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Let the Great Tablet Wars Begin

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Earlier this week, Hewlett-Packard (NYSE: HPQ  ) executive Todd Bradley took the stage at TechCrunch's Disrupt conference and proclaimed that tablets will become a $40 billion market within the next few years.

The statement sparked a flurry of oohs and ahhs, along with lots of stories on the outsized growth of tablets. But Bradley's comments shouldn't come as a surprise. After all, for weeks we've seen reports that Apple (Nasdaq: AAPL  ) was ramping up to produce 2 million iPads per month. If that's true, Apple could generate upwards of $15 billion a year from iPad sales alone. Throw in machines based on HP's own efforts with its webOS tablets and an onslaught of tablets based on Google's (Nasdaq: GOOG  ) Android, and $40 billion within "a few years" seems like a pretty conservative figure.

And so we finally enter a new age of computing. Nearly a decade after Microsoft   (Nasdaq: MSFT  ) declared the emergence of the tablet era, tablets are finally entering the mainstream.

Winners of smartphones; now the winners of tablets
Microsoft's folly when it comes to tablets was in trying to project the desktop-computing experience onto smaller, touch-sensitive devices. It's always been in Microsoft's DNA to provide as many features as possible and give aesthetics a back seat to functionality and wide-ranging compatibility. However, the sweet spot in tablets is in offering consumers a lightweight experience that's optimized for browsing and "good enough" at other tasks, such as writing e-mail or using spreadsheets. The Internet and Web browsers have matured a lot in the past decade, to the point at which they've enabled these kinds of browsing devices.

Despite HP's own ambitions, the two clear front-runners in tablets are Apple and Google. And it's no surprise that the smartphone high-flyers are now seeing the most tablet momentum. The iPhone actually started life as a tablet; Steve Jobs set out to create a tablet earlier last decade but quickly realized that a smaller version of a tablet would work perfectly as a phone.

So now the winners of the smartphone bonanza face a second jackpot, but will this next revolution be as lucrative as the smartphone revolution that preceded it?

A landmine for PC manufacturers?
Even if that $15 billion tablet figure for Apple proves too ambitious, the fact remains that tablets are an enormous growth driver for the company. In fiscal 2009, Apple's total sales for its entire Mac line were less than $14 billion. However, tablets might not have the same outsized effects for Android-based models.

The reasoning is simple: A key differentiator for Android tablets is price. Since Android is distributed freely, there's little to differentiate the phones from one another. And we're already seeing Android tablets scratching the $150 price point. Android's key advantage over the iPad is price and the varying degree of designs. So even if Android tablet sales eclipse the iPad, that doesn't mean higher profits to manufacturers. Besides, even when it's not the per-unit market-share leader (cough … iPhone), Apple's been known to generate outsized products because of its differentiated offerings.

Moreover, tablets aren't succeeding as a result of increased consumer spending on computers in general. In fact, the Consumer Electronics Association expects overall consumer spending on electronics to be flat for 2010. That means that tablet purchases in large part cannibalize spending that would have otherwise gone to netbooks or full-fledged laptops. For major PC manufacturers such as HP, Dell (Nasdaq: DELL  ) , and Acer, designing tablets is more defensive in nature. They're a threat to the companies' existing business.

Where's the value add?
However, for other tablet players that aren't heavily engaged in PC manufacturing, tablets offer a growth opportunity into a previously untapped area of consumer spending.

Take Cisco (Nasdaq: CSCO  ) , for example. The company's been developing a tablet concept called Cius that could act as a "thin client." That means people could use the tablet's Android operating system when performing tasks such as browsing the Internet and then virtually tap into a full-featured work desktop for more demanding tasks. The thin-client idea still faces some technical challenges in the form of bandwidth bottlenecks, but the enterprise adoption of tablets could provide a unique opportunity for Cisco in the coming years.

Speaking of the surprising enterprise adoption of tablets, Research In Motion (Nasdaq: RIMM  ) could also be well positioned for growing revenues from its PlayBook tablet. Tablets offer an area in which RIM could build a foothold -- not necessarily because of the PlayBook's capabilities, but because of It firms' typically slow adoption of new technologies. RIM devices are already approved for most corporate networks, while larger companies are still testing Android and Apple phones. 

In this respect, it was imperative that RIM launched within the current generation of tablets to establish a foothold. Many enterprises are working at an unusually fast pace to allow access for Android and Apple's iOS.

Not many winners
Although the tablet market is growing rapidly, it's important to remember that the devices won't be killing the PC anytime soon. Researcher IDC estimated that 294 million PCs shipped last year. Even if tablets hit sales of 50 million within a few years, they'd still be a relatively thin slice of the overall PC market. For companies such as HP and Dell that are working to diversify away from being low-margin PC sellers, the lost profits from tablets aren't enormous; just don't expect them to contribute to any kind of investing thesis.

Investing in tablet growth is a tricky thing. Apple offers a good entry into the segment as a market leader, but other companies looking to move into tablets -- such as RIM, Cisco, Samsung, and LG -- either are too big for tablets to have an outsized impact, or the chance that their concepts will succeed is fairly low.

The bottom line is that investors looking to profit from any upcoming tablet boom don't have a variety of investing opportunities available from large manufacturers of tablets. The better play on the trend would actually be the chip companies making varying components critical to both tablets and smartphones. With Intel largely absent from the mobile market thanks to the success of ARM Holdings-based processors, a number of processor companies stand to benefit from the segment. Then there are the many companies that provide connectivity and power-management chips critical to tablets.

So even though tablets might be entering the mainstream, don't expect investing profits to follow -- that is, unless you're willing to dive into a patch of chip stocks.

Looking for chip-stock and tablet ideas? Start here:

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Eric Bleeker owns shares of no companies listed above. Google, Intel, and Microsoft are Motley Fool Inside Value choices. Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor recommendation. The Fool has written calls (bull call spread) on Cisco Systems. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 02, 2010, at 2:27 PM, uc22 wrote:

    Sounds like you already wrote of MS in the slate/pad (tablet is not new) war. I predict MS and Apple are the only two viable slate/pad makers (Apple making the entire device and MS an OS and maybe even a device) in two years time. How silly this site is always writing off MS in just about everything and RIM in phones.

  • Report this Comment On October 02, 2010, at 3:05 PM, Henry3Dogg wrote:

    The Microsoft you describe is very different than the one I remember. I remember the one that used to engineer in incompatibilities to their commercial advantage. E.g.

    Between MS Word and MS Works

    Between standard Java and MS Java

    Between Kerberos and MS Kerberos

    New features were reactive. Incompatibility was a defence.

  • Report this Comment On October 02, 2010, at 6:20 PM, Henry3Dogg wrote:

    "RIM devices are already approved for most corporate networks, while larger companies are still testing Android and Apple phones"

    Doubt that approval will carry forward to a tablet device with a totally different operating system.

  • Report this Comment On October 02, 2010, at 8:08 PM, TMFRhino wrote:


    Despite being based on QNX's system, RIM really put a focus on security on their sales pitch for their tablet. I'd be surprised if security was a huge issue here, but we'll see as more details come to surface.


    Eric Bleeker (TMFRhino)

  • Report this Comment On October 03, 2010, at 9:13 PM, Aeoran wrote:

    Quoth InfoThatHelp:

    #1: "Apple iPad can run PGP kind of security or Kerberos security plugs at the OS level or database level far far far exceeding any Rim device level security."

    Blatantly false. Apple's security is only marginally stronger than Android, which might as well not have any. Here's a simple reality check: what's a jailbreak? RIM's security model and implementation is the strongest in the wireless world.

    #2: "There is no question Cocoa framework is the dominant web framework."

    Blatantly false. Cocoa is not a web framework. The only part of Cocoa you can call web-related is the WebKit HTML classes. Maybe NSURL.

    #3: "iPad sales should approach 400 million units annually."

    Fanciful and pure speculation; 10% of that number would be already a very good result. 400M units is less likely than having everyone driving a flying car by the year 2015, powered by Mr. Fusion units.

    It's interesting reading InfoThatHelp's comments. Some of the stuff suggests experience. However, other parts of his stuff are outlandish and raving lunacy. It's as if two completely different people sat down and typed every other sentence .

  • Report this Comment On October 03, 2010, at 9:37 PM, NOTvuffett wrote:

    I don't get it. Why is there an appeal for a tablet computers when a netbook can do the same things at a lower cost?

  • Report this Comment On October 04, 2010, at 4:51 PM, Aeoran wrote:

    Quoth InfoThatHelp:

    #1: "Kerberos is one of the world's leading security software."

    Kerberos is only an authentication scheme - basically, a protocol for logins. The security of a wireless system needs a wee bit more work than that. Say, jailbreak iOS and steal the key. Or any number of other trivial attacks on iOS.

    Adding security via a plugin is about as effective as walking into a fire with a pair of oven mitts on. That's why RIM's systems are secure, and Apple's are not.

    #2: "Netbooks are very much like a conventional tablet computer."

    Not really. Netbooks are far more useful, though far less sexy. Most netbooks run Windows and have tens of millions of apps. They also have something called device driver support, so they can do things such as printing a photo, playing a Flash video to a big screen, run Microsoft Office, and save files to USB sticks. This is public knowledge for everyone except for iPad champions.

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