3 Reasons the iPad Is Sliding - and the Tablet Biz May Follow

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Young woman browsing the Internet on an Apple iPad tablet computer using free coffee shop wi fi, London, England, UK
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Apple (AAPL) had plenty of new toys to unveil on Tuesday. There was the iPhone 6 and the even larger iPhone 6 Plus. The world's largest consumer tech company finally entered the promising-yet-crowded wearable computing market with the Apple Watch. And there was its potentially game-changing entry into mobile transactions with Apple Pay. But one product line Apple didn't update was the iPad.

To be fair, this isn't the time of year Apple typically updates the iconic device that jump-started the tablet movement in 2010. No rumors of shiny new iPads were being bandied about in the rumor mill ahead of the media presser. It still would have come in handy, though, since by most accounts, tablet sales are starting to fade fast.

"The tablets boomed and now are crashing," Best Buy (BBY) CEO Hubert Joly told tech blog Re/code earlier this summer. "The volume has really gone down in the last several months."

Apple investors know it all too well. The tech bellwether shocked the market when it posted a 16 percent year-over-year decline in iPad sales during the quarter ending in March, following that up with a 9 percent year-over-year drop in Apple's most recent quarter.

Right now the phenomenon is limited to Apple. Industry tracker IDC reported an 11 percent year-over-year increase in tablet shipments worldwide during this year's second quarter. However, even that global uptick is well off the category's earlier gains. It was also a slight decline from the first quarter. If Apple is feeling the pain now, it won't be long before other tablet makers do too. Let's go over a few of the reasons that this is happening.

Incentives to Upgrade are Inferior

Apple updates its iPhones annually, and folks line up outside Apple Stores to upgrade. That pattern doesn't repeat with iPad refreshes. The lure to trade up is never as strong for existing iPad owners as it is for iPhone owners. The disparity would seem strange on the surface. Apple puts the same effort into beefing up the cameras, displays, battery life and other features on both product categories. However, since folks are buying tablets primarily to fire up apps, there's less urgency to upgrade for the sake of a slightly better camera or new chipset.

Another thing that may come into play is that many smartphone owners in America are locked into two-year contracts with their phones, so there's an added incentive to update at the end of the term. There are still plenty of people pecking away at first-generation iPads that came out more than four years ago. You won't find too many people on the iPhone 3GS that was the current model at the time.

Wireless Carriers Don't Subsidize Tablets

In the same spirit of those two-year smartphone contracts, wireless carriers pay phone makers as much as $450 to lower the price for buyers willing to lock into two-year contracts. Telco giants are trying to move away from that practice, but it's still a common marketing strategy. Apple pitched its iPhone 6 as starting at $199, but that's with a two-year contract. If you want one without a contract, the price goes up to $649.

Wireless carriers never embraced the subsidization of tablets. It could be that many are just fine with Wi-Fi connectivity, but even the ones with 3G and 4G chips aren't as lucrative to wireless carriers, because folks only pay a low flat fee for data. The end result is that smartphones are artificially cheap. Tablets may be cheaper in the off-contract world, but they are perceived as being more expensive to folks spoiled by the subsidized smartphones. Paying $199 every two years for a new iPhone isn't a big deal to most Apple fans. Paying $499 every two years for a new iPad is a budget consideration.

Laptops are Getting Cheaper and Better

It probably isn't a surprise to see PC sales starting to show signs of life again. If tablets aren't replacing the PC the way they seemed to be doing through the past few years, it follows that laptops and desktops are making a comeback.

A big driver here is the Chromebook. Google's (GOOG) (GOOGL) Chrome operating system has inspired laptop makers to put out portable computers that sell for as little as $199. Even Microsoft (MSFT) has hopped on the bandwagon, making Windows licenses available to its hardware partners on terms that make it easy to flood the market with competitively priced laptops.

There are plenty of similarly priced small tablets out there, but when you tack on the cost of Bluetooth keyboards to compensate for the input limitations of standalone tablets, we're seeing a strong value proposition in the laptop market. Don't be surprised if the laptop -- and not the tablet -- is the big tech driver this upcoming holiday shopping season.

Tablets just aren't the hot gadget that they used to be, and it remains to be seen if the category will ever get that magic back.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple, Google (A and C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. Check out our free report on the Apple Watch to learn where the real money is to be made for early investors.
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