As iPad's Market Share Falls, Must Profits Follow?

Apple's share of the tablet market has plummeted from 90% to 38.8% in just three years, and it's certain to continue to fall. It has to. Apple's business model demands it.

In early 2011 I wrote:

Apple is fantastic at fostering growth in new markets. It is terrible at maintaining market share. Why? Because Apple is not a market-share leader, with very few exceptions (e.g., the digital music market). Indeed, Apple's high-margin, premium-pricing business model demands that the company cede market share as it hoards the high end of a market.

Some criticized me for that post, arguing that this time things would be different! This time Apple would be able to command a premium price and premium market share! This time Apple would defy gravity!

But it didn't. It couldn't. That's just not how free markets operate.

The Implications of Losing Market Share

In the past year Apple's share of the tablet market has dropped nearly 20 points, from 56.8% to 38.8%, with Samsung and Amazon gobbling up Apple's market share, according to a new report from Citi. Perhaps not surprisingly, the market has seen a "particular slowdown" in 10-inch tablets, caused in part by Apple's very successful iPad Mini. Speaking of the Mini, Citi warns that "innovation of this nature is insufficient to reverse share loss." It's also sparking a drop in average sales price, with the iPad selling for an average price of $467 this quarter versus $535 last quarter.

For those who say market share doesn't matter, that Apple still commands most of the industry's tablet profits, they clearly haven't been paying attention to the smartphone market. Profit share follows market share, as I've illustrated before. Already we're seeing Samsung increase its share of the profit pie as its market share increases, while Apple's profit share has declined in tandem with its market share. Apple has no one but itself to blame: as Asymco analyst James Allworth points out, Apple largely taught Samsung how to build a global mobile device business.

Apple has been minting money with app developers, over $3.5 billion on $8 billion in total App Store sales. Developers follow the money, and Apple has been the place to make money developing apps. But that was before Android took such a commanding share of the device market. Over time, those developers are going to move to where the market share is. They have to.

So is Apple doomed?

Doom that Most People Envy

Well, that depends on your definition of "doomed." Apple remains a phenomenally profitable, successful company, and likely will for years to come. Asymco's Horace Dediu makes this clear by comparing Apple's revenue to Google's and Microsoft's:

Google vs. Microsoft vs. Apple  on Twitpic

If this is "doom," I'd like a double helping.

However, the picture becomes a bit fuzzier if we look at what's happening over at Samsung, as another Asymco chart shows:

Google vs. Samsung Mobile  on Twitpic

Clearly, Samsung is learning to play Apple's game, and quite well. It's not just a market share leader: it's destined to be a profit leader, too.

A Bright iFuture for Apple?

Not that Apple is resting on its laurels. Speaking at an investor conference this week, Apple CEO Tim Cook glowed, "I've never been more bullish for innovation at Apple." While I can't see anything better than profitable niche status for Apple in smartphones, tablets, and personal computers, Apple has some interesting cards it can play to spur another bout of high-margin, mass-market boom times.

For one, there's the rumored iWatch. I've argued an iWatch makes a lot of sense for Apple to build. With a relatively low price point, Apple customers would flock to the device and refresh their iWatches every 12 to 18 months. I'd be among them. In my home we have five Macs, six iPhones, two iPads, and an Airport Extreme. We're a pretty dedicated Mac family, and have been for years.

Or take Apple TV. Apple calls it a hobby, and Apple TV has hardly stood out from the pack. But as Xbox founder Nat Brown writes, with just a few simple moves, Apple could completely dominate the console gaming market, eviscerating Microsoft and every other contender. You know, sort of like what it did to handheld gaming. Microsoft has completely failed to anticipate this move:

xBox’s primary critical problem is the lack of a functional and growing platform ecosystem for small developers to sell digitally-/network-distributed (non-disc) content through to the installed base of xBox customers, period. Why can’t I write a game for xBox tomorrow using $100 worth of tools and my existing Windows laptop and test it on my home xBox or at my friends’ houses? Why can’t I then distribute it digitally in a decent online store, give up a 30% cut and strike it rich if it’s a great game, like I can for Android, for iPhone, or for iPad?...

Apple is already a games competitor broadly, even if Apple-TV isn’t yet a game platform or a console. Mobile generally and iPad specifically have grown the total hours of game play and grown the overall game market. Only in the last 18-24mo has that overall growth turned from a segment-expanding rising tide to a tsunami swamping the console game vendor profit boats hitched to the docks. It is accelerating. Apple, if it chooses to do so, will simply kill Playstation, Wii-U and xBox by introducing an open 30%-cut app/game ecosystem for Apple-TV.

People who think that Apple could simply make modest, incremental changes to the iPhone, iPad, and Mac product lines to remain successful, as 37Signals' David Heinemeier Hansson argues, are fooling themselves. Clearly they were not around to witness Apple's last swan song, when "crappy" Windows ate its lunch on the desktop. Apple remained influential, but its business shrank to match its market share.

It turns out it's a really big deal to maintain market share, and not simply profits. Profit share follows market share.

Apple's Vision Is Bigger than Its Fanboys'

But such Apple fans needn't worry: Apple doesn't agree with them. The company isn't planning to churn out light iterations on its iThings for the rest of eternity. That kind of stasis isn't in its DNA, and Apple CEO Tim Cook knows it would be a recipe for obsolescence, anyway. Which is why he talks about Apple's pent-up innovative energy. He knows that Apple can't stay relevant by staying the same. Which is why every few years Apple has been upending the market, and itself, with new innovations.

With new innovations comes the ability to maintain its premium pricing, an essential hallmark of Apple's business model. Apple seems content to keep charging BMW prices in now-established markets that, in the long run, are fine with Hyundai treatment. This ensures Apple's niche status in markets where it once claimed 90% market share.

It also requires that Apple come out with big, market-defining products every few years to ensure that it can not only charge a premium, but also claim significant market share, if only for a year or two. The iWatch and improvements to Apple TV could well take care of Apple's hefty profit margins for the next ten years. It seems clear, however, that simply sustaining the iPhone, iPad and Mac franchises will not. After all, profit share always follows market share.

Image courtesy of TonyV3112 / Shutterstock.com.