Apple’s Next Big Thing

It’s not a watch, or TV, or smart glasses. It’s the iPad.

Fourth-generation Apple iPads
Fourth-generation Apple iPads

Photo by Justin Sullivan/Getty Images

The iPad has always labored under the shadow of its little brother the iPhone. When Apple launched the tablet back in the spring of 2010, everyone thought it was derivative—it’s just a big iPhone! Even now, after proving itself a worthy alternative to personal computers, the iPad rarely gets its due. When investors and financial analysts think about Apple’s future, they tend to focus on the iPhone, which remains the company’s cash cow. It has been estimated that Apple keeps about 50 to 60 cents in profit from ever dollar it makes on iPhone sales. This makes the iPhone the most profitable product in the world. In its 2012 fiscal year, Apple sold 125 million iPhones, generating $80 billion in revenue and probably around $35–$40 billion in profits. To put that in perspective, Apple likely made as much in profit from the iPhone in 2012 alone as Google, Amazon, Facebook, and Samsung combined made from each and every one of their products.

Poor iPad. Set against the iPhone’s monster numbers, the few billion that tablet sales generate for Apple seem insubstantial. What’s more, nobody gives the iPad credit for launching Apple’s touchscreen fortunes. If only the iPad could explain to the world that it came first—that Apple’s tablet project began in 2003, long before the company started thinking about a phone, and that Apple’s multi-touch operating system was originally developed for the tablet and only then transported to the iPhone. (Apple considered using an iPod-like click-wheel on the iPhone but ultimately changed course.)

But don’t frown, iPad. Your future looks very bright. In fact, I suspect that within a couple years, you’ll reclaim your rightful place at the top of Apple’s product hierarchy. For one thing, your brother’s dominance is on the wane. The iPhone will likely remain one of the most popular tech products in the world, but it’s been buffeted by lots of cheaper competitors, and it’s reasonable to expect its revenue- and profit-growth to slow. That’s because the global smartphone market is growing at the low end—through customers in the developing world who are switching from cheap dumbphones to cheap smartphones—and the only way Apple will do well in that market is if it releases a cheaper, less profitable phone. (It has long been rumored to be working on such a thing, but we’ll see what happens.)

Meanwhile, you, Mr. iPad, aren’t nearly as vulnerable to the competition. Thanks to the launch of the $329 iPad Mini, you’re relatively cheap. You’ve also got 350,000 apps that have been designed just for you—something that no other tablet can come close to claiming. And you keep getting better. Every year, before other tablet makers even have a chance to catch up, Apple releases a new iPad that’s faster and slightly better than any rival. In an earnings report released yesterday, Apple said that it sold 19 million iPads during the first three months of the year. That’s an increase of 65 percent from the same quarter last year. By comparison, the company sold 37 million iPhones, about 7 percent more than the previous year. If this trend continues, the iPad will eclipse the iPhone as the company’s best-selling product by 2015, if not sooner. After that, our picture of Apple will change. It will be the world’s biggest tablet company, one that also dabbles in phones and Macs.

Why am I so sure that the iPad will come to reign supreme at Apple? Because, as I wrote last year, the company’s iPad strategy follows the same script as that of the iPod. In that business—unlike in the phone market—Apple began by creating a category-defining product and then constantly expanded its lineup to cover every price point and usage scenario: The original iPod was followed by the iPod Mini, the Nano, the Shuffle, and the Touch. Apple didn’t make much money on some of those very cheap models, but it was willing to sacrifice profits because it had another trick up its sleeve: consumer lock-in. Because you stored your music in—and even purchased it from—iTunes, once you entered the iPod ecosystem, you had little incentive to leave. If your first iPod was a cheap Shuffle, you’d eventually graduate to the more expensive Touch, because—no matter how good some rival music player might be—it just made sense to stick with the iTunes universe. As a result, the iPod was indomitable. Years after it was first launched, it still claimed three-quarters of the digital music player market.

It’s the same story with the iPad. Over the last three years, Apple diversified its tablet lineup: The company now sells a 9.7-inch high-definition tablet for $499, a non-high-def 9.7-inch model for $399, and the $329 iPad Mini. Yes, that’s still not dirt cheap—you can buy one of Amazon’s Kindle tablets for $159, and Google’s Nexus 7 sells for $199. Indeed, the iPad’s sales do seem to have been hit by these very cheap rivals. According to the research firm IDC, Apple claimed 44 percent of the tablet market in the last quarter of 2012, down from 52 percent during the same time in 2011. IDC predicts that in 2013, Apple will account for 46 percent of the tablet market, while a slew of cheap Android tablets will account for 48 percent of sales.

But it’s important to note that those rivals are selling their devices at cost—neither Amazon nor Google makes any profit on sub-$200 tablets. This is a testament to the iPad’s imperviousness to competition: The iPad’s year-over-year sales surged by 65 percent—and its market share dipped only slightly—when it was pitted against rivals that weren’t making any money on their devices.

This raises a more basic question: Why are people willing to spend $329 on an iPad when they can get an Android tablet for $200? It’s not because the iPad is prettier or more powerful. It’s because the iPad is more useful—because its App Store is packed with an order of magnitude more apps than you’ll find for any other tablet. Apple says it has 350,000 tablet-specific apps in its store; Google has never disclosed the number of tablet-specific Android apps, but anyone who’s ever perused the Play store knows the number is tiny. This is a crucial advantage, because unlike for a phone, a tablet is pretty useless without great apps. You can see the iPad’s utility in usage stats: According to the research firm Chitika, the iPad accounts for almost 82 percent of all Web traffic generated by tablet devices. The next most-used tablet is the Kindle Fire, which accounts for just about 8 percent of tablet Web traffic.

By releasing the cheap iPad Mini, Apple has lowered its overall profitability, one of the factors dragging down its stock price. But, as in the iPod business, the short-term profit loss will help solidify long-term dominance. Here’s the lock-in story again: Apple is certain that people who jump on the iPad bandwagon today will stick with it for life. Even if your iPad Mini purchase doesn’t help Apple’s bottom line very much, you’ll buy lots and lots of apps for your device. Then, when the time comes to buy a new tablet, you’ll have little incentive to switch to Android and have to buy all new apps. All those users will create a network-effects advantage, too—developers will keep creating apps for the iPad because that’s where the users are, which will help attract more users to the iPad, which increases developer interest, and so on.

The tech industry has been waiting for Apple to release the next big thing for several years now. The clamoring is annoying and irrational—nobody knows what they want from Apple, exactly, just that they want something new, whether it’s a watch, a TV, a phablet, smart glasses, or who knows what. But I wonder if this is a giant distraction from the real story at Apple. In our obsession with the new, we’re missing the potential of the old. It’s very likely that Apple’s next big thing is already out there. The iPad is going to be huge. Just watch.