The iPad was introduced five years ago when iPhones were smaller and MacBooks were larger. Apple was able to market the iPad's larger screen as a reason to not only own a smartphone and PC, but also a tablet. In the past, Apple positioned products in separate silos geared for a particular buyer. Apple has begun taking a new direction where each device is merely a piece of the bigger puzzle in which a customer chooses products based on their personality and lifestyle. The change has significant implications not only for iPad, but also for how Apple looks at future product iterations, including wearables. The iPad was crowned the future of computing. In reality, iOS is the future of computing. The iPad is now positioned to take a supporting role to iPhone as Apple expands the iOS ecosystem.

iPad in 2010

When the iPad was introduced, many were unsure if a new product category was needed between a phone and a laptop. In very simple and plain language, Steve Jobs listed seven tasks that can be handled better with a device that sits between an iPhone and MacBook.

Exhibit 1: iPad Use Cases in 2010

The expectation was for people to buy both a smartphone and a tablet, and that's exactly what happened for the first few years. Sales of the iPad over the first four years on the market exceeded iPhone's initial sales during the same period. With a 3.5-inch screen, the iPhone simply was unable to beat the iPad in terms of browsing the web, checking emails, viewing photos, watching video, and reading ebooks. Meanwhile, MacBooks lacked the magical multi-touch interface and apps that came with the iPhone and iPad.

iPad in 2015

Five years later, are there still things that iPad is better at than the iPhone and Mac? While I can look at Exhibit 1 and update that list, what has happened since 2010 is people have developed different habits and lifestyles around their gadgets. For some, an iPhone 6 Plus handles email better than an iPad, while others still prefer a larger iPad Air. Over the past few months, I've been thinking of a way to describe the iPad, and I think the product has become a bit awkward when considered as a stand alone product category independent of iPhone and the Mac. When considered as part of iOS, the iPad would appear to be simply finding its place (which may very well be at a lower sales rate). Apple sold 68 million iPads last year and while sales momentum has disappeared in recent quarters, Apple is still expected to sell 50-60 million units in FY2015.

Four-Quadrant Product Grid Drawbacks

The notorious Apple four-quadrant product grid introduced by Steve Jobs in 1998 has been well publicized and discussed. As depicted in Exhibit 2, to simplify the product line and realign focus, Steve wanted a product in each of the four boxes, representing different target markets.

Exhibit 2: Apple Four-Quadrant Product Grid (1998)

The same kind of product analysis no longer works.

1) Apps have blurred the distinction between the consumer and professional columns.

2) Screen size and mobility have replaced desktop and laptop as the primary differentiator. There is no longer a one size fits all description for what screen size is geared for a particular segment. Small-screen iPhones have infiltrated enterprise and education, while MacBooks can be found in consumer and enterprise.

Exhibit 3 was what many would have come up with analyzing Apple's current product line, and in such a grid, having iPad by itself in the upper left corner exposes the product to incomplete analysis because the product is no longer targeted to only one type of buyer or customer.

Exhibit 3: Faulty Apple Product Analysis Four-Quadrant Product Grid (2014)

Apple's New Personalization Product Analysis

Instead of product quadrants, a new type of analysis is needed to measure Apple's long-term objective and strategy. In Exhibit 4, I highlight how Apple views its current product line where screen size and mobility are the primary differences between products. Now each device can appeal to consumers in various segments of the market from education to enterprise to content creation and content consumption. Personalization is becoming a much bigger factor. In this table, the iPad's role is to serve as a placeholder for those who want technology with a slightly bigger screen than an iPhone or someone who wants a more simple and interactive device than a MacBook. While some may enjoy the iPad, there will be others that have no use for such a device.

Exhibit 4: Apple Personalization Product Analysis

Exhibit 5 depicts what I would call an Apple Product Screen Personalization analysis, which includes unit sales estimates for every major Apple product ranked according to screen size. Over time, while the peaks may shift left or right, I think the general shape will remain true as the iPhone remains the top seller and other devices fall in line.

Exhibit 5: Apple Product Screen Personalization Analysis (2015)

The primary takeaway from Exhibit 5 is that future product innovation will largely be based on Apple continuing to ship a product line that appeals to different lifestyles. The iPad is merely a part of the Apple product lineup designed to appeal to lifestyles where a touchscreen ranging from 7 to 12 inches makes sense. Looking at quarterly unit sales by total iOS devices may make more sense than looking at iPad sales down 25%, but iPhone up 35%.

Over time I would expect Apple to continue to refine screen sizes. For now, it would seem like consensus has landed on 4.7 inches for iPhone and 9.6 inches for iPad. In the future, the phone may continue to get bigger, which will force Apple to push a larger iPad Pro more, so the line in Exhibit 5 will shift to the right a bit, but the overall iOS product line stays intact. The Apple Watch at the far left may also see some interesting sales trends, causing another peak at that part of the line.

Apple visualized this analysis in a slide from the iPad keynote this past October, shown in Exhibit 6.

Exhibit 6: Apple Product Screen Personalization Visualized (2014)

Here is Tim Cook describing the keynote slide from Exhibit 6:

“This is the strongest line-up of products that Apple has ever had. And we believe that each one of these play a very important role. People need different types of technology for the way they live their lives. We all do different things.

In fact, many of us and many of our customers use more than one of our products every day. Sometimes you want to sit at your desk in front of a huge beautiful immersive screen, packed with powerful technology. And we’ve made that much better today with the Retina 5K screen for iMac.

Sometimes you want to take that powerful technology with you wherever you go, and we’ve made our notebooks even better this year with MacBook Air and MacBook Pro.

Sometimes you want to be close to your content, touching it and we’ve made that experience even better today with the iPad Air 2, more powerful and incredibly thin.

Sometimes you want to hold that powerful technology in the palm of your hand and there’s no better thing for your hand than the iPhone 6 and iPhone 6 Plus.

And soon, you can wear that powerful technology right on your wrist...

They are designed to be incredible products individually but they are also designed to work together seamlessly.”

Apple has moved beyond product grids and quadrants as the combination of hardware and software have created a vibrant device ecosystem suited for various lifestyles.

iPad's Role Going Forward; Time to Reset Expectations

The iPad will likely be repositioned to appeal to consumers looking for that larger iOS companion device that may make video better to watch, Twitter easier to use, or ebooks more relaxing to read. In addition, a new iPad Pro would be geared toward content creators that may be unsatisfied with the Mac's capabilities. Accordingly, I suspect sales will likely reflect this new status. I don't view the iPad as on a trajectory to outsell iPhone, but at the same time, there will likely be buyers that need a computing device that is bigger than an iPhone with a 5.5-inch screen, but more nimble than a MacBook.

I see two factors serving as the primary buying variables going forward across the Apple product lineup: screen size and price.

Screen Size

We are still in the phase of figuring out which size of glass we want to carry in our pockets or hold in our laps in bed. I would expect continuing shifts in trends, especially once the Apple Watch goes on sale and consumers interact with a small screen on the wrist.

Price

As depicted in Exhibit 7, Apple now sells five iPad models at five prices, which isn't exactly the easiest thing to decipher when buying. Why is Apple doing this? The iPad does a great job at addressing price umbrellas.

Exhibit 7: Apple's Current iPad Line - This Is Getting a Bit Awkward (2014)

By selling older iPad models for $249-$399, Apple is appealing to those consumers that value price over certain features or components. Apple doesn't want competitors to ship capable devices that may undermine some of these smaller iOS screens. The iPhone "subsidy" in many countries complicates this a bit for the iPhone line since there are already phones being sold for free (but with a monthly fee or a subsidy). As smaller devices continue to outsell Macs by multiples, I would expect this trend of Apple relying on iPad to address the low-end of the market to continue, and eventually the same strategy may spread to Apple Watch in a few years. Meanwhile, the MacBook and iMac lines don't have the same type of price umbrellas given that iPhones and iPads address the lower-end of the market.

Currently, the $199 iPod touch is likely selling around 1-2M units a quarter. Combined with the 2-3M older iPad minis, Apple is selling around 20M iOS devices a year, or roughly 8% of total iOS devices, for less than $300.

Software Moves to Middle

One likely theme going forward is that software differences between iOS and Mac will continue to move to the middle, which will call for some new and different things where the iPad meets the MacBook. What works great on an iPhone will likely not work great on a laptop, so a solution that takes the best of both worlds may be needed in that big tablet/small laptop area. Incidentally, Apple is rumored to have a new iPad and a new MacBook Air in the pipeline, so that intersection would appear to be an exciting one in 2015.

Next Marginal Apple Product Buyer

Even though the probability is that Apple's next marginal buyer into iOS is likely an iPhone buyer from Greater China (looking at current sales), from Apple's perspective, it doesn't matter if a new user enters iOS by buying an iPhone 6, iPad mini, iPhone 6 Plus, or iPad Air. Devices have matured to such a degree and are now positioned in such a way that consumers don't need to buy 3-4 Apple products. While certain products are more universal such as iPhone, others are more personal, such as iPad. Accordingly, the shift to a more personalized product line based on screen size and mobility would suggest there will be continued effort and innovation across the product line, despite some products selling at a fraction of others. For iPad, the spotlight may continue to dim a bit, especially when compared to iPhone, as the product finds its place within the Apple ecosystem.

This report was produced by Neil Cybart on January 20, 2015 and is not meant to be used as investment advice. I publish a daily email about Apple called AAPL Orchard. Click here for more information and to subscribe.

Apple's Plan for iPad in an iPhone World