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.
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