Why Apple's Partnership With IBM Could Save The iPad

| About: Apple Inc. (AAPL)


Apple's iPad is still growing solidly in international markets.

However, sales of iPads are falling in developed markets, and a larger iPhone screen will only complicate this.

Fortunately, Apple's partnership with IBM can significantly increase Apple's penetration in the enterprise market.

It seems that when it comes to Apple (NASDAQ:AAPL), most analysts and investors have their full attention fixed on the upcoming product releases. These include the iPhone 6, an Apple television, and even a wearable device dubbed the iWatch.

While these are obviously important to the company's future, there is another aspect of Apple's business that is poised to see huge growth. This is its position in the enterprise market, which is set to grow substantially thanks to its recent partnership with International Business Machines (NYSE:IBM).

Apple is already in a dominant position with consumers, and now has a significant catalyst for the future in the form of enterprise penetration.

Apple has a whole new market on its hands

Apple Chief Executive Officer Tim Cook made it clear on a conference call with analysts that enterprise penetration is one of his biggest priorities. IBM will create more than 100 business applications to be utilized specifically on the iPhone and iPad and run on Apple's iOS operating system. Apple will receive the benefit of IBM's huge sales force pitching iPhones and iPads to its network of business customers.

Of course, IBM stands to benefit as well. Going forward, IBM will have the opportunity to sell Apple's products, which will be loaded with IBM's industry-specific apps, to its clients across the globe. The applications will feature many of IBM's tools that it sells to its own customers, including IBM's MobileFirst platform which includes several productivity tools. IBM will also offer cloud-computing services including storage, and device setup and management.

On the conference call, Cook went on to say that companies are increasingly embracing Apple devices. He stated that 98% of Fortune 500 companies use the iPad. Moreover, he referred to research from industry analysis firm Good Technology that 91% of all tablet activations last quarter were iPads.

The partnership with IBM should only accelerate this trend going forward, and may be enough to restore growth for the iPad.

May even be enough to reverse the disturbing decline in iPads

Despite Apple's earnings beats the past two quarters, a lingering concern exists in the form of sagging iPad sales. Indeed, revenue from iPads fell 8% last quarter.

The decline in iPad sales is significant, because it represents a major product for Apple. Whereas the company is entirely content with the decline of the iPod, and has fully anticipated this, falling sales of the iPad is not part of Apple's vision.

Most of Apple's businesses, including the iPhone, Mac, iTunes, and accessories segments are growing. The iPad, however, sticks out as an under-performer.

Fortunately, the decline has been limited to mostly developed markets, like the United States. In emerging economies, the iPad is still doing well. iPad sales increased 64% in China and 51% in India last quarter.

Still, since developed markets like North America are where Apple does more of its business, it needs something to stem the decline in iPads. This parternship has that potential, especially if Apple is about to release a new iPad product. Rumors in the media suggest a new iPad Air may be coming soon, which would coincide perfectly with the IBM partnership.

It does appear that the iPad is in a tough spot. The new version of Apple's flagship iPhone is rumored to feature a larger screen. This threatens to encroach on iPad's territory.

That's because as phone screens get larger, they become very similar to tablets. But, as consumers increasingly desire larger phone screens, these "phablets" are too similar to existing tablets for consumers to buy both.

Fears of Apple cannibalizing its own tablet may be soothed by the partnership with IBM. Apple believes working with IBM will open up a new avenue for its iPad. This could very well be the case. A new generation of mobile apps at the enterprise level and backed by IBM's cloud services and data analytics could be the cure for sagging iPad sales. And, a new iPad release later this year would be a perfect compliment to the partnership announcement.

More to Apple's story than the iPhone 6

While most investors and analysts obsess over the release of the iPhone 6, as well as Apple's other devices, the company has a significant growth opportunity that merits attention as well. In the U.S., Apple could seriously improve its position in the enterprise market through its partnership with IBM.

Apple's iPad is still growing overseas, but growth of the iPad in developed nations is leveling off. Through its partnership with IBM, Apple has the potential to re-energize the iPad and take a meaningful position at the enterprise level.

Disclosure: The author is long AAPL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.