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Apple's Problem in One Word

Stocks in this article: AAPLGOOGAMZN

NEW YORK ( TheStreet) -- Phablets. Apple's (AAPL) problem is that it failed to perceive the threat phablets -- small tablets that double as phones -- would create for it.

Samsung launched its Galaxy Note phablet in 2011, two years after the introduction of the first iPad. The phablet was designed to undercut both the iPhone and iPad by giving low-income consumers, especially in Asia, one inexpensive device that did both jobs.

This doesn't just appeal to Beijing hipsters. One of my dearest friends, a 68-year old Vietnam War veteran, recently chose a Note phablet over the iPhone. His eyes desired the bigger screen, and his wallet demanded he get one device, not two.

Apple, which maintained premium pricing on its iPod line for a decade, did nothing against the threat to its iPad dominance for over a year.

The response, when it came, was the iPad Mini. The problem with the Mini was that it did not address the real challenge of the Note, namely price.

As any market matures, pricing theory holds that the wise supplier moves from "premium pricing" to "value pricing," sacrificing margin in order to maintain market share. Apple did not do this with the Mini. Samsung did this with the Note.

Amazon.Com (AMZN) also did this with the Kindle, which is less a tablet and more an Amazon-only device -- the browser is deliberately terrible. But when you can get the price below $200, as Amazon has, you can move a lot of boxes.

The result of failing to address the low end of the market, combined with rivals' decisions to go after it aggressively, can be seen in the market share data.

As TrendForce reported, the saturation of the phablet market and the high price of the iPad Mini pushed Apple's second-quarter share of the total tablet market down to 35.5%, against 21.5% for Samsung, with a host of other Android names taking up what remained.

This was a huge win for Google (GOOG) Android operating system, which powers nearly all the market's small fry, as well as Samsung. Google is now trying to consolidate its advantage with the LG-made Nexus 7, which reviewers at C|Net compare very favorably with the Mini, along with the Moto X phone, produced by its Motorola division and backed by a $500 million ad campaign dwarfing anything Apple has ever done.

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