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              FILE - In this Tuesday, Aug. 21, 2012, file photo, the Apple logo is shown on a stock ticker at the Nasdaq MarketSite, in New York. Apple is entering the home stretch of what will likely be its best holiday season yet as shoppers snap up iPhones and iPads in record numbers in December 2012. Yet the world  FILE - In this Tuesday, Aug. 21, 2012, file photo, the Apple logo is shown on a stock ticker at the Nasdaq MarketSite, in New York. Apple is entering the home stretch of what will likely be its best holiday season yet as shoppers snap up iPhones and iPads in record numbers in December 2012. Yet the world's most valuable company has lost its luster among investors, causing Apple's stock price to plunge by more than 20 percent from a peak reached less than three months ago when the latest iPhone went on sale. (AP Photo/Mark Lennihan)   

Citi: The iPad business is collapsing

The strength of Apple’s iPad business is collapsing as lower priced, smaller tablets eat into sales, says Citi’s Apple analysts in a new note this morning.

 

The 9.7-inch iPad’s unit sales were only up 1.8% on a year-over-year basis in the fourth quarter, says Citi, citing IDC data. In developed markets like the U.S. and Japan, unit sales were actually down quite a bit.

 

The bigger iPad is being replaced by Apple’s iPad Mini, as well as the 7-inch tablets sold by Samsung and Amazon.

 

According to IDC, Apple has 38.8% of the tablet market, which is industry leading, but is down from its peak of 56.8% in the second quarter of last year. Amazon has 15.5% of the market, and Samsung has 13.1% of the market.

 

As the smaller tablets take share, the average selling price of a tablet is going to fall. We saw this last quarter for Apple as the average selling price for the iPad was $467 compared to $535 the quarter before.

 

As the selling price collapses, Apple’s profits are going to fall. And therefore, Apple’s spectacular revenue and EPS growth of the last few years are going to slow down considerably.

 

Citi does not believe Apple has any innovation in the works that is strong enough to reverse the decline of the large iPad business, and therefore many people’s expectations about the strength of the iPad business may need to be reset.

 

While there is merit in what Citi is talking about, we would caution that the holiday period is often strongest for Apple’s rivals because people buy cheap tablets as presents for other people. When they are shopping for themselves the other three quarters of the year they tend to buy iPads. So these trends may not hold.

 

Also, the rise of smaller tablets has happened every year in the fourth quarter, according to the IDC chart Citi included in its report, which we have below. The iPad Mini may mean that things are different this time, though.

 

Here is the growth of the 10-inch iPad business:

 

Citi 10-inch iPad Table

Citi

 

This is the way the 10-inch tablet market shrank last quarter, although, it’s worth noting this is a cyclical looking trend:

 

Citi Chart on tablet screens