Here's The Problem With The Most Popular Explanation For Why The iPad Business Has Hit A Wall

There are only two things that really matter for Apple's business right now - the iPhone and the iPad.

The iPhone was surprisingly strong last quarter, driven, it seems, by growth in emerging markets where people were buying the lower cost iPhone 4S. (Apple for its part says growth was across all product categories in all regions.)

As strong as the iPhone was, the iPad was weak. iPhone sales were up 17%, but iPad sales were down 16%.

Tim Cook tried to explain it by saying the iPad business is not as weak as it looks if you only look at sell-through, not sell-in. Sell-through accounts for sales to customers, sell-in accounts for sales to retail channels. It's a wishy washy answer, and it doesn't change the fact that iPad sales were still down on a year-over-year basis.

He also said that from a big picture perspective, customer satisfaction with iPad is off the charts, and the iPad is dominating in the education and enterprise sectors. This doesn't really answer the question of why the iPad business is down now, though.

The most popular explanation for the slump in iPad sales, illustrated in the chart above, is that people don't need to upgrade their iPads as often as they need to upgrade their iPhone, thus the flat sales. On Twitter, a lot of people are saying that the iPad 2 is good enough that there's no reason to replace it with an iPad Air or a new iPad Mini.

Analyst Benedict Evans of Andreessen Horowitz pointed out a problem with this theory on a podcast with Andreessen partner Chris Dixon.

"The thing about the upgrade cycle is that on a purely mathematical basis, if the upgrade cycle is any given number, that shouldn't change the growth rate," said Evans. "If the upgrade cycle lengthens, that should pull the growth rate down. It shouldn't of itself cause a halted growth. For that to happen, you have to run out of new people to buy the thing and that's not the issue."

Our emphasis added there. This is a key point. There's no way Apple has run out of people to sell an iPad to, so the upgrade cycle shouldn't matter. Upgrade cycles only impact saturated markets, and tablets are not yet saturated.

Evans continued to discuss the iPad sales and his most compelling argument for why the iPad has stalled is that people don't need tablets all that badly. Smartphones are good enough for use on the couch that an iPad seems redundant.

This resonates based on our own personal use. We have a MacBook Air, an iPad, and an iPhone. Our usage breakdown during non-working hours is something like 76% iPhone, 15% iPad, 15% MacBook Air. If you asked us to ditch one of the three, the iPad would be the first to go. (Then the MacBook Air, then you'd have to kill us to get the iPhone. Or ask nicely.)

If Evans' theory is right, then it just adds to the pressure for Apple to release a bigger iPhone. A 5.5-inch iPhone could easily take the place of an iPad.

It's okay if the iPhone eats into iPad sales. The iPhone has a higher selling price and is more profitable for Apple. The more iPhones Apple sells, the better.