It's the Tablets, Stupid

Getting tired of all the hoopla surrounding Apple's (Nasdaq: AAPL  ) iPad tablet? That's understandable. Still, there's a good reason hardware vendors are falling all over themselves to launch iPad competitors.

Where the money is
The PC market is huge. And mature. Sales growth rates are low to negative. Unit shipments of PCs (desktops, notebooks, and mini-notebooks) grew a measly 3.1% year over year in the fourth quarter of 2010, according to Gartner. Since PC prices trend down over time, revenue growth is typically less than unit growth.

That makes it hard for PC makers to deliver strong earnings growth. Cost-cutting can boost the bottom line, but big PC vendors such as Hewlett-Packard (NYSE: HPQ  ) and Dell (Nasdaq: DELL  ) have been cutting costs for years. It's hard to imagine there's much fruit left on their cost-cutting trees. What's left is likely hard to harvest.

Where the growth is
As prices of notebook PCs fell, buyers increasingly chose notebooks over desktops. A few years ago, notebook growth held up even as desktop growth deteriorated. PC vendors emphasized mobile computing. In 2005, Lenovo acquired IBM's (NYSE: IBM  ) PC business and became a leader in notebook computers. The same year, HP listed mobile computing as one of three major IT market trends it was pursuing.

That worked -- for a while. Now notebook growth is stagnating. According to DisplaySearch, unit shipments of notebooks and mini-notebooks grew a paltry 1% in the fourth quarter of 2010. IBM's sale of its PC business looks prescient.  

Now what?
There is hope. In the fourth quarter, shipments of tablet computers increased from being nearly nonexistent the year before to 10 million units. Was that a fluke? Not according to a recent NPD Group study, which reports that 30% of tablet owners are using desktops less for email and Web browsing. The shift is only slightly lower for social networking, at 28%. A strong majority of owners reported being very satisfied with their tablets.

Apple versus … ?
The iPad had a 75% market share in tablets in the fourth quarter, according to Strategy Analytics. Success invites competition. Tablets using Google's (Nasdaq: GOOG  ) Android operating system are hot on the iPad's heels, jumping from a 2.3% market share in the third quarter to 22% in the fourth. Android's gains were almost entirely the iPad's loss.

The top-rated Android tablets on tech site CNET are the Samsung Galaxy Tab, Dell Streak, Barnes & Noble Nook, and ViewSonic ViewPad. Motorola Mobility (NYSE: MMI  ) recently introduced its Android tablet, the Xoom. Return rates on the Samsung, one of the first Android tablets on the market, are about 16%, compared to 2% for the iPad. It's hard to say what's driving the difference or whether an upcoming update of the Android operating system will help close the gap.

Looking beyond Android, last September Research In Motion (Nasdaq: RIMM  ) announced the BlackBerry PlayBook tablet, and earlier this month, HP launched the TouchPad tablet, which uses WebOS, acquired from Palm. 

It's too soon to tell which tablets will emerge as viable competitors to the iPad. That said, the iPad is almost sure to see its market share decline. iSuppli estimates that it will fall to 70% this year and 62% in 2012.

The law of large numbers
In evaluating the impact a new product can have on a company's earnings, it's important to compare the potential of the new product with the size of the company overall. HP's PC group accounts for only 32% of its revenue. In contrast, desktops and mobile devices account for 55% of Dell's revenue. Thus, tablets can have a far larger impact on Dell than on HP. Similarly, tablet success (or failure) could have a big impact on Research In Motion as it works to relieve pressure the iPhone has put on its BlackBerry.  

Foolish takeaway
Apple is the clear winner in the tablet wars. In Apple's most recent quarter, the iPad alone grew the company's sales by an impressive 29% from the year-ago quarter and accounted for 42% of sales growth. Yes, it's likely to lose market share as competitors enter the market. That said, the iPhone and iPod offer a guide to Apple's ability to fight off competition. The iPad could make it a triple crown. The remaining horses in this race largely appear to be high-risk, high-reward long shots.  

More on tablet PCs:

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Fool contributor Cindy Johnson owns no shares in any of the companies in this story. Nor does she own an iPad -- to her dismay. Google is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers choice. Apple is a Motley Fool Stock Advisor recommendation. The Fool has written puts on Apple and owns shares of Apple, Google, and IBM. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (6)

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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 February 20, 2011, at 2:21 PM, jesterisdead wrote:

    Tablets are hype. The only practical use is couch surfing and eReaders, which C|Net apparently is including in its definition of a tablet. eReaders will continue to sell at virtually no profit in order to push book sales, but the iPad has already made its sales from its mindless iBots and the market is saturated. Tablets are a dead end.

  • Report this Comment On February 20, 2011, at 3:07 PM, gslusher wrote:

    @jesterisdead:

    "Tablets are hype. The only practical use is couch surfing and eReader"

    I guess that's why so many Fortune 500 companies are deploying them.

    From the article:

    "Unit shipments of PCs (desktops, notebooks, and mini-notebooks) grew a measly 3.1% year over year in the fourth quarter of 2010, according to Gartner."

    Mac unit sales were up 23% year-over-year. Desktops were about flat (-1%), while laptop sales were up 37%.

    "According to DisplaySearch, unit shipments of notebooks and mini-notebooks grew a paltry 1% in the fourth quarter of 2010."

    Apple laptop sales grew 16% quarter-over-quarter.

    "In the fourth quarter, shipments of tablet computers increased from being nearly nonexistent the year before to 10 million units."

    Apparently, that has to include the 2 million Galaxy Tablets Samsung "shipped" during the quarter. Samsung has had to admit that this was, essentially, channel stuffing. Nowhere near that many were actually sold. Apple actually sold over 7 million iPads in the quarter.

  • Report this Comment On February 20, 2011, at 5:36 PM, hp9009 wrote:

    For what it is worth the tablets are useless unless you are using cloud storage and even then the CPU processing speed is poor at best combined with the smaller sized displays. So for my money, I opted for the old and faithful laptops for my kids which I ordered from HP. I got a 2Ghz 15.6'' display and 4GB RAM along with a 32GB drive and I think all that for $419 is a good bargain, this is not refurbished and runs Windows 7. I would love to buy tables at some point in the future when I can attach a USB or use NAS drive of my LAN so I do not have recurring payments for cloud storage, have really powerful CPUs, have larger displays and have lots of internal memory. Nice front facing camera, I do not know why the stupid manufacturers are adding full HD cameras on the back and 1.3 cameras in the front - they think someone is going to take a photo with a 10' slate?

  • Report this Comment On February 20, 2011, at 6:03 PM, eyehelper wrote:

    The idea that they are useless is interesting. Kids love the content. It's not all work use that sells tablets. It's hard to walk into a meeting with a pc. Usually everyone is waiting for someones boot up garbage on their laptop. Cloud storage is great for doctors, lawyers etc. folks that don't always want to carry a breifcase full of briefs around. I don't think fortune 500 will drive the demand. Also with 22 billion in Healthcare electronic records stimulus beginning this year you can bet your doctor is going to have one if he needs it or not. I can write a prescription by logging into my office pc with my ipad. don't underestimate these things . Seems like the demand will come from the general public and that is big. tablets are cheap ways to deliver content to your toilet or the coffee shop table. Gotta watch the kids faces light up to three little pigs on the ipad before bed

  • Report this Comment On February 22, 2011, at 10:10 AM, MartinSamuelson wrote:

    "Return rates on the Samsung, one of the first Android tablets on the market, are about 16%"

    That was from a controversial research report that was ridiculed by many and fully rebuked by Samsung. Samsung claimed less than 2%.

  • Report this Comment On February 22, 2011, at 10:18 AM, beetlebug62 wrote:

    You wrote, "The iPad had a 75% market share in tablets in the fourth quarter, according to Strategy Analytics. Success invites competition. Tablets using Google's (Nasdaq: GOOG) Android operating system are hot on the iPad's heels, jumping from a 2.3% market share in the third quarter to 22% in the fourth. Android's gains were almost entirely the iPad's loss."

    Two things. One, Strategy Analytics were counting shipments not sales. Samsung's Galaxy Tab was filling its retail channel, so that distorts the total shipments. A Samsung spokesperson said sales were a little disappointing, but "smooth".

    Two, when the market for pads is more than doubling in size, any share loss is small compared to actual unit sales growth.

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