baker said. "But what's clear is that the refresh cycle for tablets is dramatically different than most people thought it would be."

Baker's point on tablet refresh was a thread that ran through most experts' commentary on the slide in iPad sales. For many, the mounting evidence that tablets in general, but Apple's iPad specifically, were being held by buyers longer than anticipated was one of the primary reasons, if not the reason, why iPad growth has stalled.

Ben Thompson, an independent analyst who covers technology on his Stratechery website, put it plainly. "Clearly the iPad has hit a wall, and I suspect the issue is the replacement cycle," Thompson wrote (subscription required). "iPad growth has been driven by new customers, but as Apple has saturated the (smaller) market of people who want a third device, there has not been a wave of upgraders to pick up the slack."

Early assumptions that most tablet owners would replace their devices every two years -- misguided as it turned out, because tablets are not smartphones, which do turn over every two years on average -- proved wrong.

"The replacement cycle for tablets is definitely longer than for smartphones, because most tablets are not on a carrier contract," said Carolina Milanesi, chief of research at Kantar Worldpanel ComTech, referring to the smartphone subsidies prevalent in the U.S. that reduce consumers' out-of-pocket expenses when they pick up a new handset.

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