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Apple’s (AAPL - Analyst Report) iOS is expected to lose tablet market dominance in 2013, as per Bloomberg, which quoted a recent report from market research firm IDC. According to IDC, Apple’s operating system will command 46% market share, compared with Google Android’s 49.0% at the end of 2013.

Apple dominated the tablet software market post the release of its iconic iPad in 2010. However, since then Apple’s market share has declined from a high of 83.0% in 2010 to 51% in 2012, while Android’s market share increased significantly from 17% to 46% during the same period.

The primary reason behind Android’s stunning growth has been steady flow of new products from the likes of Samsung, Google, Amazon.com (AMZN - Analyst Report) and Microsoft (MSFT - Analyst Report). These manufacturers challenged iPad’s dominance by launching devices with a smaller screen (less than 8 inches) at a much lower price.

The year 2012 saw the entry of Google in the tablet hardware space, through the launch of Nexus 7 that has a 7 inch screen. Both Samsung and Amazon launched 7 inch tablets during the year. Most of the smaller sized tablets from these manufacturers (except Galaxy Tab 7.7) cost around $250 (32 GB memory); while iPad’s starting range is $499 (16 GB).

Apple responded to growing competition by releasing iPad Mini (7.9 inches) at a much lower price of $329. However, the device have been criticized for its low–resolution (1,024 x 768 pixels) compared to Nexus 7 and Kindle Fire HD (1,280 x 800 pixels), which cost much lower than iPad Mini.

According to IDC, global tablet shipments are expected to be 190.9 million units by the end of 2013, much higher than its earlier prediction of 172.4 million. IDC forecasts tablet market to surge to 350 million units by 2017. Android is projected to grow at a compounded annual growth rate (CAGR) of 14.8% compared with Apple’s 15.0% over 2012-2017.

IDC believes that the major growth beneficiary over this period will be Microsoft’s Windows operating system (expected to grow at a CAGR of 48.8%), which will grab market share from both iOS and Android. Microsoft, which resurrected its presence in the tablet market by launching Surface in June last year, is expected to grab 7.4% market share by 2017, significantly up from 1% in 2012.

Our Take

We believe that pricing will be a major growth constraint for Apple going forward. As the domestic and European markets get saturated, Apple is looking for growth in the emerging markets of Asia-Pacific and China. However, these markets are relatively more price sensitive than Apple’s other territories.

Hence, we believe that the company may eventually find it difficult to gain significant market share against stiff competition from low-priced alternatives from other established players, such as Samsung and Amazon over the long term.

Currently, Apple has a Zacks Rank #3 (Hold).

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