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In a fiscal fourth quarter that slightly missed profit expectations, Apple reported one figure that looks especially worrisome: It sold only 14 million iPads.
You're thinking, of course, are you crazy? Fourteen million, up 26% from a year ago ($7.5 billion worth of them), is a problem? Yes--because it's at least 1 million below expectations already reduced by analysts who figured that if 100 million iPads were sold so far, as Apple announced at the iPad mini event, their 17.5 million fourth-quarter estimate was too high.
Update: After rising a fraction of 1% in initial after-hours trading, Apple's shares moved up and down before flattening after the analyst call started. Shares had fallen 1% today, to $609.54.
There are a number of possible reasons iPad sales fell even shorter than expected. Here are some, pending comments on the analyst call currently underway, during which I'll be updating this post--and there are a lot of questions on iPads:
* Cannibalization: This is the concern raised by some analysts: People who couldn't quite justify $400 and up for a regular iPad were waiting for the iPad mini, which starts at $329. No one really knows how many people did this, but it seems likely some did. Update: Apple CEO Tim Cook essentially confirmed not cannibalization but delayed purchases thanks to iPad mini rumors.
* Shortages: When the iPad mini came out with a minimum price of $329, analysts wondered why it wasn't closer to the other seven-inch tablets from Google and Amazon.com, whose base prices range from $159 to $199. It turns out that some components for the device are in short supply, so it didn't make sense to price them lower and create demand Apple couldn't fulfill. But perhaps the shortages affected current iPads as well?
* Consumer saturation: Well, I doubt it, since lower price points, the undeniable appeal of tablets to consumers, and the fact that a lot of people still don't have them all mean the iPad probably isn't limited by demand. But it's something to think about, given that 100 million have been sold already, very quickly.
And the most interesting possibility:
* Competition: Could Google's Nexus 7, Amazon.com's Kindle Fire, and other, full-size Android and Windows tablets finally hitting iPad sales? The market research numbers show millions of those devices have sold, so it's a distinct possibility, especially ahead of the lower-cost iPad mini.
They're still far below iPad sales. But it doesn't take an Apple Genius to see that the arrival of at least decent rival tablets could be presenting real competition for the first time. That's perhaps the most worrisome possibility if only because it seems the most likely--if not in the last quarter, at least in future quarters.
Here's more from the analyst call: Apple is saying that it exceeded its own expectations for iPad sales. So assuming it's not blowing smoke, maybe analysts just got ahead of themselves. Also, Apple says it had 3.4 million iPads in channel inventory in the quarter, or its target four weeks of inventory, so that's potentially a factor in sales numbers.
One question concerns how the iPad lineup will look as it evolves?
CEO Tim Cook says the company continues to be confident the tablet market will surpass the PC market. "It is already extremely compelling for many, many customers to choose a tablet, in particular an iPad, over a PC. Each quarter, you see 80 to 90 million PCs sold. We do think the iPad, the iPad mini, and the iPad 2 will continue to be extremely attractive for many people in lieu of PCs. We're extremely confident of what we have in the pipeline."
Another question on tablets: How does the competition such as the Surface introduced by Microsoft today look?
Cook: "I haven't personally played with the Surface yet. What we're reading about it is that it's a fairly compromised, confusing product." Most people, he adds, are going to conclude they really want an iPad.
Q: How are you going to differentiate the iPad mini? And how about cannibalization?
Cook: We provide a fantastic iPod Touch, an incredible series of iPads. Customers will decide which one or two or three or all four they will buy. We've learned not to worry about cannibalization. It's far better for us to do it than someone else. Bigger factor is all the PCs sold that iPads might serve people better with. It's an enormous opportunity for us.
Q: On Apple TV--status and strategy for living room?
Cook: For Q4, we sold 1.3 million, up 100%. So 5 million Apple TVs for fiscal year, almost double from 2.8 million last year. But it still has the hobby label. However, it's a beloved hobby. We continue to think there's more there and pull the strings to see where it takes us. (Same answer as he has had before.)
Q: Why the deceleration in iPad sales?
Cook: June to September was 17 million to 14 million reduction. The June quarter had 1.2 million increase in channel inventory. So very different sell-through. We had expected it to decline, based on two or three years of results, because normally we would see a seasonal reduction in the September quarter. Higher ed is still buying notebooks.
That's exaggerated further because we announced a product in March and have enormous full demand in the June quarter. In addition, it's clear that customers delay purchases of tablets because of rumors of new products. It did occur.
A year-ago quarter also had a channel inventory build. So the sell-through year over year actually grew 44%. So the underlying sell-through was extremely strong.
Q: Why was the iPad mini priced as high as it was?
CFO Peter Oppenheimer: We didn't set out to build a small, cheap tablet. We set out to build a tablet with the full iPad experience. Bigger screen than rivals, two cameras vs. one, fastest WiFi, higher-performance chip, unibody enclosure. The gross margin is significantly below our corporate average. We'll work to come down the cost curve.
Cook: We try to create a product that people will love for months and years after they purchase it and continue using it in a robust way. That's what iPad mini has been designed to do.
Q: Would Apple consider running ads on the iPad to reduce the cost to consumers, as Google and Amazon are doing?
Cook doesn't say for sure but implies it would not, again emphasizing the iPad quality aspect.
Q: Why did Apple do a smaller iPad after Steve Jobs said it wouldn't?
Cook: Steve had made the comments about seven-inch tablets. Let me be clear, we would never make a seven-inch tablet. But one of the reasons [we made a smaller one] is the size. The usable area is 35% greater on the iPad mini than the seven-inch tablets. And the iPad mini has the same number of pixels as the iPad 2. So you have access to all 275,000 of the apps in the App Store. IPad mini is not a compromised product.
