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My Comments on Tablets on Bloomberg Surveillance

My thanks to Tania Chen for organizing my appearance on Bloomberg Surveillance in New York on September 26th.

Is Apple Really Dominating the Tablet Wars?: Video – Bloomberg.

Although there isn’t much one can cover in 5 minutes, there were some good questions around tablets. The role of Amazon and Microsoft in particular.

Why are tablets and smartphones insulated from tough economic conditions?

The iPad launched in April (i.e. Q2) 2010. Since then the PC industry (excluding Macs) has seen a decline in growth. The following graph illustrates global shipments as reported by Gartner:

Note that the growth rate has been negative for 4 out of the eight quarters since. The latest data shows a decline in shipments of over 9% bringing yearly growth to negative territory for the first time since the recession of 11 years ago.

International Tablet of Mystery

One of the remarkable patterns associated with the iPad has been its growth rate. Looking at the ramp of the product relative to the iPhone and iPod touch reflects this sense of raised expectations:

 

When will tablets outsell traditional PCs?

I truly believe, and many others in the company believe, that there will come a day that the tablet market in units is larger than the PC market.

Tim Cook Discusses Q1 2012 Results – Earnings Call Transcript – Seeking Alpha

Question is when?

I began by projecting growth rates of various market participants including the leading Windows PC makers (HP, Acer, Dell, Lenovo and Asus), the combined “others” and the Mac. I also added the iPad, Samsung’s tablets, other Google sanctioned Android tablets and Amazon. I also projected a split between traditional and tablet Windows shipments.

The underlying assumptions are:

  1. Mac growth continues at 25% as it has on average for a few years
  2. Windows grows slightly in 2012 with the introduction of Windows 8 late in the year. However I anticipate Windows 8, including tablet versions, to mostly be upgrades with slow enterprise take-up within this time frame.
  3. The tablet versions of Windows begin shipping in Q4 2012 with 7% of total Windows shipped. The ratio reaches 20% by end of 2013.
  4. iPad growth will flatten for ’12 and ’13 at 100%, similar to iPhone’s historic performance.
  5. Android tablet growth will be significant in the current year and follow iPad growth pattern though settling at 80% during ’13.
  6. Amazon growth will be approximately 80%.

Building the platforms combined growth bottom-up gives the following forecast for the next two years (and historic growth shown for perspective.)

The other tablets

Analysts have to count things in order to measure value. It sounds easy but it can be tricky. As I pointed out with PCs vs. iPads, if you count an iPad as a PC you can get into a lot of trouble with your clients. But if you don’t you end up directing them away from confronting an existential threat. Only very rarely is a market report published in contradiction to widely held sustaining beliefs. More often than not analysts bow to the source of their paychecks and in so doing show their rear end to the truth.

This comes up again now with respect to how to count tablets. Consider that there is little difference in architecture, software or design between an iPhone and an iPad. They run the same OS, use the same microprocessors and have similar communication methods, inputs and sensors. However they are considered completely different products and counted as part of separate markets. The only physical attribute that differs is the screen size. So we have to conclude that the size of the screen is a huge determinant factor in deciding whether a product is a tablet but not a smartphone (or music player).

But what about tablets themselves? Their screen sizes vary widely. A 10″ screen is certainly a tablet device, but a 4″ screen certainly isn’t. Where is the boundary exactly?

More media tablet hype

The iPad is still only slightly more than a year and a half old. Forecasting unit volumes has proven very difficult. But more than that it’s proven very difficult to appreciate the impact on the market it’s disrupting, PCs.

For some people this is obvious, but what if you don’t live and breathe disruptive theory? What if you don’t watch every data source like a hawk for hints of change? What if you are not even a technologist. How would you form an opinion on the effect of the iPad on PCs?

There are many industries and sectors about which I know nothing. If you asked me to analyze a market like industrial lubricants, I’d probably start by reading the consensus opinion put forward by the leading market analyst, an expert in that particular sector. That would form the baseline.

In the PC sector, that opinion is formed by Gartner (and IDC and Forrester perhaps). Gartner will get a lot of citations and its stats and opinion forms the baseline view. It may not be right, but we can expect it to be the “consensus”. This is because Gartner surveys a lot of data and interacts with a lot of insiders in the industry. They collect and weigh these inputs and put out what is likely to balance them all.

If Gartner says that the iPad is a “media tablet” that is not a PC they may be wrong. But they are also repeating what the PC industry is saying. So I value Gartner as a reflection of the consensus. If there is a significant gap between Gartner and what I conclude to be reality then there is an interesting opportunity as well as evidence of incumbent ignorance.

Let’s then look back on how Gartner has been reporting the iPad’s rise and the PC’s decline.[1]

The case against the Kindle as a low end tablet disruption

In an Harvard Business Review post Rob Wheeler makes the case for the Kindle Fire as a disruptive innovation. I believe that it is but crucially I disagree that the Kindle Fire is a low end disruption.

My assessment of the Kindle Fire is based on the two attributes which Amazon highlights as the key selling points which offer a basis of differentiation and potential for asymmetric competition: a low price and a new browsing model. I believe that these two attributes result in two opportunities: one for low end disruption and another of new market disruption. I reject the first and tentatively support the second.[1]

The price

It’s immediately obvious that the price point of the Kindle Fire is well below alternatives. That forms the basis of disruptive potential, but before we jump to analyzing the disruption hypothesis we should determine whether and to what extent Amazon profits from the device directly. Profitability gives us a clue to where Amazon will apply resources and thus establish its trajectory of improvement.

We know the margin on the Fire is low because we can calculate the bill of materials for 7″ tablets. Gene Munster of Piper Jaffray estimates that Amazon “loses” $50 for each unit sold. We also know that the design Amazon used is essentially very similar to the RIM PlayBook and was sourced from the same ODM. RIM priced the product at $499 but has struggled to find buyers and is reluctantly dropping the price. We also can estimate that Apple with a product having more than twice the screen size is keeping modest (~30%) gross margins for at a price point approximately double that of the Fire. It does seem that Amazon does not have much or any margin to dip into.[2]

So the Fire can be classified as a low price product. Does that make it a low end disruption?

Is the tablet computer a new PC or post-PC?

Steve Ballmer stated and Andy Lees confirmed that Microsoft views iPad and other tablets as “just PCs”. From a market measurement point of view Canalys agrees. IDC and Gartner don’t, calling the new devices “media tablets.”

Before deciding whether tablets belong with PCs in market metrics, it would be interesting to look at what the data shows. When seen as a combined market, the focus should be on platforms. The following chart shows the four main PC+tablet platform volumes since late 2008 [1].

The second chart shows the same data as share of total market:

Feature Tablets

Andrian Georgiev, a reporter from the Bulgarian business newspaper “Capital weekly” wrote an article for which he asked me some questions. My answers are below. The article is available here (Bulgarian).
Q: How many tablets will be sold worldwide this year and in 2012?
A: We can only guess the answer. The total will be constrained by parts shortages for 2011, but my estimate [through the end of 2012] is over 100 million. Perhaps even 120 million is possible.

Q: Do you think Amazon is working on a tablet? Could it be a game-changer?
A: If Amazon (or Facebook or Baidu) were to build a tablet the greatest innovation will be in their business models. In other words how they make money. I suspect Amazon’s hardware will be free or nearly free but users will be incentivized to buy content or other goods from Amazon. Similarly for other businesses that will take a hardware product and make it an accessory to their core business. In that regard the “game will change” because hardware will conform to “the application” above it. In other words, that the device will be an accessory to the service, not the other way around.

Q: Why is it so hard for manufacturers to create a tablet that rivals iPad?
A: The iPad is a collection of components. Some are easy to duplicate or to source. This includes memory, microprocessors, communications components. Other components are harder to find and may be expensive once found. This includes the right kind of batteries and the screen. Yet other components are impossible to find or duplicate. That includes software.

Some additional thoughts:

The changing of the game may not happen for some time. “Feature tablets” (analogous to feature phones) will however be viable as niche businesses quite soon. I believe “conforming” operating systems will be more popular with tablet makers than with phone makers.

Understanding RIM's tablet platform app strategy

Yesterday RIM reported their quarterly earnings. The results were mixed to slightly negative and the shares were down 10% in after-hours trading.

I’ll work through the smartphone market data at a later time but for now what I want to focus on is RIM’s strategy which really means understanding RIM’s intentions or their approach to the market. For that we have to go straight to the source: what management actually says. Trouble is, management often speaks in a jargon that is unfamiliar to people (sometimes unfamiliar to anyone outside the company).

Strategy analysis involves translation. So here follows the interpretation of Jim Balsillie’s remarks during the conference call (transcript sourced from Businessinsider.com).