Tech giant Apple (NASDAQ: AAPL ) and its Korean archrival Samsung (NASDAQOTH: SSNLF ) pretty much own the tablet market these days.
Between the two of them, Apple and Samsung control 50% of this booming market. However, as one analyst recently noted, their dominance of this space will likely come under increasing pressure in the years to come.
Tablets — the new normal
Recently, market researcher Canalys hammered home this idea in its quarterly update on the state of the PC market (note: Canalys lumps tablet sales in with PC sales). In its update, Canalys noted the growing influence tablets have on overall PC shipments. In the third quarter alone, tablets comprised 40% of all computer shipments.
Perhaps more importantly, Canalys goes on to note that this will likely be the last time tablets don’t account for more than half of total PC shipments. In 2014, tablets will comprise an impressive 50% share of overall PC shipments (desktops, laptops, and tablets).
Of course, this should be an encouraging sign for investor favorites like Apple and Samsung. Right?
As it turns out, yes and no.
Apple and Samsung under pressure
This tablet growth might not be as positive as investors might first think because of the geographies that should fuel the bulk of the market’s overall growth in the coming years.
As with the smartphone market, small manufacturers in key emerging markets, like China, are playing an increasingly integral role in driving growth in the tablet market. Canalys analyst James Wang highlighted this very dynamic, commenting:
With the cost and time-to-market advantages afforded by their Chinese supply chain, these small-to-micro brand vendors are eating up tablet market share [...] Onda and Teclast in the People’s Republic of China ship more units than some of the major international top tier vendors in their home countries. [...] Vendors such as Acer, Asus, HP, and Lenovo have all entered the price war, with entry-level products at sub-U$ 150 price points. With vastly different cost structures these vendors will continue to find it extremely challenging to keep pace with local competitors.
Sounds pretty grim, right?
He isn’t alone, either. Research firm IDC also sees this same dynamic playing out.
The specter of declining market share certainly isn’t something to be thrilled about. However, it’s not nearly the most important barometer for success in a market — it’s another, arguably more vital metric, where Apple and Samsung still stand head and shoulders above the rest.
Where Apple and Samsung really win
Any time you see a discussion of market share, it bears remembering that not all unit shipments are created equal. Although it’s true that Apple’s and Samsung’s overall percentage of the tablet market will decline, that isn’t necessarily the negative many headlines would have you think.
Why? Because many of those incremental tablet shipments in the $ 150-$ 200 price range aren’t nearly as lucrative for their manufacturers as tablets at the high end of the market. The bulk of tablet sales in emerging markets are low-margin devices, similar to the PC market today. You have powerhouse companies like Hewlett-Packard and Lenovo that hold the greatest share of the market, but generate just a fraction of the overall profits that a company like Apple does off its devices.
The same is true in tablets. Although it’s difficult to put an exact figure on it, Canaccord Genuity estimates that Apple and Samsung actually capture the entirety of profits in the smartphone and tablet space. And that dynamic won’t likely change anytime soon.
Even with the looming specter of a market-share decline on the horizon for Apple and Samsung, you don’t have to worry. They’re the two companies that should maintain their very profitable device franchises for years to come, and that’s something investors truly should be thankful for.
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