Can Apple Restore the Luster of the iPad?

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Apple (AAPL) hit fresh 52-week highs this week, with smartphones accounting for more than half of its sales.

Apple sold 13 percent more iPhones than it did a year earlier, and it had a surprising spike in Mac sales. Macs and Macbooks grew faster than its flagship iPhone business, but it's still just 15 percent of the sales mix at Apple. For now, the iPad is Apple's second-biggest -- but fading -- product line.

Dust Is Gathering on the Shelves

Apple has a problem. It sold 9 percent fewer iPads during the three months ending in June than it did a year earlier. If you think that's bad, that was coming off of a 16 percent decline during the March quarter.

Apple's explanation during its fiscal second quarter -- the one ending in March -- is that retailers had too many unsold iPads during the end of the holiday quarter. This led to a the dramatic slowdown in shipments during the March quarter.

That's a scary admission. However, after back-to-back quarters of year-over-year declines in revenue, we're out of excuses. The iPad is slumping, and it's doing so at a time when tablets in general are more popular than ever.

That's the rub. Apple's iPod business has been fading for a couple of years, and nobody seems concerned. Portable media players in general are declining, largely because folks are using smartphones and tablets as digital media players. However, to see Apple's iPad sales slipping at a time when the tablet is still hot is a major concern.

From iPad to Launch Pad

Two things work against the iPad's popularity: platform and price. The platform is a mixed blessing. Apple's iOS is intuitive, and fans will tell you that it just works. However, as Android gains market share in tablets and smartphones, Apple risks that developers will lean more heavily on putting out Android apps in the future.

It's certainly not a problem now. Developers love iOS because iPad and iPhone owners spend more time on apps and spend more money than owners of cheaper Android devices. That may be fine for now, but it may not be the case if the iPad continues to surrender market share to Android and possibly even Windows devices.

%VIRTUAL-pullquote-The iPad is too expensive. %The bigger problem is price. The iPad is too expensive. Despite introducing cheaper iPads over the years -- you can now get a petite iPad for as little as $299 -- the price to own an entry-level Android device is even cheaper.

Seeing Apple retailers overstocked on iPads after the holidays is bad. Following that up with back-to-back quarters of declines is worse. The only two ways out are for Apple to either lower its prices to the point where the iPad is competitive or raise the bar dramatically in the iconic tablet's next generation to make it irreplaceable by cheaper rivals.

Apple isn't likely to lower its prices, but it would be a smart way to gain more market share for iOS that it can exploit with its iPhone and future devices. Coming up with game-changing features is the way Apple would like to go, but that's not easy to do these days when overseas manufacturers are quick to copy what works.

We can't dismiss the iPad. Apple's rich history of innovation often finds it having the last laugh. However, something needs to change to get iPad sales back on track. If not, the iPad may be the next iPod, and that's not a compliment.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.

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Can Apple Restore the Luster of the iPad?
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