Apple needs the iPad to be 'long arc,' enterprise driven

Tim Cook isn't writing off the iPad, but acknowledges that you can't measure sales in 90 day increments without zooming out and seeing the enterprise possibilities.

Apple CEO Tim Cook argues that the iPad is a "long arc" product that will have a replacement cycle that falls somewhere between a PC and a smartphone. Whether Cook's theory works or not will largely depend on the enterprise.

The company's December quarter results were stellar. Apple sold a whopping 74.5 million iPhones driven by the iPhone 6 and iPhone 6 Plus upgrade cycle. It's also becoming clear that the iPhone 6 Plus is cannibalizing iPad sales as phablets trump tablets for many.

Could a bigger 'iPad Pro' help boost flagging sales?

Could Apple help buoy flagging iPad sales by bumping the display up from 9.7-inches to over 12-inches?

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Apple earnings: Apple Q1: 74M iPhones sold in "record" quarter, as earnings beat expectations | Apple Q1: Apple Watch ships in April; IBM deal to pay off for iPad | Apple said to have sold more iPhones in China than in the US | Nine iPhones sold every second | Apple statement

Indeed, Apple sold 21.4 million iPads in its fiscal first quarter, down 18 percent from a year ago. Revenue was down 22 percent in the first quarter compared to a year ago.

Now it's possible to shrug off iPad growth issues given the iPhone success and new businesses such as Apple Watch and Apple Pay. But those new businesses aren't locks to be a success. Let's play out the following scenario to illustrate how the iPad matters.

  1. Apple is currently benefiting from an iPhone upgrade cycle from folks with iPhone 4S devices. That pop may not come around for two years given wireless carrier contracts and pent up demand for larger screens from Apple.
  2. It's possible that the Apple Watch could flop. Battery life issues and a first generation device may lead to a slower sales ramp. Analysts could be overly optimistic about the Apple Watch.
  3. Apple Pay and the company's services revenue stream will take time to develop.

Should those scenarios play out at all, Apple is going to need the iPad to hold the fort. Yes, the Mac does well, but can't carry the team. The iPad will be needed to smooth out iPhone upgrade cycles.

Cook thinks that the iPad has legs and urged analysts to think beyond 90 day increments (good luck with that Tim). Here's what Cook said when asked about the iPad's growth:

In the short run I don't think you're going to see a miraculous change or improvement in the year-over-year. But here's what I see. I see that the first time buyer rates are very high. And so by very high I mean that if you look in some of the developed markets like the US, Japan, the UK, you would find that 50% of the people are buying an iPad for the first time. If you look in China, it's over 70%. And so when you have that kind of first time buyer rates you don't have a saturated market.

When I look at the customer sat on iPad it's literally off the chart. When I look at the usage, the usage is six times our nearest competitor. The usage as measured in web browsing is like 71% of total tablets. Also, the commerce taking place across the iPads is enormous. Essentially, over 80% of the commerce on tablets are taking place on iPad.

And so when I back up I believe that over the long arc of time that the iPad is a great business. I also have visibility obviously to what's in the pipeline and feel very, very good about that.

Cook's comments could easily lead to an iPad Pro rumor or two, but he emphasized that he's not projecting anything. Cook's main point is that the iPad business is long term.

Why? The enterprise and the iPad's upgrade cycle isn't clear yet. Cook continued:

The upgrade cycle is longer. It's longer than an iPhone, probably between an iPhone and a PC. We haven't been in the business long enough to say that with certainty, but that's what we think. There is probably some level of cannibalization that's going on with the Mac on one side and the iPhone on the other.

Cook also got to the IBM partnership, which may ultimately benefit Apple more than Big Blue only due to ease of consumption. It's easier to buy an iPad out of that deal than consume apps, IBM analytics and the services that go with it. See: IBM, Apple roll out industry apps: A look at the buying moving parts

I think the partnership with IBM and the work that we have going on in the enterprise is profound. I think we're really going to change the way people work. I'm really excited about the apps that are coming out and how fast the partnership is getting up and running. I think that can move the dial there. I'm not predicting the 90 day clips and so forth but over the long arc of time I really believe that iPad is a great space.

The other reason Cook is stumping for the iPad is that enterprises are deploying the tablet to a small percentage of workers. The IBM deal is designed to tackle industries and up that percentage of iPad deployments.

Given Cook's enterprise enthusiasm I'd argue it's a safe bet that a larger screen iPad Pro can't be too far behind.

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