Apple's iPad Problem

Apple's iPad Problem

Apple faces very significant threats in the tablet space from top-shelf Google Android-based devices. While the current iPad Mini limps along with a dual-core Cortex A9 CPU, 512MB of RAM, and a 1024x768 display, the latest-generation Nexus 7 powers through with a quad-core Qualcomm chip, a hefty 2GB of RAM, and a gorgeous 1920x1080 display. It's no surprise that while the tablet market continues to grow, Apple saw a year-over-year decline in its own iPad sales in the most recent quarter. Of course, Apple is gearing up to launch its next-generation suite of iPads - both large and Mini - but what's it going to take to reignite the spark?

Solving the "big" iPad issue
Ever since the iPad Mini hit the scene, it has dominated Apple's mix. While the sales were great (after all, it's better to have those sales than to let a competitor have them), these products offer gross margins well below the corporate average. Keep in mind that the gross margin profile on these products is rough even with fairly cheap components compared to those of its competitors. This leaves Apple in a bit of dilemma - how can it preserve its gross margin profile? While this Fool believes that Apple will offer two tiers of iPad Mini (a $330 one and perhaps a $500 one with a retina display, fingerprint reader, and so on), this is a necessary but insufficient condition. Apple needs to, if possible, resurrect sales growth of the "big" iPad - a much higher-margin and ASP product.

The problem is that a 10-inch iPad (and, really, 10-inch tablets in general) straddle this very weird line between notebook PCs (and, recently, convertibles running Windows 8.1) and pure tablets. On one hand, people are tripping all over themselves to buy keyboard accessories from the likes of Logitech or ZAGG in order to turn these devices into full productivity devices (which has likely hurt traditional notebook sales.) However, as Microsoft and its partners roll out convertibles that offer a tablet and a keyboard dock in one coherent package (and a fully functional operating system to boot), will that have an adverse effect on iPad sales and bring users back to the "Wintel" world?

Apple can fight back if it can radically reinvent the "stand-alone" 9.7-inch tablet category. In particular, Apple has the potential to reinvent its "big" iPad products and make them so desirable from a software ecosystem and physical design standpoint that it can counter the very real value proposition from the Windows side of things. It could do so with a beautiful design coupled with an enhanced software suite conducive to productivity (perhaps bringing over the productivity tools found on OS X.) It also wouldn't hurt to more aggressively push an Apple-designed keyboard to go along with it. In short, the big iPad needs to evolve into full-fledged iOS "notebook" if it is to remain a viable product category going forward.

The problems with this
The issue, of course, is that this leads to a bifurcation of Apple's mainstream "notebook" lines. At the midrange, you've got an iOS-based device with a much slower A-series processor with touch, and then at the high end you've got the MacBook Air with an Intel Core processor that offers significantly more performance than the iOS device. Eventually, these would need to be converged more gracefully for it to really work out - and it's not clear whether iOS would simply include OS X features, or if OS X would be modified to become touch friendly and support the iOS app ecosystem. Apple's got a very tricky situation on its hands!

Foolish bottom line
With all of that said, Apple has a tendency to surprise consumers and investors alike. There's still every reason to believe that the next-generation "big" iPad could be compelling enough to gain share against both other tablets and convertible Windows 8.1 devices. However, it's far from a sure thing, and that's why the Oct. 22 event is going to be - in this Fool's opinion - a pretty big deal.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple, Google, and Intel. The Motley Fool owns shares of Apple, Google, Intel, Microsoft, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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