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  (Source: Reuters)
Tim Cook offers many interesting theories as to why the tablet market is growing, but iPad sales are shrinking

While showering shareholders with $90B USD cash via a 7-to-1 stock split -- just over half of Apple's roughly $170B USD cash pile (including fiscal Q2 2014 profit and long term investments) -- sent shares of Apple, Inc. (AAPL) rising and investors humming a happy tune, one part of Apple's earnings report unsettled analysts.

I. Asked About Slow Sales, Office, Tim Cook Chides Microsoft for Slow Launch

The iPad had sold: It doesn't take a rocket scientist to notice the trend there -- sales of the iPad, the world's most popular tablet computer, have hit a slump after a strong holiday season.  Combined with basically flat quarterly Mac computer sales and weak iPhone growth (~17% on a year-to-year basis) by Apple's standards, and this red flag becomes even noisier.

Apple CEO Tim Cook offered a somewhat odd non-sequitur in that he simultaneously praised rival Microsoft Corp. (MSFT) for its high profile launch of an Office 365 app for the iPad, yet also seemed to perhaps imply that Microsoft's "slowness" to release that app had hurt the iPad.
 
iPad sales are in the doldrums because of Microsoft Office?

During the earnings call's Q&A segment UBS Securities (UBS AG (UBS)) Steven Milunovich asked Tim Cook about the slow iPad sales, perhaps nudging him towards the Microsoft Office tie in.  He asked:

Tim, I understand that the iPad is not as weak as it appears on a sell-through basis, but still it's relatively flat over the last year in terms of sell-through. What are your thoughts in terms of why that is and can that accelerate with Office on the iPad going forward?

Tim Cook odd look
Tim Cook, Apple CEO [Image Source: Mashable]

He responds:

Office; I believe does help. It's very unclear to say how much. I believe if it would have been done earlier, it would have been even better for Microsoft frankly, there is a lots of alternatives out there from a productivity point of view, some of which we brought to the market, some of which many, many innovative companies have brought. But I do see that Office is still a very key franchise in the enterprise, in particular. I think having it on iPad is good, and I wholeheartedly welcome Microsoft to the App Store to sell Office. Our customers are clearly responding in a good way that it's available.

The response sort of makes sense, but one must wonder what good it does to complain about Microsoft not having released the software earlier.  Apple, of course, offers its own first-party solution iWork for the iPad.  
 

Tim Cook did try to emphasize the strong points of the iPad's sales.  He emphasized in another part of his lengthy, winding response that the iPad had sold 210 million total units to date.  He remarks:

When I backup from iPad, here is what I see. It absolutely has been the fastest growing product in Apple's history, and it's been the only product that we've ever made that was instantly a hit in three of our key markets, from consumer to business including the enterprise and education. 

He also pointed to that Apple had a 95 percent market share in educational deployments (excluding Microsoft's free giveaways, apparently), and that 98 percent of the Fortune 500 were using the iPad in some way.

II. Cook Offers Vague Aspersion About Hybrids

Other parts of Tim Cook's response were also somewhat odd and defensive, though.  He seemed to imply that Apple's slump to 46 percent of the tablet market sales in the U.S. was the result of miscategorization.  Presumbably he's talking about hybrid form factors like Microsoft's Surface 2 or the numerous transformable tablet computers that run Google Inc.'s (GOOG) Android operating system.  

Tim Cook doesn't believe hybrid tablets are really tablets.

But he fails to ever really explain what he means, stating:

In the retail market, if you look at the U.S. as a proxy, the NPD numbers for March just came out a few days ago and we had 46% share and embedded in that 46%, there's a lot of things in there that I personally wouldn't put in the same category as iPad, and that are weighing the share down.  It's certainly a market we wouldn't play in and in a type of product you would never see an Apple brand on.

Perhaps Tim Cook has learned a lesson from public blowback over comments from the late CEO Steve Jobs that seemed to imply smaller tablet and larger phone form factors were useless.  Perhaps by keeping his complaints as vague as possible, if Apple later sees a strategic advantage in making, say, a hybrid tablet, he won't face quite as resounding a "told you so" from critics.  But the alternative -- making such vague and bitter complaints -- seems almost worse that Steve Jobs' approach.

III. Apple Still Struggling to Figure Out Supply and Demand Balance Under Cook

The other parts of the Q&A were equally cryptic.  As he did with the iPhone 5C miss in Q1 2014 (Oct.-Dec. 2013) he blamed some sort of overproduction (or underproduction?) scenario.  He states:

iPad sales came in at the high end of our expectations, but we realized they were below analysts' estimates and I would like to proactively address why we think there was a difference. We believe almost all of the difference can be explained by two factors. First, in the March quarter last year we significantly increased iPad channel inventory, while this year we significantly reduced it. Luca will go into more detail about this later.

It makes sense that Apple would balance supply and demand but Mr. Cook's wording is troublingly ambiguous.  He could be alluding that Apple underproduced to try to avoid excess inventory.  Or his comment could perhaps allude to drops in price of some models.  But that would be yet another non-sequitur as if anything you'd expect lower prices would stoke more sales.  Or perhaps he's saying that Apple overproduced in Q2 2013 and sold the iPad at lower prices to try to temporarily reduce excess inventory resulting in a somewhat artificial temporary jump in Q2 2013 iPad sales?

He perhaps hints at the latter possibility in Q2 2013's earnings call, in which he stated (the grammar is a bit odd, possibly garbled by Morningstar's transcription):

These compares are made further challenging until we anniversary the launch of the iPad mini, which as you know we strategically priced at a lower margin.

The phrase to note is "strategically priced".


iPad mini with Retina Display

If he was telling investors something in his first point, they shouldn't expect much from his second point which basically repeats his first point about supply-demand imbalance in Q2 2013 versus a more balanced Q2 2014.

He continues:

Second, we ended the December quarter last year with a substantial backlog of iPad mini that was subsequently shipped in the March quarter whereas we ended the December quarter this year near supply demand balance. We continue to believe that the tablet market will surpass the PC market in size within the next few years, and we believe that Apple will be a major beneficiary of this trend.

The final part of that response it really peculiar, in that it seemingly casts Apple in a very negative light.  His comment doesn't really speak to the iPad sales slump at all -- if anything it highlights its severity by clearly stating that the market Apple is competing in is growing, but Apple's sales in that market are shrinking.

IV. Apple Says It's "Anti-Doing Something That's Not Strategic"

There's plenty of other places where Tim Cook appeared to be on the defensive.  In an interview with The Wall Street Journal and ZDNet Mr. Cook defended Apple's decision to be less aggressive in terms of acquisitions, instead opting to push the cash out to shareholders (something some shareholders have long been noisily clamoring for).

Alluding to Google and Facebook, Inc. (FB) he comments [sources: 1, 2]:

From an acquisition point of view, we've made 24 bids in 18 months, showing that we're on the prowl.  Obviously, we’re on the prowl.  We’re not anti- getting a big company.  What we’re anti- doing is doing something that’s not strategic.  We’re not looking to pay the most and get the most buzz out of it.

(There's a bit of a discrepancy -- ZDNet reports that Mr. Cook just said that Apple bid on 24 companies, not that it necessarily bought all of them.  The WSJ report says Apple bought 24 companies.)

Facebook Instagram
Tim Cook sort of seems to insult Google and Facebook's
acquisition strategies in a roundabout way.

Tim Cook also took the opportunity in the Q&A segment to take a potshot at Android.  He comments:

I would just add to that, because we are not fragmented like our competition, we can update an OS with a major release and a substantial percentage of our customers will update to our latest software.

While Tim Cook's response to this slump is less than decisive and a bit troubling, it's not necessarily atypical of his reign at Apple.  He's earned a reputation for at times offering odd or offensive remarks, such as his rant about Europe, which he later apologized about.  At times it seems as if Mr. Cook is struggling with the unenviable challenge of running one of the world's most profitable companies, a company that was long regarded as a key trend setter.

So there you have it -- Apple is pure and unfragmented, but shrinking in the fast-growing tablet market.  And if you want to know why you have to learn to decode Tim Cook's cryptic comments.  Were it Steve Jobs at the helm still, investors would likely receive a blunt -- if perhaps biased -- view on the issue.  Instead in the new era of Apple they're left to decode the web of words Apple's new leadership is weaving.

Sources: Apple Q2 2014 Earnings Call Q&A on Morningstar, Apple Q2 2014 Earnings Call on Morningstar



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RE: apple refuses to change with the market
By Reclaimer77 on 4/24/2014 4:26:45 PM , Rating: -1
quote:
My fiancee moved from the iPhone to Windows Phone


What a surprise, the poor woman. If you talk about Windows Phone to her half as much as you write about it here, she either got brainwashed or figured you wouldn't marry her unless she did.

But either way, I salute you for getting one more person out of the Apple Concentration Camp. And grats on the engagement!

quote:
Ironically, I decided to go back to Android for the app selection


Whoa whoa whoa!!! I see you trying to slip this in under the radar :) Welcome back to Team 'Droid! I won't say I told you so :P


RE: apple refuses to change with the market
By JasonMick (blog) on 4/24/2014 7:07:41 PM , Rating: 3
quote:
What a surprise, the poor woman. If you talk about Windows Phone to her half as much as you write about it here, she either got brainwashed or figured you wouldn't marry her unless she did.
LOL I think you think I'm really platform biased ... I'm actually pretty platform agnostic. The main reason I give Windows Phone a bit more coverage than its market share might on the surface suggest it deserves is because I think competition is good for the market and I think Microsoft at least is doing something interesting in different. I've also tried to cover other platforms, but the only one I find very promising is Firefox OS.

I admit that personally I really liked my Lumia 900, so I'm sure the fiancée hear about that sometimes. I don't deny it has its flaws ... most notably lack of apps (but then again Apple fans say the same thing about Android given that some professional or artist apps are exclusive to the iOS). The reason why this wans't more of an issue is that I don't use a lot of apps, and when I do it's typically for news.

On Windows Phone I used CNN and ESPN. CNN is a bit slow and inaccurate news wise, but it had a beautiful Windows Phone app that was easy to navigate. Ditto for ESPN. On Android I find I've been using BBC News... its app is pretty nice. I do like that Reason has an app for Android, albeit it's a bit dated.
quote:
But either way, I salute you for getting one more person out of the Apple... Camp.
Well it was more leading by example. I didn't really evangelize to her about it.

She just honestly just felt that the iPhone was looking increasingly dated and had been much less reliable in terms of hardware than she hoped -- the buttons going bad on her phone was very odd. I'll say I've had phones die (well a BlackBerry Storm x2 or x3? I forget... but a couple). My Nokia's Microphone started to lose its pickup after being dropped one too many times. But otherwise no hardware issues. My HTC EVO 4G android started to have issues with its microSD slot and "ate" (e.g. irreparably corrupted) a memory card. But I've never seen the physical buttons on a phone die until my fiancée's iPhone 4S. It was bizarre she couldn't even turn it on by the end as the power button just totally broke.
quote:
And grats on the engagement!
Thank you! :) Hopefully it goes better than the last O_O
quote:
Whoa whoa whoa!!! I see you trying to slip this in under the radar :) Welcome back to Team 'Droid! I won't say I told you so :P
Ha thanks.... yea I said it in the Android article. I never had a problem with Android... I actually have always really admired what Google has done and what Samsung and others are doing. I just personally didn't feel compelled by Samsung's chassis designs... I know some people (like you?) are, everyone is different.

But the HTC One was beautiful ... often said last year I would buy one if the contract was up (either that or the Lumia 1020 as its camera was so often). Lack of OIS on the 2014 HTC One was a bit of a bummer (it actually does make a difference... I get a lot of blurry images at times), but the device is otherwise impeccable.

The apps are great... I just wish I had more time to enjoy them particularly the games. I have this one "Shadowrun Returns" wishlisted... it brought back my memories of playing Fallout on my old Pentium 3 PC back in the day! ;)

I'm on T-Mobile Jump... so glad to be off AT&T. Together my fiancée and I are paying for both phones + Jump what we would pay for just my contract on AT&T and no upgrades. Plus T-Mobile coverage is better in my region... I can actually get calls in large buildings, which would almost always be dead to AT&T.

Again, I'm really platform agnostic... who knows in Oct. 2014 when I'm eligible for a trade-in/upgrade, what I'll get... maybe a Lumia 1030 if it looks good? Maybe an LG G3? Hey, I might even get an iPhone 6 if Apple really steps up its game.

I'm not opposed to Apple. I just feel like under Cook it's basically sat in place doing nothing (other than the seemingly very unpopular iOS 7) or at best copying Android (iPad Mini, larger iPhone screens). "Uninspired" is the word that comes to mind.

Steve Jobs was doubtless a jerk to many of his workers, but I have little doubt that had he lived, he would have demanded continued refinements to the iPhone... he's probably rolling over in his grave particularly at Cook bowing to shareholders on the stock split deal.

My philosophy when it comes to smartphones is don't marry yourself to a single platform. Find what you like about your favorite platform, and be open to whoever offers that best. In your case, I definitely feel that would still be Android.

But hopefully that clarifies why someone like myself with slightly different tastes could consider a Windows Phone or an Android without a strong bias or prejudice in either direction.

The biggest thing I miss about my Lumia is that even for a 2 year old phone its animations still seemed faster and smoother than my HTC. I might root it and put on CM and see if that helps... but its definitely something you'd notice if you used Windows Phone for a long time. If you'd just used Android though, you probably wouldn't notice.. it's not so much it ruins the experience, it just doesn't feel quite as buttery smooth as WinPhone.

That said I will store my collection of apps if I go back to WinPhone. That's the great thing about Android... if you do switch to another platform, you can always reinstall your apps when you come back. :)


By augiem on 4/24/2014 11:34:57 PM , Rating: 2
quote:
he's probably rolling over in his grave particularly at Cook bowing to shareholders on the stock split deal.


Even Jobs had to make compromises. 3rd party apps on iPhone anyone?


By Reclaimer77 on 4/25/2014 10:54:44 AM , Rating: 1
Ah it was just some good-natured ribbing man. You don't have to explain yourself to me.

And I have noticed the uptick in Android/Google related articles lately, and I appreciate that. The site seems more balanced now.


By NellyFromMA on 4/25/2014 11:17:38 AM , Rating: 2
LOL, I would never peg you for a Microsoft backer what-so-ever. Every time you write about MS, its rarely ever a positive remark. Even when there is a positive remark, it's followed almost immediately with a chastising and promotion of Android.

With that said, to each their own.


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