Can Apple Halt Its Eroding Market Share?

Apple Apple is rapidly losing market share — and that might be fine if it had not also lost its ability to innovate.

By innovate I mean gaining share in a big market in which Apple previously did not compete. Apple innovated with the iPod in the MP3 player market; with the iPhone in the smartphone market; and finally with the iPad in the tablet market. Apple was able to accomplish this due to four capabilities — product design, ecosystem building (iTunes and App store), marketing, and product supply — that it used to grab growth opportunities.

Sure these products follow fairly traditional patterns of rapid growth, followed by maturity and decline. But prior to 2011, Apple was able to come up with a new product that would offset the maturity of the older ones.

Apple is starting to lose market share in two of its biggest product areas — iPhones and iPads — whose markets are maturing.

Smartphones are not exactly a mature industry but their growth rates are slowing. Strategy Analytics reported that global smartphone shipments reached 295 million units in the second quarter of 2014 — up 27% from the year before (but 2013 shipments rose a whopping 47%).

Meanwhile Google Google Android operating system captured a new record of 85% share — at the expense of BlackBerry, Apple iOS (Apple iOS lost one point of share to Android  due to its weak lower-end product), and Microsoft Microsoft Windows Phone.

Strategy Analytics analyst Linda Sui told eWeek that Apple remains the leader but its volume is below that of Samsung and LG. Noted Sui: "In higher end segment, Apple is still the leader but volume is much lower than Android in mass market. Samsung and LG are the top two Android players in premium tier segment, but I don't think they can challenge Apple's position in this segment in the short term."

But Apple is taking steps to reverse this market share slippage. Re/Code reported that on September 9 Apple is expected to launch "two large-screen iPhones, one with a 4.7-inch display and another with a 5.5-inch display, according to people familiar with the matter. [Apple] is asking suppliers to manufacture between 70 million and 80 million units combined of the new iPhones — which are larger than the current models with a display measuring 4-inches diagonally."

Apple's tablet decline has been particularly precipitous. According to IDC, Apple's tablet market share has plunged fast — from 60% in the second quarter of 2012 to 26.9% in the second quarter of 2014. Meanwhile, Samsung has gained 10 percentage points.

But the bloom may be off the rose of the tablet market. NPD DisplaySearch reported in early July that for the first time tablet sales had fallen between 2013 and 2014. Moreover, Apple's 8% decline in iPad unit sales to 13.3 million units is consistent with the idea that at 20% – IDC has vastly over-estimated 2014 tablet market growth.

Can Apple halt this decline? During Apple's July 22 conference call for its third-quarter earnings report, CEO Tim Cook answered Bill Schope of Goldman Sachs's question about sources of future iPad growth with an oracular pronouncement: "We feel that there is significant innovation that can be brought."

It sounds like that means investors can hurry up and wait. John Brownlee at Cult of Mac concluded that "the earliest we can expect a radical iPad Air redesign is 2015."

Smart phones and tablets are maturing. Can Apple find a big new market from which to source faster growth?

This returns me to where I started: the definition of innovation. What Cook appears to mean is a tweaking of product features. What Apple used to mean by innovation is creating a big new profit pool by taking share of  a huge market where it was previously not a player.

In that sense of innovation, investors may have to wait much longer than 2015 for Apple to halt its eroding market share.