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What do Google and Apple’s latest devices tell us about the tablet market?

It has been a big week for new tablet releases, with both Google Inc. (Google) and Apple Inc. (Apple) revealing new devices that could become market leaders. Notably, Google announced the Nexus 9, an 8.9-inch tablet manufactured in partnership with HTC, alongside a new phablet, the Nexus 6, manufactured by the previously Google-owned Motorola on October 5, 2014. A day later, Apple took to the stage to announce the iPad Air 2, its latest flagship tablet, as well as the iPad mini 3, an update to its range of smaller, 7.9-inch tablet range. The announcement came less than a month after Apple revealed its latest smartphone products, the iPhone 6 and iPhone 6 Plus, the latter of which is set to compete against Google’s Nexus 6 in the phablet sector. Critically, both companies’ announcements signal a shift back towards larger tablet devices.

Clearly both companies see the tablet market as an important revenue stream – iPad hardware sales accounted for 15.7% of Apple’s net sales in its most recent fiscal quarter ended June 2014, and it also generates further income from sales of apps and digital content on its iPad products through the App Store. With Apple’s iPad net sales and unit sales declining, Apple needs to innovate its iPad range to re-establish sales growth. For Google, meanwhile, the majority of its capitalization on the tablet market comes through digital content sales, rather than sales of its hardware, and the Nexus line has a history of serving as a showcase for the latest version of its Android operating system. The release of the Nexus 9, incidentally, coincides with the launch of the latest version of Android, 5.0 Lollipop.

Innovation of the two companies’ tablet product ranges can best be seen when comparing the new models to previous iterations. Notably, the biggest changes of Apple’s two latest iPads come with the iPad Air 2 which, alongside a few cosmetic changes, and the addition of the company’s Touch ID fingerprint sensor, offers a number of technical upgrades over its predecessor – a new processor, a more advanced camera, and a newly designed retina display are all present. The iPad mini 3, meanwhile, offers very little in the way of upgrades, with the inclusion of the Touch ID fingerprint sensor and a new gold color option being the only standout additions. Surprisingly, Apple has elected to continue to sell the original iPad mini and its successor the iPad mini 2 at substantially lower starting prices – $249 and $299, respectively. These prices compare favorably to the $399 starting price of the iPad mini 3, especially given the lack of upgrades the latest version offers consumers. Furthermore, last year’s version of the iPad Air, which is likely to still be considered as a superior device by many consumers, now has the exact same starting price of $399. Given this value proposition, it could be suggested that Apple is steering consumers towards the older iPad Air model, or even the much cheaper previous iPad mini devices, rather than the iPad mini 3. But, the question begs to be asked, why would Apple do this?

The answer lies with one of Apple’s other recently announced products, the iPhone 6 Plus, which has a 5.5-inch screen and marks the company’s entry into the phablet sector. Crucially, the rising popularity of phablets is starting to stifle demand for tablets with smaller screen sizes, such as the iPad mini, which had recently been the fastest growing segment of the market. Apple stands to make a much bigger profit on its iPhone 6 Plus, an unlocked version of which retails at a starting price of $749, than it does with the iPad mini. As such, the company would rather the iPhone 6 Plus cannibalize sales of its smaller tablet than the other way around. This explains the less-than-attractive upgrade offered by the iPad 3, as Apple shifts its focus back towards the higher priced iPad Air range. Instead, Apple may be counting on the more attractively priced older versions to compete with significantly cheaper white box and Android alternatives, or the recent wave of extremely cheap Windows tablets hitting the market.

While Apple finds itself in the position of needing to steer the tablet market back in its favor, Google is able to reflect the movement back towards larger-screened tablets, rather than drive it. The announcement of the Nexus 9 certainly does this – there has been no mention of an update to the company’s Nexus 7 product, a device that spearheaded the popularity of smaller-screen devices upon its initial release in 2012. Instead, the Nexus 6 phablet now represents Google’s small tablet offering, with the larger Nexus 9 set to compete against larger premium devices, such as the iPad Air 2.

It is possible that other tablet manufacturers may mirror this movement back towards larger-screened, more expensive tablets, as they attempt to continue to drive tablet revenues in the face of slowing demand. However, there is still room for maneuver at the bottom end of the market, and Apple’s movements may not be enough to counter the threat of its much cheaper competitors.

If you are interested in the tablet market, keep an eye out for MarketLine’s upcoming Tablets Industry Profiles, which are due to appear on the MarketLine Store soon.

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