When Apple (NASDAQ:AAPL) launched the iPad in mid-2010, people were surprised. While Apple fans were happy to see a new and exciting gadget, there were also a large number of skeptics who questioned the utility of what they considered to be merely an enlarged version of the iPod. Now that the iPad has disproved its critics with respect to its usefulness, a more legitimate concern is that Google's (NASDAQ:GOOG) Android based tablets would rapidly eat up iPad's market share just like Android smartphones are dominating the smartphone market. This concern is not new; when Michael Dell was asked in April 2011 whether Android tablets would outpace iPads going forward, he answered: "Not tomorrow. Not the next day. But again, if you look at 18 months ago, Android phones were like, "What is that?" And now there are more Android phones than iPhones. I don't see any reason why the same won't occur with Android tablets." Has that day arrived? Will that day ever come? Is there any reason why the Android tablets will not be able to wipe out the iPad's market share? These are the questions I will be looking at in this article.
Chart by Dividend Pros. Data from Statista.
Chart by Dividend Pros. Data From Statista.
The charts above show the trajectory of Android and iOS' market share for smartphones and tablets based on quarterly data. One thing that you can clearly notice from these charts is that so far, the Android tablets' market share has not taken off quite the same way as Android smartphones grabbed the share from the iPhone. Let's look at some of the reasons for this:
When the first generation iPhone was launched back in 2007, it was a revolutionary, premium product with virtually no competition. That is why Apple charged a premium price for it and focused on high gross margins. The first few versions of Android phones that aimed to compete with the iPhone lagged behind Apple's device in terms of form, features and functionality by a long way; the only point on which Android phones could compete with the iPhone was price. And that is what they targeted; phone manufacturers like HTC and Samsung (OTC:SSNLF) started making Android smartphones that were cheaper than the iPhone even at the premium end of the range. Although not quite the same as Apple, makers of Android smartphones were still able to achieve decent gross margins because licensing of Android software was free.
However, when Apple launched the iPad, it surprised everyone with the amazing price point that competitors found very hard to match. In Apple's FQ4 2010 earnings call, the legendary Steve Jobs had the following to say on this subject:
"Our potential competitors are having a tough time coming close to iPad's pricing, even with their far smaller, far less expensive screens. The iPad incorporates everything we have learnt about building high value products from iPhones, iPods and Macs. We create our own A4 chip, our own software, our own battery chemistry, our own enclosure, our own everything. And this results in an incredible product at a great price. The proof of this will be in the pricing of our competitor's products which will likely offer less for more."
And he was right too; the competitors' first attempts at competing with the iPad were Android tablets priced higher than the iPad while offering relatively poor designs and fewer features. Inevitably, this strategy did not work out, so today you have Google and Amazon (NASDAQ:AMZN) selling tablets at negative to single digit positive gross margins to compete with the iPad.
One reason why Android smartphones were easily able to outpace the iPhone is the strength in their distribution channel. Bernstein Research notes that phones manufactured by Samsung are supported globally by a significantly larger number of carriers as compared to the iPhone. On the other hand, the iPad's distribution is not restricted by telecom carriers; here Apple has a vastly superior distribution network thanks to Apple stores, a huge network of authorized resellers and retail stores as well as various carrier partners.
Number of Apps
Another important reason why Android tablets have not been able to catch up with the iPad is the relatively small number of tablet optimized apps available on Google's platform. And availability of top quality apps is especially important for tablets; unlike a smartphone which is primarily used as a communication device in addition to being used for content consumption through apps, the whole purpose of a tablet is to consume and create content through high quality apps; without the appropriate apps, a tablet's usefulness is very limited.
Although the lack of apps is not a complete deal-breaker for people who primarily use apps for media consumption, it is for a potentially huge market for tablets: enterprise users.
Winner in Enterprise
While heavily discounted Android tablets like Google's Nexus 7 and Amazon's Kindle Fire may be gaining ground amongst casual media consumers, such devices are not at all popular among enterprise users where the iPad easily dominates. According to a recent report by Good Technology on mobile device activations amongst its corporate clients, iPads accounted for 93.2% of tablet activations in Q4 2012 while Android tablets captured just 6.8% of the market during this period. This is hardly surprising because the iPad gives corporate users everything they want: a refined, classy hardware design to impress clients with as well as full functionality and features courtesy of diverse range of top quality business apps from iOS. Moreover, unlike Android, iOS contains many features specifically designed for businesses such as embedded support for Microsoft's (NASDAQ:MSFT) distributed file system, Active Directory, Windows Server, and Exchange. Apple's Mobile Device Management ((MDM) solution also gives enterprises the ability to manage large scale deployment of iOS devices for their business; whilst device policies, restrictions and strong encryption methods available in the iOS also give business users a high level of security and protection. A survey of MDM software vendors conducted by Gartner revealed that adoption of Android devices among businesses remains limited due to difficulties in managing the fragmented Android platform. This fragmentation also raises concerns about security. When these concerns are combined with the lack of business specific apps available on Android, the future for Google's platform looks bleak in the huge enterprise market. Moreover, these concerns also apply to other potentially huge non-consumer markets such as education, health and other government institutions.
In the Q4 2013 earnings call, Blackberry (NASDAQ:BBRY) CEO Thornsten Heins responded to a frequently asked question about the Blackberry 10 platform: Why did Blackberry choose to launch a touch screen phone (the Z10) first as opposed to a QWERTY keyboard phone that is more popular among Blackberry loyalists? Heins replied that a touch screen phone was released first to target the growing Bring Your Own Device (BYOD) trend, as more and more workplaces are allowing their employees to bring their personal devices to the office. This shows the growing importance of BYOD in the enterprise mobility market. BYOD is great for iPad because of its appeal to both business users as well as casual consumers. However, the BYOD trend is not as beneficial for Android tablets; since most enterprise users prefer the more business friendly iPad over Android tablets, the BYOD trend may influence even casual users to opt for the iPad if they are also going to use the device at work, even if a similar Android tablet is perfectly suitable for their personal use.
The iPhone, when launched, was a remarkable, revolutionary and disruptive product. However, the speed at which Android invaded and captured a huge share from a market that was essentially introduced by the iPhone is also quite extraordinary. Thus it is only natural that a lot of people, including Michael Dell, initially thought that the iPad would suffer the same fate as the iPhone in terms of conceding market share to Android. But if you think strategically, you would realize that the market dynamics for iPad and other tablets are pretty different from the smartphone market, as I have explained above. Therefore, I believe that Google (Android Tablets), Microsoft (Surface), and Blackberry (PlayBook) will have a tough time competing with Apple in the highly lucrative tablets market, and iPad's continued dominance of the tablets makes Apple a Buy.
Disclosure: I am long BBRY.
Business relationship disclosure: This article was written by Dividend Pros' analyst covering technology.