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The initial remarks came during the call's preamble in which Tim Cook and CFO Luca Maestri summarized Apple's the hardware unit sales. For the second quarter in a row now, Tim Cook has had to explain a slight drop in iPad sales, both year over year and in successive quarters, and that has to be a painful process.
Apple sold 13.3 million iPads in the June quarter, down from 16.4 million in Q2.
Mr. Cook briefly remarked that “iPad sales met our expectations, but we realize they didn't meet many of yours,” and then he alluded to the IBM partnership as a “catalyst for iPad sales.” In a few minutes, he would say a whole lot more.
Shortly thereafter, CFO Luca Maestri explained that iPad sales were actually up substantially in the Middle East, China and India, but that was more than offset by a decline in more mature markets.
At just under 30 minutes into the call, in response to Bill Schope with Goldman Sachs, Tim answered a rather pointed question about the presumed long-term market for tablets and the competitive landscape.
Mr. Cook's strategy was, first, to remind us that Apple has sold over 225 million iPads to date. He reflected that that was more than anyone had ever expected just a few years ago.
Next, he stated that he thought that a lot of innovation can be brought to the iPad market, and Apple intends to do just that. Mr. Cook was also pleased to note that 50 percent of iPad buyers are first time tablet buyers.
There are some bright spots. Apple has 59 percent of the tablet market in units and 70 percent in dollars. Mr. Cook cited estimates that by the year 2018, there will be a global annual market for 350 million tablets.
The iPad Problem
It can probably go without saying that Apple, seeing the trends, asked itself what it could do to spur iPad sales given the weakness in the more mature markets.
And that's where the partnership with IBM comes in. The Apple CEO sees each company as complementary to each other. Each has solid revenue streams and that don't conflict with each other. But to the extent that IBM can bring to bear its big data and analytics tools to the mobile market and Apple can bring first-class business hardware, in the form of the iPad, to the enterprise market both can prosper side-by-side.
Mr. Cook said he wants to “see what it [partnership] can do to sales.” The combination of product innovations and the IBM relationship is seen as the fix to the iPad sales problem.
The Mac Surge
Finally, the surge in Mac sales appears to play a role here. Frequently during the call, Mr. Cook and Mr. Maestri commented on the surge in Mac sales being driven by the “portables” market, meaning MacBooks. In particular, they gave credit to the iPad Air. (There was a recent price drop.)
At this point one might conjecture about how, perhaps, those in all the mature market segments, (education, business, etc.) have been feeling the need for a new, sleek, capable MacBook Air, ready for Yosemite and have all the the iPads they need. On the other hand, China, India and the Middle East are still catching up, and the market is nowhere near saturated. It remains to be seen if the workings of this reverse cannibalization can be clarified.
Perhaps it's just a short term effect and will be negated when those iPad innovations Mr. Cook talked about hit the street.