We agree that sales are down for the iPad. That being said, I don't agree with your reasoning as to why. The reason the iPad numbers are down has more to do with the larger iPhone encroaching on the iPad market, especially the iPad mini market and market saturation.
Obviously, a 5.5 inch phone will severely damage 7.9 inch tablet sales:
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In order to properly assess all of the recent changes to iPad strategy, a closer look at sales is needed. While overall iPad sales have been in decline for years, reports of iPad's death have been greatly exaggerated. There is much more going on behind the scenes.
iPad sales have faced one major headwind in recent years. This item explains a significant portion of the sales decline. It's not inferior software, weak storytelling, or even a longer upgrade cycle. Instead, the iPad's problem has been the iPad mini.
People aren't buying as many iPad mini devices these days. Excluding 7.9-inch iPad mini sales from overall iPad sales results in a completely different sales picture. As seen in Exhibit 3, iPad mini unit sales have declined 70% after peaking in 4Q13 and 1Q14. The product's value proposition has been permanently reduced due to larger iPhones. Apple has clearly experienced Peak iPad Mini. It's not that the iPad mini form factor is going away, but rather that it will play a smaller role going forward.
iPad mini sales weakness has masked stronger sales trends for larger iPads. In what will come as a surprise to many, the iPad Air 2 has been the best-selling iPad to date. In addition, more than half of people buying an iPad Air 2 were new to iPad. These are very promising signs for the iPad business. Not only are large screen (9.7-inch and 12.9-inch) iPad sales relatively unchanged over the past four years, but they actually have increased year-over-year this past holiday quarter. The iPad Pro line played a major role in this sales rebound."
https://www.aboveavalon.com/notes/2017/3/29/apple-is-pushing-ipad-like-never-before
When people have a choice of buying a new product, they typically prefer buying phones. After that, I don't think it comes down to only owning two devices and having to select an iPad or a laptop for most Apple customers. It comes down to their upgrade path and new sales. If people have a 3 year old computer and feel that an iPad will offer them more bang for the buck than a new laptop, they may spend money on a tablet this year and put that laptop upgrade off another year or two. Personally, I upgrade laptops about every 5 years, iPads about every 3, and iPhones almost every year (though I have held out as many as 3 years). I make my decision to upgrade based on how the old and new compare and how that affects what I do on each platform.
As I have said before, the Surface has too many compromises to make it worthwhile for the way I use my laptop and iPad. Personally, I would rather have three devices that are purpose built. For people that can only afford two devices, there is a strong chance they are buying a phone and a cheap laptop. The Surface isn't exactly a frugal purchase.
That is a good analysis and I had not yet the chance to see the numbers.
The smaller iPads really declined a lot in sales. But the larger models also suffered a decline, as they peaked in 2012. Sales seem to be flat in the last quarters (perhaps with small increases), but they were not where they were in the past.
Sales are of course big and the iPad is a sucess and there is a market for that. Huge sales, successful device, no doubt about it.
But I also see a loss of opportunity for Apple here. The iPad could have taken more of the PC market. As you said, people who can afford only two devices will buy a phone and a cheap laptop. But they could buy an iPad instead.
The way I see it, the iPad was Apple's answer to the netbook. So, it could be the device to take over the world, especially countries in which most of the population cannot afford a Mac. China, India, Russia, Brazil, Pakistan, Indonesia, Nigeria, Thailand, Egypt, and so on. Billions of people. Huge market. But people are still buying cheap laptops instead of iPads.
Apple is actively advertising the iPad Pro as a laptop replacement, and that may be the purpose. But the iPad has yet to become this laptop replacement as it does not do everything one would expect from a laptop. You may say, the iPad is a different device, a tablet, so you should not expect it to replace a laptop. Well, in this case, Apple should not expect to take over the laptop market with the iPad, which could well be its intention.
As for the Surface, I see it having a different purpose. It is more of a showcase, showing off that Windows machines can compete with Macs. But Microsoft's business is still software and it does not want the Surface to be huge as it does not want to cannibalize sales of companies such as Dell or HP.
But Microsoft is pushing for cheaper laptops, although it does not make them. And Windows on ARM can become a way to cheaper and more premium devices.
