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After its stiff post-earnings sell-off, Apple (NASDAQ: AAPL ) rebounded slightly this week. The company closed out the week at $453 per share, a 3.1% gain from where it'd closed the previous Friday.
The central story line surrounding Apple's sell-off -- how much growth is still in front of the company -- is still being debated after earnings. However, this week featured a story that both Apple and general technology investors shouldn't ignore. While investors might not be used to looking abroad at Turkey for coming technology megatrends, one looks to be taking place in the country right now. At stake is the trajectory of tablet growth, and a potential huge market for Apple itself.
An emerging opportunity?
When investors think about top growth markets in front of Apple, they frequently start with the fabled BRIC markets -- Brazil, Russia, India, and China. Apple has been very upfront that it sees China passing the United States to become its largest market.
Yet lost in the mania over using the catchy "BRIC" acronym to describe markets with strong growth is that there are dozens of high-growth countries where companies like Apple don't historically have strong presences. Each of these countries is unique in the opportunity it presents.
One of the most under-the-radar growth opportunities is actually, yes, Turkey. It's a country with strong growth rates, relatively strong GDP compared with many other high-growth peers, and a large population of more than 75 million. Not only that, but Turkey's government and populace have also been willing to embrace technology.
Across 2011, Intel (NASDAQ: INTC ) posted surprisingly strong growth rates, which surprised investors who were watching continuing sluggish PC growth in the United States and Europe. The key growth driver was emerging-market growth, which Intel would trumpet on its earnings calls. What's surprising is that in addition to citing growth in China, India, and the world's fourth most populous country, Indonesia, Intel would also trumpet growth in Turkey. The company was an under-the-radar growth driver for Intel's booming global sales.
However, Turkey is seeing the same shift as other emerging markets, where PC growth is slowing in favor of spending on mobile devices. That's a unique opportunity in and of itself, but what's more interesting is the government's involvement in pushing to improve its educational system with tablets.
18 million tablets -- that's a big number
Turkey initiated the Fatih project, stylized as F@tih, in November 2010. The basic premise was to modernize education by providing tablets to students and administrators. What makes the program so interesting is its enormous size and scope.
Turkey is hoping to purchase 17 million tablets for students and approximately 1 million for administrative employees and teachers. The rollout is expected to happen in an extremely fast time frame, considering many educational decisions are made at glacial changes. The project is expected to be completed within three years.
It's an extremely ambitious project, especially in its universal aim for technology in classrooms. In the project's official PowerPoint presentation (the top link is an English presentation), it notes among its initial aims to ensure that each school has a multiple-function printer. The fact that just getting multiple-function printers in schools is part of the project illustrates some of the disparity in Turkey, which has a large east-west divide, where Istanbul and coastal cities on the Mediterranean are much wealthier than rural communities and ones in the eastern half of the country. In many schools, this isn't a simple technology "upgrade"; its an attempt to catch up to today's technology in one massive shift.
F@tih is an undertaking that, if successful, could lead other nations -- both richer and poorer -- to follow Turkey's lead. There are already numerous programs modernizing technology with tablets, but if Turkey can prove that their widespread use improves education and saves costs in other areas, it could accelerate large-scale deployments like the one being conducted across the country.
There's a lot at stake here.
The future of tablet growth?
The news of Turkey's impending tablet purchases was big news across Apple sites last week, because Turkish President Abdullah Gul met with Apple VP of Education John Couch. The size of a potential deal between the Turkish government and Apple has been reported at $4.5 billion.
Apple's size -- $165 billion in sales in the past 12 months -- doesn't make any potential deal in and of itself a game-changer. Yet the basic premise of a deal with Turkey is tremendously powerful. Steve Jobs conceived the iPad as something revolutionary to education, so that in one fell swoop Apple could put itself at the center of a case study in using tablets to revolutionize education.
That's a potentially massive market. The huge growth areas for the iPad were that beyond its obvious placement with consumers -- a place Apple has always found higher levels of success -- it could also make deep inroads into business and education. Becoming the de facto platform for education in different countries creates a large install base. That not only creates more sales from the educational iPads, but it also increases the odds that users will have more than one iPad device. That is, if someone has a school or work iPad, there's a good use case for also having one at home that stores more personal media and apps.
If tablets were purely a consumer phenomenon, you could see them at their peak with an attach rate of maybe one tablet per person. However, if tablets are huge in business and education as well, it not only drives familiarity with iOS as a mobile operating system, but it could also mean something like 1.5 tablets per person, as a good amount of the population has a personal and work or school tablet.
Not Apple's contract to win?
The elephant in the room is that Turkey's tablet contract isn't necessarily Apple's to win. The bottom line is that Apple will be more expensive than competing offerings. Turkish website Sabah reported on the costs Turkey paid for its pilot program providing tablets in the classroom:
PRIORITIES WERE A STRONG MEMORY AND RESISTANT GLASS: The pilot stage for the tablets was conducted with Samsung and General Mobile via the State Materials Office. For every 4,800 tablets purchased from Samsung, each one cost 775 TL. For every 4,000 tablets purchased by General Mobile, each cost 599 TL. For every smart board purchased from Vestel, 3,990 TL will be paid out.
The currency conversion is one TL, or Turkish lira, to 0.57 U.S. dollars. That means Turkey paid about $441 per Samsung tablet. That's a range Apple could be competitive in. The General Mobile tablet would cost about $341 per unit. That's a range closer to where the lowest-end iPad Mini sits.
The argument would be that Apple would provide a more secure and reliable tablet, even if costs were slightly higher. However, if educational areas are looking to cut more costs or offer more wide-scale customization to a large tablet roll-out, that could lead them to Android offerings. Also worth noting is that the country's educational head has met with Microsoft (NASDAQ: MSFT ) , a company that offers more compatibility with the large PC-install base in the country, and one looking for tablet traction.
To put the size of 18 million tablets in perspective, it'd constitute about 30% of all Android tablet sales in 2012. With Google looking for more traction in the tablet space, winning educational tablet contracts, especially in price-sensitive markets, could become a priority for Google in coming years.
Tablets as a growth field
The bottom line is that tablets are reaching a critical growth phase as smartphone growth slows in developed markets. Across 2012, researcher IDC increased its forward projection of 2016 tablet sales by more than 40% from where it expected them to be at the start of the year. The future of tablets and how much growth remains is still very much up in the air. Stories like Turkey's future show the potential for tablets to be an equal to smartphones one day. The big question for investors is whether the market goes very low-end, or whether Apple can keep up its dominant market share.
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