When Apple (NASDAQ:AAPL) released the first-generation iPad several years ago, the company arguably created the tablet market as it currently stands. While some doubt the usefulness of a tablet, the fact that more than 220 million of these devices are expected to sell during 2013 is proof that this industry is for real. However, as with any fast-growing market, there are several questions that investors need to ask before choosing to invest.
Huge market potential, and a blurring line
In the next several years, the tablet market is expected to post significant growth. In 2014, sales are expected to increase by more than 30%, followed by a 33% increase in 2015, and an increase of 25% in 2016 .
Some have argued that tablets are such good consumption devices that older PCs and secondary computers are being replaced by tablets . Of course, for content creation, consumers and businesses still use PCs.
However, with the advent of more powerful tablets and innovative Bluetooth keyboards, as well as convertibles, the line between tablet and PC is being blurred. Microsoft (NASDAQ:MSFT) seems to be leading this charge with its advertisements for the new Surface 2. Billed as the "one device for everything in your life," Microsoft wants users to look at the Surface as their tablet and PC.
The idea that tablets aren't powerful enough to create content is going away as well. The new iPad Air has a 64-bit processor, and Samsung, Amazon.com (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) have debuted tablets with quad-core processors. The hardware that used to reside only in PCs is becoming common in the tablet world.
The useless hardware battle, and who really buys tablets
Three main focuses in the tablet market seem to be weight, speed, and pixels. Apple says the iPad Air is 28% lighter , has two times the CPU performance of the prior model, and offers the famous retina display. Both the Google Nexus 10 and the Kindle Fire HDX 9 claim pixel density of at least 300 ppi, with fast processors and lightweight designs. The Samsung Galaxy Note 10.1-inch comes with 298 ppi, a fast processor, and the innovative S-Pen.
The bad news is, the human eye can't distinguish the difference when pixel density passes a certain point. When it comes to processors, most mid-range tablets can breeze through the apps that are currently available. Since the top-selling larger tablets vary in weight by only half a pound or less, many consumers won't notice the difference. The hardware game is that of incremental differences.
Customers who are heavily invested in the Apple ecosystem aren't interested in the technical specs of an Android tablet. In similar fashion, customers who have bought into Google Play or the Amazon ecosystem may not care if the newest iPad is thinner and lighter than before. Microsoft isn't quite playing the same hardware game, and instead wants customers to look at the Surface 2 as a laptop and tablet in one.
In the end, each of these companies must woo its existing users to upgrade, and try to explain to non-tablet users why its device is better than the rest.
Two risks and what investors should really focus on
Investors might believe that picking any of the aforementioned companies should equal great returns based on the tablet market's expected growth. The problem is, there are new technologies threatening to replace the tablet, even as the market is growing.
The first and possibly the most significant threat is the increasing size and capability of smartphones. As smartphones become more capable, and their screen size and battery life begin to catch tablets, consumers may choose to carry one less device, and it won't be their smartphone that gets left at home.
Technologies like Google Glass and smart watches are in their infancy right now. However, being able to wear your technology instead of having to carry an extra device around is another threat .
However, the biggest threat to the tablet market might be apps that behave the same on multiple platforms. If a user can get the same experience using the USA Today app on an iPad Air, Kindle Fire HDX 9-inch, Surface 2, or a Nexus 10-inch, what is their impetus for choosing one over the other? In addition, some games can be accessed on either iOS or Android with the same login credentials. Cloud-based and cross-platform apps threaten the very ecosystems these companies have worked hard to build.
Investors ultimately should invest in Apple if they believe the company will continue to woo its existing user base and add new users along the way. Investors in Google should probably focus on how the company's paid clicks are doing rather than how the Nexus lineup is selling.
Amazon might trumpet the greatness of the Kindle lineup, but investors should realize Amazon wants users who buy goods and services, if they do that on a Kindle that's great, but they don't have to use a Kindle to be loyal customers. Investors in Microsoft should pay more attention to how Office 365 and Enterprise sales are going rather than Surface results.
The bottom line is, the tablet is a great consumption device. However, don't let the talk of who carries the most market share consume your thoughts when choosing which of these companies to invest in.