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Czech Republic Tablet Market Contracts in 2015 as Numerous Factors Converge

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The tablet market in the Czech Republic declined year on year in the first three quarters of 2015 in terms of shipment volume, according to a Quarterly Tablet Tracker published by International Data Corporation (IDC). While the market posted a three digit growth rate in each quarter of 2013, it slowed down to double digit growth in 2014 and grew only 2.1% in the first quarter of 2015. The following quarters brought a marked volume decline by 4.5% in Q2 and by 6.9% in Q3. IDC forecasts a decline for Q4 as well, followed by stagnation due to saturation in 2016.

The typical tablet had a 7" screen size in 2015. In 2016, the typical screen size will be 10". Android will remain the predominant OS, with the share of iOS dropping by a third. More than two-thirds of tablets had only WiFi (non-cellular) connectivity, which will remain unchanged in 2016.

Unlike the standard slate tablet product category, innovative detachable tablets (also known as 2-in-1 devices or hybrid tablets) recorded three-digit growth rates in the first half of 2015 and 57.1% growth in Q3. In spite of this, detachable tablets remained a minor product category, representing only 6.4% of overall tablet shipments in 2015. According to IDC's historical data and forecast, the annual number of newly shipped tablets will reach 0.9 million units - more than the entire notebook market (the notebook market consists of 0.8 million newly shipped units; the entire PC market totals 1.1 million units). The number of newly shipped tablets already slightly surpassed the number of notebooks at the beginning of 2013 (for the last several years, notebooks account for 7 out of 10 PCs shipped). At the beginning of 2016, the number of tablets shipped is forecast to exceed the number of PCs (desktops and notebooks combined). This will be largely the after-effect of the inflated market of Bing-based entry-level PCs and the transition to the newer version of the OS. Moreover, tablets are more affordable than PCs, generally costing about 44% of the average PC price (ASP) in Q3 2015 (it was only 35% in Q3). As tablets represented only 72% of PC shipment volume in Q3, and the average price was only 44%, total tablet market revenue represented only 32% of overall PC market revenue.

What factors, other than market saturation, were responsible for the decline? "Among other causes, the tablet market suffered from cannibalization, owing to a surge of 'phablets' (large smart-phones), which represent a close substitute. Revenue from phablet sales exceeded that of tablets back in the first quarter of 2014; since then, it has increased almost fourfold," says Petr Švagrovský, senior research analyst with IDC. "In addition, end users did not renew their tablets as frequently as expected - at least in the consumer sector. In the commercial sector, renewal cycles must be shorter in order to comply with security demands. Newer and safer versions of the OS are not compatible with legacy hardware, which creates an incentive for companies or public-sector entities to buy new devices."

With respect to the limited disposable incomes of users, tablets and PCs are, to some extent, substitutes rather than complementary devices (also, detachable tablets with Windows are more capable of coping with the workload demanded from PCs, while Android slate tablets, used mainly for passive consumer amusement and communication, can be perceived as complementary devices). As users have limited incomes, one would expect tablets and other mobile technologies to crowd out PCs. Although the combined revenue generated by tablets and PCs reached its peak in 2014 and began to decline in 2015 (its level has settled at $1 billion per quarter), the good news for distributors is that, with phablets added to the combined market, revenue is still growing. If smartphones are added to the mix, the outlook is even more promising. The decline in 2015 was caused by several factors. On the PC side, the market needed to absorb the excessive old inventory shipped earlier - vendors were encouraged by Microsoft to ship entry-level PCs "with Bing" in large quantities, as Microsoft offered its OS with a remarkable discount. Also, in the previous period, the market went through a transition to a newer version of the OS as Microsoft concluded its support of Windows XP. The Bing policy also impacted the tablet market, as the price of entry-level notebooks dropped close to that of tablets, thus causing a shift in demand from price-conscious consumers.

The market was also shaped by factors that will impact future development. While overall European economic conditions started to improve slightly after the "Greek crisis", which culminated in the summer of 2015 and pushed the European Central Bank (ECB) towards monetary stimulation/expansion, the Czech economy grew by 4.7% year on year in terms of real GDP, which is outstanding within the EU. The growth was accompanied by higher employment, and so acted as a driver for consumer demand and, subsequently, for public-sector demand, owing to greater tax sums collected. The price level was pushed down by very cheap oil on the worldwide level; to avoid deflation, the central bank continued to intervene at the foreign exchange market to weaken the local currency, a measure that increases the prices of imports (including of hardware), making them less affordable for local entities. Tablets ASPs on the Czech Market settled at $256 in 2015, the same level seen in 2014, which represents stagnation after years of strong price erosion and growing penetration of brands from multinational corporations (MNC) in the entry-level segments. The rising penetration triggered consolidation, with the market share of some "B-brand" vendors contracting significantly, while others even left the market. The presence of the MNC vendors in the entry-level price segment will continue to crowd out smaller local/regional vendors or imitators.

As market saturation was key to the current decline, this factor warrants a closer look. After 2014, the Czech tablet market became saturated - the number of tablets per 100 inhabitants in the installed base reached 17, which is well above the average in Central and Eastern Europe (CEE) of 9 units per 100 inhabitants, though still lagging behind the Western Europe (WE) average of 27 tablets. For comparison, these values were 10 for Hungary, 12 for Poland, 15 for Slovakia, 20 for Austria, 25 for both Germany and France, and 35 for The Netherlands. Yet, the values were only at 38% of those in the PC (desktop + notebook) installed base relative to the population, in both the Czech Republic and CEE.

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Tags: tablets  Czech Republic