Apple 'Lost' the Tablet Battle but Remains King of Profit

NEW YORK (TheStreet) -- Apple (AAPL) iPads it was reported, lost the tablet throne to Google's (GOOG) Android-based hardware in 2013, with Microsoft (MSFT) a distant third. One must exercise caution when interpreting the data because these observations are like comparing apples and oranges if you're not careful.

Google provides its Android operating system to various hardware manufacturers for essentially nothing in order to support its ecosystem. Google's operating system subsidy enables high-volume, low-cost tablets to create and proliferate into markets in which iPad doesn't compete.

Caught between the success of Apple in the premium category and Google in the value category for tablets, Microsoft recently reduced the price manufacturers pay for some Windows 8.1 licenses. Manufacturers producing Windows-based devices retailing for $250 or less will pay $15 per license in lieu of the usual $50.

Between the three types of operating systems, it's crystal clear Apple's iOS creates the most revenue and profit.

Apple may no longer claim to sell the most tablets based on the operating system, but it's not from consumers losing interest in the iPad; indeed, sales are growing. In 2012, Apple held a 53% market share of a 115 million tablet market, or about 61 million units sold. In 2013, Apple's commanded 36% of a 195 million market for about 70 million units, a 15% year-over-year gain.

If any device was designed to shoot an arrow into Apple's heart it's Amazon's (AMZN) Kindle. Kindle utilizes the free Android operating system as its base, but is then altered specifically for Amazon's customers. Kindle is further subsidized by Amazon's willingness to sell the tablet at or near cost. Expectations were high for a tablet consumers can effectively buy at a subsidized wholesale price.

Despite the Kindle's value proposition, it appears to be losing consumer appeal. During the critical fourth-quarter holiday season, market share fell about 20% while unit sales dropped slightly. Amazon wasn't alone. Barnes & Noble's (BKS) answer to Amazon's Kindle, the Nook, failed to meet expectations and is losing money and the company is shrinking the Nook's development headcount in order to reduce expenses.

So based on direct profitability, Apple remains the king of tablets even if it doesn't own the market. For Apple investors, the goal is to make money -- and Apple is executing well. Microsoft appears to arrive in second place in profitability. Despite the recent discount program for $250 and less devices, Microsoft still most likely makes money on every copy of Windows 8, even at $15 a license.

I expect Apple's margins to remain under pressure this year as it positions its product, which is increasingly becoming a commodity in a space dominated by tech giants able to indirectly monetize each sale.

I rate Apple as a buy and a strong buy below $550, and Microsoft a buy. Both companies are strong candidates for investors wanting to add dividend-producing equities in their portfolio.

At the time of publication the author had no position in any of the stocks mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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