The Great Tablet Segmentation

With Apple's latest quarterly results and research reports showing a slowdown in tablet growth, many are wondering about the future of these devices.

I believe there is still growth potential for the tablet. The problem is that Apple is the only one driving tablet innovation in a meaningful way. Apple makes nearly 80 percent of the profits in the segment. With such little revenue to fight for, more OEMs have focused their efforts on the smartphone segment, not the tablet segment. And even if they are doing tablets, they are doing low-end models with very little differentiation. Also, Apple has the curse of quality behind its iPads since many people keep them well beyond what had been the normal two-year refresh cycle. 

But I believe we are at the beginning of something new in the tablet market that will hopefully drive growth for these highly mobile computers. I believe we are about to see the great tablet segmentation. This is a chart we at Creative Strategies have been using in our industry trend presentations over the last year outlining some of the segmentation we see evolving.  

Inevitably, when markets mature, they segment. Consumers must be aware of their needs, wants, and desires in order to consider a market mature. They must know what they want and why they want it. Modern day tablets, being so new, are just now reaching maturity. Most developed consumers have had a chance to at least use an iPad or other tablet and what the product means to consumers, families, and corporations is currently being defined. However, as consumers become more self aware, segmentation opportunities will begin to exist in the tablet market.

Nabi, a company focused on making tablets for kids of different ages, sold nearly 2 million units in the U.S. in the 2013 holiday quarter, according to our estimates. Not bad for a specialized product. But perhaps the most interesting example of this segmentation opportunity is what Nvidia is doing with its Shield tablet.

What makes the Shield tablet interesting is the way it was built for gamers, with the graphics engine, connection to the Steam PC game portal, integration with Twitch, access to Nvidia Grid technology, a custom controller, and access to multiplayer game engines. That sets it apart from any other tablet in the eyes of any serious PC or console gamer. Nvidia is hoping to appeal specifically to the gamer niche, which is not necessarily high volume but is extremely lucrative. The Nvidia Shield tablet is an excellent example of a segmentation opportunity in the tablet form factor. This product also leverages Nvidia's strengths and highlights the trend of companies getting into hardware as a natural extension of their existing products and business model.

Of course, since the tablet market is actually almost 25 years old, with the first models showing up in 1990, this type of segmentation has really existed since they were introduced to the market. Although the vendors behind these early models hoped they would be interesting to consumers, they mostly were bought for use in what is called vertical markets by police, fire, first responders, mobile data collectors, and manufacturing. In fact, when the iPad was introduced in 2010, the industry had sold only 1 million tablets worldwide the year before. But these tablets never were considered acceptable to consumers and therefore only hit home in these vertical markets Now, with the growth of tablets in both the business and consumer markets maturing, we are seeing this more aggressive approach to tablet segmentation and this is where we may see the return of growth in tablets in the future. 

The iPad, as of now, owns the crown of "general purpose tablet." It can cover the most ground for most consumers' use cases. And we expect Apple to innovate around the iPad later this year with updated processors, new screens, and maybe even a new form factor. While some Apple iPads do end up in vertical markets, they really have their broadest reach with those who use them as multi-purpose tablets.

However, it is important to note that segmentation opportunities like the Nabi kids tablet, or the Nvidia Shield tablet present the more lucrative opportunities for vendors since competing with Apple appears to be a waste of time. This is especially true in vertical markets where tablets designed for use in the military, medical, and gas and oil exploration are stronger than ever and can be priced well above most consumer mass-market tablets. 

While the Nabi and Shield tablets present some of the more interesting segmentation examples to date, I still expect more experimentation by vendors.