Thoughts on Apple's Revised iPad Line
In what has become something of a trend, Apple once again unveiled a few iPad strategy adjustments in March. This year’s changes include an update to the 7.9-inch iPad mini and altering the 10.5-inch iPad Pro to arrive at a lower-priced and rebranded 10.5-inch iPad Air. The best way to analyze these updates is to look at Apple’s broader iPad strategy and the significant amount of change that the product category has undergone in just the past two years.
Changes
iPad mini. The most noteworthy change to the iPad mini was that it received an update in the first place. The last time the iPad mini received an update was in September 2015. Over the subsequent three years, iPad mini sales have steadily declined and now represent a small fraction of overall iPad sales. As smartphone screen sizes increased, the market for a tablet with a 7.9-inch screen shrunk. Sales for the iPad mini won’t surpass record level put in years ago, a claim referred to as Peak iPad mini. However, there was likely still enough demand for a 7.9-inch iPad to warrant an update.
The most noticeable update to the iPad mini will be found on the performance front related to the A12 Bionic chip. The iPad mini 4 had an A8 chip. The new iPad mini also has an improved display and Apple Pencil support (1st generation). Apple maintained the $399 price for iPad mini while cutting entry-level storage in half to 64GB. In addition, Apple removed the number nomenclature, instead opting for the much simpler and cleaner “iPad mini.”
iPad Air. Apple positioned the new 10.5-inch iPad Air as the successor to the 9.7-inch iPad Air 2 that was discontinued back in early 2017. In reality, the new iPad Air is more of a 10.5-inch iPad Pro successor that had components removed in order to have a lower price. The new iPad Air retails for $499 while the 10.5-inch iPad Pro went for $649.
Primary addition (from the 10.5-inch iPad Pro): A12 Bionic chip
Primary subtractions (from the 10.5-inch iPad Pro): 12MP camera, quad speakers, ProMotion, less RAM, 4K video recording.
Another minor change includes Apple removing the 512GB capacity option.
Three Sales Phases
When looking at the broader iPad category, there have been three distinct sales phases over the years:
Rocket launch
Implosion
Stabilization
Exhibit 1: iPad’s Three Sales Phases
Rocket launch. The iPad was Apple’s best-selling product out of the gate with 22M units sold in the first twelve months. It is going to be difficult for another Apple product to come close to achieving iPad’s early sales success. While there were likely a number of factors that came together to produce a perfect storm for iPad’s record launch, fascination with iOS on a large screen (the iPhone had a 3.5-inch screen when the iPad launched) and a thriving iOS app ecosystem provided plenty of fuel for the iPad rocket.
Implosion. iPad sales peaked at the end of 2013 at 74M unit sales on a trailing twelve months (TTM) basis. Three years later, the iPad sales runrate stood at 41M units. Three factors are behind the dramatic decline in sales: less demand for iPad mini, a longer upgrade cycle, and the broader iPad category being cannibalized by more capable iPhones.
Stabilization. The iPad business has been trending at a 44M annual unit sales run rate for the past two years. The combination of sales to new users and sales to existing users is roughly flat year-over-year. Apple’s decision to bifurcate the iPad line with more capable and powerful models at the high end and increasingly lower-priced models at the low end has played a major role in stabilizing sales. It also hasn’t hurt that the sales headwind associated with declining iPad mini demand has ended.
Current Line
The iPad line currently consists of five models and a few dozen SKUs when considering storage options and case colors.
iPad Pro (11-inch and 12.9-inch)
iPad Air (10.5-inch)
iPad (9.7-inch)
iPad mini (7.9-inch)
It may be easy to look at the five preceding models and conclude that Apple is aiming to copy the Mac line with a few “Pro” models at the top end and lower-priced models branded as “Air” and “mini” at the other end. Some may even think Apple is trying to recreate the 2x2 matrix Mac quadrant from the late 1990s in which Apple sold four Macs, two portables, and two desktops, targeting the consumer and professional markets.
However, there is one critical error in the preceding assumption.
Touch-based computing has blurred the line between consumer and professional devices. Each iPad model is used by a wide range of users. In addition to being a content consumption device, the iPad mini is utilized in various enterprise settings. Meanwhile, the 12.9-inch iPad Pro, combined with the Apple Pencil, can be either used for a wide range of content creation tasks or simply web browsing and content consumption. There isn’t one device that ultimately targets just consumer segments or enterprise use cases.
Instead, Apple’s iPad strategy seems to be following more of a hybrid approach, taking elements of both the Mac and iPhone lines.
In terms of nomenclature, there is no question that Apple is borrowing from the Mac. The MacBook Air is the best-selling and most popular Mac. The popularity is one reason why Apple decided to stick with the Air branding following last year’s update. Similarly, Apple is likely positioning the iPad Air at $499 to be one of the better-selling iPad models. Similar to the Mac mini, the iPad mini will then likely represent a smaller percentage of overall sales while handling a variety of enterprise use cases.
The strategy found with taking the 10.5-inch iPad Pro form factor and removing components and technology to lower the price and arrive at the 10.5-inch iPad Air is reminiscent of the iPhone SE strategy. The move to unveil the latest industrial design with the Pro models at the top is also something seen with the iPhone.
Borrowing from both the Mac and iPhone playbooks make sense when considering the iPad has a user base that measures in between that of Mac and iPhone. At end of the 2018, the iPhone, iPad, and Mac user bases were as follows:
iPhone: 910M (my estimate, although Apple recently disclosed that the number had surpassed 900M)
iPad: 290M (the math behind my estimate is available here for Above Avalon members)
Mac: 105M (my estimate)
Consumer Choice
One of the largest complaints facing the iPad line over the years has been the complexity and confusion in terms of the number of models available for purchase. Apple has done a few things to add clarity. Instead of keeping older models in the lineup at lower prices, management has moved to having a few new iPad models at prices ranging from $329 to $999. In addition, Apple has worked on reducing price gaps between models. The $250 price gap that had existed between the 10.5-inch iPad Pro and iPad mini 4 has been reduced to $100 with the new iPad Air and iPad mini.
iPad Pro (12.9-inch): $999
iPad Pro (11-inch): $799
iPad Air (10.5-inch): $499
iPad mini (7.9-inch): $399
iPad (9.7-inch): $329
There is no question that some customers use price to select the best iPad. Accordingly, the $329 iPad and $499 iPad Air will likely be strong sellers. In order for Apple to reach these lower prices, the company had to make some difficult product marketing decisions in terms of components, industrial design, and subsequently, Apple Pencil support. The non-Pro models work with Apple Pencil V1 while the Pro models are designed to work with Apple Pencil V2.
Another variable that may guide a customer’s buying decision is screen size. As with price, Apple has done a good job of covering the screen range from 7.9 inches to 12.9 inches.
iPad Pro 12.9-inch
iPad Pro 11-inch
iPad Air 10.5-inch
iPad 9.7-inch
iPad mini 7.9-inch
Apple continues to position the larger 9.7-inch iPad, instead of the new, smaller iPad mini, as the entry-level option. This is done because larger iPads have become vastly more popular than the iPad mini. Apple did not want to sacrifice that popularity just to have screen size correlate directly to price. In addition, the larger 9.7-inch iPad is marketed to educational institutions (special pricing brings the 9.7-inch iPad to $299).
Ready for WWDC
In recent years, the iPad line has undergone transformational changes. Apple management has not only bet on higher-priced, larger iPads with the Pro segment, but also doubled down on lower-priced iPads in an attempt to compete against Chromebooks and even hand-me-down iPhones.
From a unit sales perspective, the iPad mini’s best days are clearly behind it, and a $999 iPad Pro will likely end up representing a small fraction of overall iPad sales. However, from a hardware perspective, it’s hard to argue we aren’t looking at the strongest iPad line to date. Apple has spent the past three years expanding the iPad line in order to appeal to hundreds of millions of people.
This takes us to software - the missing link. All of the signs point to Apple getting the iPad line ready for new software features unveiled at this year’s WWDC. This week’s hardware updates cap off the first half of Apple’s two-part iPad show.
Receive my analysis and perspective on Apple throughout the week via exclusive daily updates (2-3 stories per day, 10-12 stories per week). Available to Above Avalon members. To sign up and for more information on membership, visit the membership page.