In Case You Don't Realize How Fast Apple's iPad Business Has Gone Down The Tubes...

On October 22nd, Apple is finally launching new iPads.

This launch can't come soon enough.

It wasn't long ago that Apple fans were slapping each other on the back and crowing about how, one day, Apple would be known as "the iPad company."

The theory was that iPads were such a mega-hit new product category that iPad sales would continue to grow at astronomical rates until, eventually, they might even eclipse sales of the iPhone.

You don't hear that theory much anymore.

Why not?

Because, despite the launch of a cheaper iPad last year--the iPad Mini--the growth of Apple's iPad sales has hit a wall.

In the June quarter, Apple's iPad sales dropped a startling 14% year over year, to only 15 million units.

Even after adjusting for channel inventory, iPad sales to consumers dropped 3% year over year.

This in a tablet market that is projected to grow about 50% this year. This for a super-ballyhooed new product category that is supposed to drive the company's growth for years.

So, what's going on?

Well, part of the issue was a tough comparison with last year: The iPad with a retina screen launched in the June quarter last year, and this triggered a nice jump in iPad sales in that quarter--to 17 million units from 12 million in the prior quarter. That set a high bar for this year's June quarter.

But that's not the whole problem.

The larger problem, arguably, is that Apple is trying to maintain premium pricing in a market in which competitors are increasingly selling high-quality iPad alternatives for significantly lower prices.

The June quarter's lousy sales, it is important to note, came only a couple of quarters after Apple launched its iPad Mini--the smaller, cheaper tablet that was designed to allow Apple to compete with similar tablets from Google, Amazon, and others. We had not even anniversaried the launch of the Mini and iPad sales were still down.

This "premium pricing" strategy is a departure from the strategy Apple has used for the iPhone and early iPads. (Those products were priced at or below the rest of the market). This is also a strategy that helped bury Apple in the earlier PC era - when it was charging premium prices for the Mac.

The iPad Mini and Apple's larger iPads are still arguably the best tablets of their kind on the market. But they're also some of the most expensive. Apple, which generates its profit from device sales, is trying to protect its profit margin by maintaining relatively high price points for its iPads. Amazon, Google, and other tablet manufacturers, meanwhile, are selling their tablets at lower price points, in part because they generate their profits from app and media sales rather than device sales.

Apple says it wants to sell the "best" products, not the "most" products, so this pricing strategy is in keeping with that philosophy.

The trouble is that Apple is also trying to ensure that its mobile operating system, iOS, remains the dominant global mobile platform. And in platform markets--markets in which third-parties build apps and sell services on top of a platform--market share is crucial.

By trying to maintain its premium pricing and high profit margin, Apple is likely losing sales that would otherwise help the company capture more of the mobile platform market. That tradeoff helps produce higher profits for Apple today, but it also likely weakens the long-term value of the iOS platform. If, instead of focusing on maximizing near-term profits, Apple were focused on trying to make iOS the dominant global mobile platform, it would likely reduce prices on its iPads and iPhones. This would hurt the company's profits today, but it would also likely lead to a stronger market position--and higher profits--several years from now.

In other words, Apple is stuck with what can only be described as a high-quality problem.

The company's profit margin is so high, and this is producing so much profit, that investors have made it one of the most valuable tech companies in the world. If Apple sacrifices its profit margin and profit to increase its mobile platform market share, investors will probably scream. (It is a slowdown in sales and drop in profits, after all, that has clobbered the stock over the past year.) If, on the other hand, Apple maximizes its current profit at the expense of market share, as it appears to be doing, this will likely weaken the company's market position long-term.

Unless Apple believes that iOS can remain a dominant and sustainable mobile platform even with only niche market share, in which case market share losses don't matter, there's a right answer here.

The right answer is for Apple to reinvest more of its gigantic profits by reducing the prices of its iPads and iPhones.

Apple is so phenomenally profitable that it could reduce its iPad and iPhone prices significantly and still coin money. And, in doing so, it could also accelerate its unit growth and increase its global market share.

Doing this, of course, would further reduce Apple's current profit and trigger additional declines in the stock price. But that doesn't mean it's the wrong decision for the long term.

What Apple will not likely be able to do is have it both ways.

The company will not likely be able to continue to own the dominant global mobile operating system while also trying to maintain its premium device pricing and profit margin. Gradually, as hardware competitors get better and operating systems like Android become more ubiquitous, iOS will become more of a niche player. Ultimately, if it becomes too much of a niche player, it will lose its value to developers and distributors. And if that happens, Apple is finished. If there's no clear reason for consumers and developers to pay up to be in "the iOS ecosystem," there will be no reason for consumers to pay up to buy Apple gadgets. The vicious cycle will feed on itself, and, ultimately, both Apple's profits and market share will collapse.

So Apple investors (I'm one) and fans shouldn't just brush off last quarter's lousy iPad sales. And they should hope that the company will now offer a tablet that is very price-competitive.

Tablets are still a rapidly growing market, and Apple still has arguably the best products in the category. But Apple appears to be losing market share fast. And that is likely a direct result of its decision to try to maintain its premium prices and profit margin in a world in which talented competitors are producing high quality products and being ever more aggressive on price.

Regardless, the new iPad product launch is important...

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