Apple Doesn’t Need To Enter The Low-Cost Smaller Tablet Market

Amazon’s (NASDAQ:AMZN) Kindle Fire shipments slumped in the first quarter of 2012, after seeing record demand during the previous quarter’s holiday season. According to IDC, Amazon shipped only 750,000 Kindle Fire tablets during Q1, a sharp fall from the 4.8 million shipped during Q4 2011. ^[1] Kindle Fire was however not the only tablet to be affected by the seasonal slowdown as overall Google’s (NASDAQ:GOOG) Android-based tablet shipments declined steeply, causing worldwide tablet shipments to come in lower than IDC’s projections for the quarter.

Even Apple (NASDAQ:AAPL) was impacted by the seasonal slowdown, albeit to a lesser degree as the new iPad was launched and the prices of the older iPad versions were slashed. The comparatively strong showing of the iPad helped Apple grab a 68% market share with 11.8 million unit shipments, and shows that the impact of a cheaper and smaller tablet on Apple is minimal.

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Kindle Fire’s not so fiery Q1 shipments put in perspective

The Kindle Fire’s launch just ahead of the holiday season had seen frenzied buying as shoppers picked up the aggressively priced tablet for themselves as well as to give away as gifts. The aggressive price point of $199 and the nascent stage of the tablet market caused many to believe that the Kindle Fire would be the first true competitor to the iPad. Shipment numbers that came out earlier this year did not disappoint as the Fire saw close to 5 million shipments during the quarter and became the top-selling Android-based tablet for the quarter.

However, this also led to a stockpiling of inventory as Amazon tried to ship as many tablets as possible to take advantage of the holiday demand. Consequently, the inventory backlog caused shipments to fall in Q1 as some of the demand was met by existing inventory from the Q4 shipment last year. Therefore, the frugal Kindle Fire’s shipment numbers are not reflective of the true sale figures. NPD, another market tracking firm, said that actual Kindle Fire sales to customers were 3.8 million in Q4 2011 and 1.8 million in Q1 2012. ^[2] While the Q1 figure is still low, the decline when seen from this perspective is not as sharp as the drop in shipments.

What this means for Apple

Still, the below-par performance of the Kindle Fire and the overall Android  tablet market in general emphatically dispels concerns that the iPad’s sales might take a beating unless Apple comes out with a smaller iPad. Apple’s iPad shipments in Q4 2011, when the Kindle Fire was launched, reached an all-time record of 15 million while only 750,000 Kindle Fires were shipped in the most recent quarter when the new iPad was released.

This is not to imply the death of the Kindle Fire in any manner whatsoever since the tablet has sold more than 5.5 million units in a hotly contested market where it has only been around for less than two quarters. We believe that given the nascent stage that the tablet market is in, there is enough room for competition and the creation of different market segments – the ones with the bigger iPad-esque form factor and the ones with the smaller Fire-esque one.

We however don’t think that Apple will try to go after the smaller tablet market considering the low margins on a offer, owing to the more competitive pricing landscape. The iPad’s gross margins are already on the lower-end at about 30% compared to the company-wide average of about 45%, as of Q1 2012.

Moreover, we think that a cheaper 7-inch tablet appeals to a different segment of population that includes mostly price-conscious consumers. The entry of the Kindle Fire has lowered the cost barrier and will pave the way for new consumers entering the tablet market. This will serve to whet consumer appetite for tablets and may even make customers shift to a costlier tablet such as the iPad for their future purchases.

Also, Apple has historically lowered the prices of the older versions of its mobile devices as it launches new ones. We have seen Apple do this for the iPhone as well as the iPad, and we believe this strategy meets the demand for the low-cost tablets to a good extent without having to develop a smaller tablet.

Apple has also historically avoided playing the volume game, preferring instead to have a niche market following while cornering most of the industry profits. Even in the mobile phone business, where its iPhones are selling like hotcakes, its global market share is in single digits but it takes up more than three-fourths of the industry’s profits because of its high margins. ^[3]

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Amazon’s Kindle Fire shipments slump in Q1: IDC, Reuters, May 3rd, 2012 [↩]
2. Shipments Are Not Sales, NPDGroupBlog, May 4th, 2012 [↩]
3. Apple and Samsung capture 99% of handset industry profits: Canaccord, Financial Post, May 2nd, 2012 [↩]