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Decoding the tablet wars: what investors need to know

First State’s global equity manager Luis Benoliel breaks down the numbers, names and essential knowledge needed to capitalise on the mobile computing boom.

Revolutionary Apple paves the way

‘Let’s look at the numbers: the tablet market is expected to have shipped almost 120m units in 2012. For comparison, the notebook market is just over 200m units and barely growing. By 2013, the tablet market could grow to over 180m units; a truly outstanding revolution,’ says Luis Benoliel of First State.

‘Investors have been looking for the iPad to build on the amazing and highly profitable success of the iPhone. This has garnered nearly a 40% share of the North American smartphone market, close to 30% in Western Europe and almost 30% in Japan, where the largest mobile operator does not even offer iPhone.’

The Challenge

‘Apple’s brand and its high margins keep Apple tied to its premium positioning and that may leave the company vulnerable. Apple cannot attack the lower-priced end of the table market without risk of killing its “cool” brand image.’

‘The last time Apple was in this position, when Android began challenging the iPhone, Apple responded with an innovation step-change by creating the tablet segment. This time profits, margins and expectations are higher. But it isn’t clear that there is anything as dramatic in the pipeline.’

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The competition rises…and Microsoft needs a win

Benoliel says: ‘It is catching up and trying to evolve Windows into a tablet-friendly system with mixed results; the traditional combination of applications and Intel chips is very power-hungry, whilst the pared-down version (Windows RT, running on ARM chips with longer battery life) has not yet met approval.’

The Challenge

‘Its route to the market is also being threatened as branded hardware manufacturers may ask themselves why they should pay for windows when Google gives Android away for free,’ he says.

‘So Microsoft is hedging its bets and entering the hardware business for the first time with its Surface computers. This is a significant change because the cost of Windows not winning the tablet wars is significant. One should expect Windows to put up a fierce fight.’

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Google cautiously enters the fray

‘Google is also playing defence here, as it almost has as much to lose from the “death of PCs” such as Microsoft. Google makes its money off ‘search’ via internet browsers but if consumers access information via ‘apps’ rather than a browser, Google’s addressable market may be pressured.’

‘That gives Google an incentive to win in the tablet wars. And it has a secret weapon – Android. It acquired the operating system in 2005 and has taken the smartphone unit market share of this previously unknown operating system to over 50% in developed markets and close to 65% today.’

The Challenge

‘Tablets are changing consumer behaviour due to the growth of what pundits call ‘couch commerce’. Every hour spent online using tablets could represent a lost opportunity for Google.’

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Samsung shaping up sharply

‘Its success has been achieved through vertical integration; unlike other equipment manufacturers, it controls a large growing part of a smartphone or tablet’s components and provides leading solutions in these areas,’ explains Benoliel. ‘It had the first ‘ultra-thin’ smartphone and has innovated with phones that use a stylus.’

The Challenge

‘Although Samsung has never created a category in the way that Apple or Sony have, it has come to dominate categories with its focus on cost and design. Whether this will be enough to prevail in tablet-land is not yet obvious as Samsung lacks an extra income stream.’

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Amazon as an outsider

‘Amazon has perhaps the least right to succeed in tablets, being an online retailer first and foremost,’ says Benoliel. ‘The new 7inch Kindle Fire is a modern tablet that doesn’t try to be a lap-top replacement but a device for content consumption.’

‘Because Amazon can make a margin on commerce, it can afford to price aggressively on the hardware and so, for the moment, it is the low-cost entrant into the marketplace.’

The Challenge

‘Ultimately, it will be down to the consumer who will prevail and whether the design-cool of Apple will outweigh Amazon’s edge in watching and selling. The next few months will be critical.’

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