Market Insight

Apple's Q4 2013 iPad Results Analysis: With US market maturing focus is on China

January 30, 2014

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Apple reported its results for calendar quarter Q4 2013, (the first quarter of Apple’s 2014 financial year) with iPad, iPhone and Mac all showing unit and revenue growth year over year (YoY).

  • Apple reported sales of 26m iPads this quarter, an 18.2 per cent increase over the 22m sold in the same quarter in the previous year. Note that this result is within 2 per cent of the IHS forecast of 25.5m units for the quarter.
  • iPhone sales reached 51m units up from 47m in Q4 2012, an 8.5 per cent increase YoY.
  • Apple’s Mac computer sales increased 16.7 per cent YoY; reaching 4.8m units sold 0.8m units up on the final quarter of 2012.

Key Findings

  • The iPad Air and Retina mini launch was a success, with enthusiastic product reviews and solid demand across both categories.
  • Saturation in the US market is limiting growth opportunities there; iPad sales dipped 3.0% YoY in North America.
  • China is picking up the slack, with sales more than doubling in that region YoY.
  • Central and Eastern Europe, the Middle East and Africa (MEA), and Latin America all played key roles, recording double digit growth YoY.
  • Apple’s fourth quarter iPad activity mirrors an overall industry trend, with growth in tablet sales outpacing that of phones and notebook computers in 2013, marking the increasingly strong role that tablets are playing in global computing for manufacturers, OEMs, and users alike.

New products expand the iOS base

A myriad of factors contributed to the strong fourth quarter showing of the iPad. Primary amongst these was the fourth quarter launch of the iPad Air and the new Retina Mini, which triggered fresh demand for a product line that is rapidly approaching its fourth birthday. Apple offset the higher price of the Retina mini ($399 for the base unit), with a drop on its price of the original mini to $299, spurring renewed demand around the globe for the one year old product. The iPad also figured strongly in Black Friday activity across the US, with a host of channel partners offering a variety of discounts on the Air and original mini and several US retailers featuring trade in offers for older model iPads.

Demand for the Air outstripped Apple’s initial expectations, spurring increased orders for components in November and December. The Air represents a major update of the 9.7-inch product, slimmer, lighter, and significantly faster than its predecessor. Apple focused its advertising budget on the Air as well, a strategic move to lure customers back towards the 9.7-inch platform and the associated higher price point.

The availability of the Retina mini, by contrast, was done with a quiet announcement on the Apple site on November 12th, 2013 and a marked absence of advertising push, once again very strategic on a product where supply was much more constrained than that of the Air. The initial launch was limited to online and a few target cities in the US, and expanded as supply improved. The shift to a higher price point on the Retina mini marked a strong departure from overall industry trends, as Android competitors continue to drive pricing in that market ever lower. The new price point positions the Retina mini in easy stepping distance of the 9.7-inch Air and provides breathing room from the newly discounted original iPad mini.

iPad Q4 2013 share by region

The maturing US market

Balancing the revenue concerns with YoY unit growth is where the art comes into Apple’s tablet strategy. One of the challenges of designing a better tablet is driving fresh demand for a product that is, by design, durable, versatile, and easily upgradeable (free OS upgrades). In addition, unlike many smartphones, the iPad is typically not a subsidized purchase and thus lacks relatively short term carrier contracts driving the product refresh cycle. As a result a substantial portion of the 195m iPads sold as of Q4 2013 are still in operation. In the US, Apple’s biggest market, IHS calculates that the iPad’s active installed base is in the region of 100m, a figure equivalent to over 30 per cent of the US population.

Not surprisingly given that statistic, tapping into other regional markets is essential to Apple’s short-term and long-term success. The US market drove initial tablet demand, with sales far outstripping sales in the other regions. It remains the largest sales region in 2013 but growth is dropping steadily, reflecting the overall market saturation. For vendors locked into the US or North America (US and Canada) this presents a serious obstacle to growth.

Amazon, a major competitor with its Kindle Fire products, relies more heavily on US sales. Its more limited international presence has left Amazon more vulnerable in 2013 as US tablet demand slowed and its 2013 tablet sales actually declined YoY.

Moving east and west with a focus on China

While the US remains Apple’s core marketplace, it has paired that market’s development with expansion into other markets, both mature and emerging. Apple opened its first retail store in the US in May of 2001 and the US still accounts for 60% of its stores but it was quick to go international, opening its first Japan store 2.5 years later in November of 2003. At the time of the initial iPad launch Apple already had established stores in eight other countries, including the UK(2004), Canada (2005), Italy (2007), Australia (2008), Germany (2008), China (2008), Switzerland ((2008), and France (2009). Since the iPad launch it has added Spain (Nov. 2010), Hong Kong (2011), Sweden (2012), and the Netherlands (2012) to that group. Much of the store expansion in recent years has focused on non-US sites, with a strong focus on China.  The store strategy has paid huge dividends, allowing Apple to avoid the boundary limits that have plagued some of its competitors, most notably Amazon. The online retail giant has been rolling out its international operations slowly and is presently only fully active in twelve countries, five of those new entrants in 2013.

iPad unit shipments YoY by region

It is notable that iPad’s China sales doubled YoY in Q4 2013, aided to a large degree by the timely availability of the iPad Air in that market. With production of the iPad Retina mini improving in time for Chinese New Year, Apple is well situated to follow that success with even stronger sales in that market in Q1 2014. The success in China and other markets was integral to Apple’s Q4 2013 sales growth, helping to offset the 5.5 per cent drop in US sales from Q4 2012. Sales in Western Europe showed only modest YoY growth, increasing 1.5 per cent over fourth quarter 2012 activity. Double digit growth in Central and Eastern Europe, the Middle East and Africa contributed to much stronger YoY growth figures for EMEA overall (up 8.2 per cent). Sales growth in Latin America also hit double digits, up 30.6 per cent YoY but that was not sufficient to drive growth in the Americas into positive territory.

The recently announced partnership with China Mobile, coupled with planned additions to its existing ten stores in China are indicative of a strong focus on that market going forward. In sharp contrast to the US market, Apple’s active installed base of iPads in China has only recently passed the 30m mark. With a population over three times the size of the US, there is considerable space for years of growth in China. While the China Mobile partnership is primarily focused on smartphones, it grows the brand in China and the number of users connected to the Apple ecosystem, which benefits the tablet and Mac opportunities in that region as well. Note that Apple includes Hong Kong and Taiwan in China, while IHS counts those two regions in Rest of Asia Pacific.

Opportunity in the waiting

It was notable in Apple’s reported fourth calendar quarter report that revenue dropped 9.0 per cent YoY in the Rest of AP. Excluding its strong presence in Australia, with 21 stores and Hong Kong with 3, Apple has a noticeable void of Apple stores in the other Rest of AP countries. This region represents one of the strongest growth areas at present for low-cost Android tablets.

India stands out as a large potential market and one which other vendors – Lenovo, HP, and Samsung – are moving aggressively to capitalize upon. While Apple is likely to move into that market with its full retail operation eventually it currently works in partnership with Apple premium resellers and a network of smaller Apple Shops, in store kiosk style areas, devoted to Apple. Full sized stores in some of the major Indian cities could potentially create much stronger brand pull.

Whatever approach Apple uses as it continues to expand expect that it will continue to focus on profitability, revenue, and quality; even if that means ceding the unit lead in tablets to one of its competitors.

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