Anticipated Huge Deals on Tablets Help You, Hurt Makers

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Stephan Savoia/AP

"Apple's holiday quarter was one for the record books. Despite strong competition from its rivals, [Apple] managed to grow its iPhone unit sales to an all-time high. ... The only dent in Apple's otherwise perfect earnings report was the iPad. Sales of Apple's tablet dropped from 26.04 million units in Q1 of 2014 to 21.4 million units in Q1 2015."

That's how Internet shopping advisory website described Apple's (AAPL) first quarter of the new year. (For our own detailed take on Apple's earnings, click here.) And yet, according to DealNews, Apple's pain could be your gain -- if you play it smart.

Citing challenges that range from the "rise of the phablet" for media consumers, to tablets' unsuitability for most office tasks, to the simple explosion of options for anyone who wants to own a tablet computer -- whatever the reason for iPad's recent sales weakness, DealNews predicts Apple will have to cave on pricing if it wants to sell more iPads this year.

In fact, DealNews is so certain that discounts are coming, that it's declared 2015 "the year of the iPad deal" for tablet shoppers.

Good, Better, Better-er

Fact is, 2014 was already a pretty good year for iPad shoppers. According to DealNews, "2014 saw a 40 percent increase in iPad deals" available to consumers from outlets such as Fry's, Target (TGT) and eBay (EBAY). Instances of "rare or all-time low prices" spotlighted by DealNews jumped 125 percent compared to 2013.

Crucially, DealNews notes that even post-holiday season, iPad prices continued to fall, with new iPad Air 2's -- a model that's only been out for about six months -- being sold for as little as $390. The website now predicts that this "incredible bargain" price (then) will be even easier to find in 2015.

So What's the "Bad" News?

All of this is certainly good news for anyone in the market for a brand-new (or used) iPad. The news will be less good, however, for Apple shareholders -- and potentially much, much worse for Apple's competitors.

Consider: The latest "teardown" analysis of Apple's iPad Air 2 suggests Apple is reaping lower gross margins on the product than it received from the preceding iPad model -- potentially four points' worth of gross margin less, at somewhere between 45 percent and 57 percent. (Gross margin is basically the price Apple charges for a device, minus the cost of its components and manufacturing, divided by the price. Tech research firm IHS iSuppli routinely publishes reports on these estimated gross margins by "tearing down" new models and estimating their component and manufacturing costs.) Notably, the iPad Air 2 is the same device that DealNews says has been selling for "incredible bargain prices" lately.

Meanwhile, Samsung's closest-competing product, the Galaxy Tab S 10.5, is priced "very similarly" to iPad Air 2 (according to UK tech firm PC Advisor ). It's also believed to generate similar profit margins for Samsung. (iSupply pegged the last model, the Galaxy Note 10.1, at about a 46 percent gross margin.) Other, lower-end Samsung tablets, in contrast, are believed to be generating "very little profit margin."

Other rivals could be in even worse shape -- even losing money. reports that Microsoft (MSFT) has flooded the market with Surface tablets but is losing money on the business. In a single quarter in 2013, the company wrote off nearly $1 billion in inventory when units, shipped to retailers, had difficulty selling.

Meanwhile, Amazon (AMZN) is widely understood to be selling its media consumption devices, such as the Kindle Fire line of tablets, at break-even profit margins. It's even been known to sell them for less than the cost of their component parts, in hopes of making up the difference, and earning a profit, through sales of content and merchandise via the Kindles. Google (GOOG) (GOOGL) is similarly believed to be selling its Nexus tablets at essentially breakeven prices.

What This Means for Investors ... and Shoppers

If DealNews is right, there's a price war brewing in tech land this year, with all parties involved likely to suffer as they attempt to undercut one another on pricing. That's going to be bad news for anyone invested in Apple stock -- and worse news for people investing in the manufacturers of lower-profit margin tablets, who may end up selling their devices at a loss.

But for the rest of us? DealNews is right: If a price war breaks out, this will be a shopping season to remember -- whether you're in the market for an iPad or really, for any tablet at all.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. And lucky him, he just bought his first iPad ... before the price war broke out. The Motley Fool recommends and owns shares of, Apple, eBay and Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.​