Tablets - Epicenter for Convergence

INDUSTRY REPORT | Consumer Electronics | December 7, 2010

TabletsTabletsTabletsTablets EpicenterEpicenterEpicenterEpicenter for for for for tttthe Convergence of he Convergence of he Convergence of he Convergence of Smartphones and PCsSmartphones and PCsSmartphones and PCsSmartphones and PCs

Report Author

William Kidd

Director,

Financial Services

© 2010 iSuppli Corporation. All Worldwide Rights Reserved. Confidential. Patents Pending | 1700 E. Walnut Avenue, El Segundo CA 90245 | Telephone: 310.524.4007 | Email: [email protected]

El Segundo, USA (HQ) Santa Clara, USA Scottsdale, USA Minnetonka, USA Hong Kong, China

Shanghai, China Shenzhen, China Hsin-Chu, Taiwan Tokyo, Japan Kyoto, Japan

Seoul, Korea Bracknell, United Kingdom Munich, Germany Herblay, France

Industry Report | Financial Services

`

� Although many devices have been labeled as convergent from a consumer perspective, tablets are unique in that they truly have brought once disparate industries together and as direct competitors. Tablets represent a significant challenge for many consumer electronics OEMs, since not all possess the tools to be successful, leaving many scrambling to develop a competent mobile O/S, as well as device, commerce and content ecosystems. In contrast with a smartphone O/S, a mobile O/S is capable of handling a broader set of CE devices (e.g., tablets, TVs, automobiles, etc) and range of uses, supported by more tailored/media-intensive UIs.

� We’ll soon see O/S and UIs developed specifically for tablets, highlighting an opportunity to out-innovate Apple. Although Apple has taken its smartphone O/S very far and impresses with interconnectivity, we believe the tablet user interface (UI) could undergo significant improvements. Thus, ample opportunities exist to innovate further with MeeGo and possibly later by Microsoft. Android’s tablet O/S is a wild card in terms of features.

� We don’t think many smartphone players are as ready for tablets as they imagine due to their lack of competitive commerce/content ecosystems. iTunes has taken years to built up its content/commerce portal, whereas most other smartphone players just have app stores. What may be acceptable to smartphone users isn’t likely to be the same for tablets, since the uses (e.g., watch movies, read newspapers) are so different.

� We believe creation tablets will create both a larger market opportunity and more PC cannibalization than others forecast today. Our departure from conventional thinking stems from our belief that tablets (2-4 years out) will not only be able to retain their form factor advantages, but also possess notebook-like content creation capabilities when equipped with a competent O/S and a wireless keyboard/mouse. A smartphone-based O/S will always struggle to become a creation-based platform. Our creation position bolsters Microsoft’s competitive footing, believing that it still has a large role to play in tablets, whereas a consumption-centric view favors Apple and Android. With our creation tablet view, the overall market by definition has to be substantially larger than forecasts that assume largely consumption tablets, which represents an iPad-centric market evolution. Based on our view, PC makers should be able to improve their competitive position in tablets over time, since consumers would be purchasing a hardware solution that is essentially a new notebook form factor.

� We see the supply chain as a sound way of capturing broader technology themes, such as the growth in smart devices, mobility or even connectivity. However, for a tablet specific investment play, we prefer tablet OEMs, given the value of the O/S and ecosystem. Suppliers as a group tend to be more device diversified, lessening their reliance on tablet components. DRAM is a good example of this, though mobile DRAM has more tablet relevance (potentially 25% of demand in 2014). That said, tablets are likely important in spurring broader adoption of flash and SSD in other devices. Similarly, processor makers could leverage progress in tablets into other smart devices, whereas for Intel specifically, mobile competition make tablets more of a threat than an opportunity. For a few smaller players with narrow but strong product offerings, tablets alone can be meaningful. Atmel, a supplier of touch controllers to Android smartphones, may be one such example.

� Tablets are an early step in a larger CE revolution, where devices increasingly get smarter and possess greater commonality, empowered by a unifying O/S and more shared chipsets. Thus, hardware and software similarity will exist in devices that previously had none. Homes, even faster than lifestyles, have always evolved with technology, from coffee makers to microwaves to Wi-Fi, and we expect the near future to be no different. We believe TVs (by bringing them under a converged mobile O/S with relevant and new apps) are probably the next important catalyst in this evolution. We believe consumers will be drawn to a platform solution for their lives, adding TVs/cars initially and later exercise equipment, lighting/home security and other devices, beyond tablets and smartphones. Interconnected and integrated solutions will create new compelling functionality, which once in existence, will become a requisite. Android is surely an early favorite here.

Consumer Electronics

Tablets: Epicenter for the Convergence of Smartphones and PCs

William Kidd

Director 310.524.4015

[email protected]

December 7, 2010

William Kidd, Director, 310.524.4015 / [email protected]

Consumer Electronics 2 12.7.2010


Table of Contents

I. Convergence and the Mobile O/S ............................................................................................................ 8

The Converged Mobile O/S ...................................................................................................................................... 8

O/S Framework Makes CE Devices More Compelling ......................................................................................... 10

The Dizzying Rate of Change ............................................................................................................................... 11

O/S Competitive Landscape ................................................................................................................................... 13

Nokia ..................................................................................................................................................................... 14

Microsoft and Windows Phone 7 .......................................................................................................................... 15

HP, Palm and WebOS .......................................................................................................................................... 17

Blackberry OS ....................................................................................................................................................... 17

Software vs. Hardware ............................................................................................................................................ 18

Open Source vs. Closed Source............................................................................................................................. 19

Interconnectivity ...................................................................................................................................................... 21

II. Ecosystems ........................................................................................................................................... 22

Commerce/Content Portals ..................................................................................................................................... 22

Smartphone ≠ Tablet .............................................................................................................................................. 24

III. Tablet Device Forecast ........................................................................................................................ 25

A Brief Look Backward ............................................................................................................................................ 25

Black Friday through Year-end ............................................................................................................................. 25

A Great iPad Start = Higher Expectations ............................................................................................................ 26

Forecast Rationale (Base Case): Media Tablets Are Very Successful, Modest PC Overlap ................................. 27

Tablets (Rhoda Alexander) ................................................................................................................................... 28

Compute Platforms (Matthew Wilkins) .................................................................................................................. 30

Smartphones (Tina Teng) ..................................................................................................................................... 32

Alternate Scenario: Creation Tablets Create More Opportunity and Cannibalization ............................................ 34

Where is the real opportunity? The Connected Life. .............................................................................................. 38

Compelling Data Points .......................................................................................................................................... 41

Supporting Data and Forecasts .............................................................................................................................. 43

Connected Devices ............................................................................................................................................... 43

Mobile Handsets ................................................................................................................................................... 44

Smartphones ......................................................................................................................................................... 44

Mobile Landscape ................................................................................................................................................. 46

IV. Insight from Teardowns ...................................................................................................................... 48

What separates a tablet from other devices? ......................................................................................................... 48

Apple’s New Design Paradigm: The User Experience Comes First ..................................................................... 48

The HMI Cost ........................................................................................................................................................ 50

Tablet BOM Analysis versus Mobile PCs and Smartphones................................................................................ 51

V. Supply Chain Repercussions ............................................................................................................... 53

Processors (Francis Sideco) ................................................................................................................................... 53

Flash (Michael Yang) .............................................................................................................................................. 55

The Flavors of Flash ............................................................................................................................................. 57

DRAM (Mike Howard) ............................................................................................................................................. 59

Display Systems (Vinita Jakhanwal, Joe Abelson) ................................................................................................. 61

Other Tablet Component Suppliers ........................................................................................................................ 62

VI. Tablet-Related Valuation Comps ........................................................................................................ 63




VII. Key Developments .............................................................................................................................. 66

11.12 - Android’s Tablet O/S version delayed; iPad continues to lack real competition ...................................... 66

10.15 - Intel sees path to tablets through new atom-based “Oak Trail” processor. ............................................. 67

10.15 - PC market growth remains strong, but not as strong as previously forecast. .......................................... 67

10.01 - RIM announces that it intends to launch its new BlackBerry PlayBook 7” tablet in early 2011 ............... 68

09.17 - Are Tablets the Next NAND Pillar?........................................................................................................... 68

09.10 - Android: Our thoughts on tablet screen-size challenges and O/S fragmentation. ................................... 70

07.30 - Android teardown analysis show similar parts/suppliers help to lower cost ............................................. 71

07.20 - Raising iPad Sales Forecast .................................................................................................................... 72

06.25 - As Apple improves its iOS for enterprise customers, RIM’s last bastion could crumble .......................... 74

06.25 - New eReader Prices Reflect iPad Effect .................................................................................................. 75

06.25 - We are positive on PCs in Q2, though panel suppliers are concerned by iPad and Europe. .................. 77

06.18 - New PC systems touch-screen forecast .................................................................................................. 77

05.21 - Google Brings the O/S Wars to the Television ......................................................................................... 81

05.21 - Dell Streak wants to be your almost wallet-size virtual PC ...................................................................... 81

05.14 - Early demographics on iPads skew to the affluent................................................................................... 82

04.30 - Google is succeeding with Android, but apparently failing with its own handsets ................................... 83

04.30 - HP enters mobile O/S race, buying Palm ................................................................................................. 83

04.30 - Apple buys Intrinsity ................................................................................................................................. 84

04.16 - Intel executives not so optimistic on tablet pc category ........................................................................... 84

The following members of iSuppli Financial Services authored this industry report:

William Kidd Director

310.524.4015 [email protected]

Wenlie Ye Senior Researcher


Sharon Stiefel Researcher





Table of Figures

Figure 1: Tablets Are at the Forefront of the Converge in Consumer Electronics ............................................................ 9

Figure 2: The Evolution in Consumer Electronics Devices to Networked from Digital .................................................... 11

Figure 3: Converging Connected Device Landscape ...................................................................................................... 12

Figure 4: Comparison of Leading Mobile O/S ................................................................................................................. 13

Figure 5: Leading Open Source Mobile (Tablet) O/S ...................................................................................................... 19

Figure 6: Some Famous Open Source Success Stories ................................................................................................. 20

Figure 7: Comparison of Leading Mobile Commerce/Content Ecosystems ................................................................... 22

Figure 8: iPad’s Year One vs. Other Major CE Product Launches ................................................................................. 25

Figure 9: iSuppli iPad/Mobile PC Forecast Evolutions (thousands*) .............................................................................. 26

Figure 10: iSuppli’s “Base Case”: Media Tablets Excel but Don’t Replace Mobile PCs ................................................. 27

Figure 11: Detailed Tablet Consumption Forecast .......................................................................................................... 28

Figure 12: Netbook Cannibalization Scenarios ............................................................................................................... 30

Figure 13: Netbook Cannibalization/Shipment Risk – Most Likely Scenario .................................................................. 31

Figure 14: Converged Device Comparison ..................................................................................................................... 32

Figure 15: iSuppli - Tablet Base Case ............................................................................................................................. 34

Figure 16: iSuppli Financial Services – Tablet Alternate Case ....................................................................................... 35

Figure 17: Our Unified Consumer Electronics Future: The Connected Life .................................................................... 39

Figure 18: The Addressable Market of Connected Devices Continues to Expand; Tablets at the Forefront ................. 43

Figure 19: Smartphones represent 30% of all handsets by 2014, up from 16% in 2010 ................................................ 44

Figure 20: Smartphone Shipments by O/S; Could Tablets Be Just as Fragmented? Unlikely ....................................... 44

Figure 21: Smartphone Shipments by O/S (millions) ...................................................................................................... 45

Figure 22: Smartphone Shipments by Handset OEM (millions) ...................................................................................... 45

Figure 23: Varying Approaches to Monetizing Mobile ..................................................................................................... 46

Figure 24: Mobile Communications Valuation Complex ................................................................................................. 47

Figure 25: Apple’s New CE Design Paradigm ................................................................................................................. 48

Figure 26: The HMI First, “Nested” iPhone 4 .................................................................................................................. 49

Figure 27: Lenovo IdeaPad Exploded BOM View ........................................................................................................... 49

Figure 28: iPad 3G 16GB - HMI Cost Analysis (HMI ~45% of BOM) .............................................................................. 50

Figure 29: BOM Cost Analysis – Tablet/Notebook/Netbook/Smartphone Comparison .................................................. 51

Figure 30: Summary Tablet BOMs .................................................................................................................................. 52

Figure 31: Processor Revenue Forecast, 2009-2014 ..................................................................................................... 53

Figure 32: Tablet Apps Processor Revenue Forecast (millions) ..................................................................................... 54

Figure 33: Flash Memory Revenue by Category, 2009-2014 ......................................................................................... 55

Figure 34: The Insatiable Appetite for NAND Flash ........................................................................................................ 55

Figure 35: Tablets Produce Incremental Growth And Help Make NAND Affordable Elsewhere .................................... 56

Figure 36: The Evolutionary Path of SSD in PC, Notebooks, Netbooks and Tablets ..................................................... 57

Figure 37: 2010 a record year for DRAM ........................................................................................................................ 59

Figure 38: Mobile DRAM (mDRAM) to Increase its share of total DRAM ....................................................................... 59

Figure 39: Tablet DRAM still a relatively small portion of overall DRAM ........................................................................ 60

Figure 40: Internet Access Device Display Revenue 2009-2014 (Millions) .................................................................... 61

Figure 41: Select Tablet Component Suppliers by Function ........................................................................................... 62

Figure 42: TMT Valuation Comps by Sector ................................................................................................................... 63

Figure 43: Tablet-Related Equity Sectors (CE, Computers, Handsets, Display, IP and Storage) .................................. 64

Figure 44: Tablet-Related Equity Sectors (Semiconductors) .......................................................................................... 65

Figure 45: Side-by-side comparison Playbook, Galaxy Tab, iPad .................................................................................. 68

Figure 46: Tablet NAND density and total GB shipped, 2010-2014................................................................................ 69




Figure 47: Major Handset Component Comparison (Android supplier analysis) ............................................................ 71

Figure 48: iPad Sales Forecast 2010-2012 (July 2010) .................................................................................................. 73

Figure 49: eReader Teardown Analysis: Component costs and origins (versus iPad) ................................................... 76

Figure 50: Worldwide PC Systems Touch-screen Market, Value by Technology 2007-2014 ........................................ 79

Figure 51: Tablet PC Market Shift, 2009 & 2010 ............................................................................................................. 79

Figure 52: Touch-Screen Industry Value Chain .............................................................................................................. 80

Figure 53: Survey results from Yahoo’s demographic study of iPad Users .................................................................... 82




iSuppli / Screen Digest

Tablet Market Intelligence Team

CONSUMER ELECTRONICS

� Tablets, Rhoda Alexander Tablets - U.S. Consumer Preferences Survey (pending Q1 release) U.S. Tablet Market Tracker (pending Q1 release) Portable and Desktop Computing Systems are Ready to Feel the Touch. 06.10.10

� Compute Platforms, Matthew Wilkins Compute Platforms Q3 2010 Market Tracker. 09.21.10 PC Technology Penetration. 07.30.10

� Wireless Handsets/Smartphones, Tina Teng Wireless Communications: Smart Phones, The Center of Your Social Life. 10.26.10 Smart Phones Become Multifunctional with Preloaded Software. 06.30.10

� Connected Devices, Jagdish Rebello, PhD Connected Devices Database - Q3 2010. 09.03.10

� Consumer Electronics (Macro), Jordan Selburn Consumer Platforms: Consumer OEMs Fight for Slice of $300 Billion Pie. 11.22.10

SUPPLY CHAIN

� Small & Medium Displays, Vinita Jakhanwal Small & Medium Displays PriceTrak. 11.19.10 Small Medium Displays Supply and Demand - Q2 2010 Database. 11.02.10

� Flash Memory & SSDs, Michael Yang Mobile and Embedded Memory - Mobile Fueling Next Generation Growth. 09.24.10 NAND Dynamics - Are Tablets the Next NAND Pillar? 09.10.10

� DRAM, Michael Howard DRAM Dynamics - The Logical Future of DRAM. 11.23.10 DRAM Q3 2010 Market Tracker Database. 09.28.10




Wireless Processors/Baseband, Francis Sideco Touch and Go: Mobilized Tablets Spark Wireless Growth in CE Devices, 07.29.10 LTE, Tablets and Earthquakes: What Do They Have In Common For Wireless Systems? 06.29.10

� Teardowns, Andrew Rassweiler Teardown Analysis - Lenovo S10-3t Netbook Tablet. 11.04.10 Teardown Analysis - Samsung Galaxy Tab GT-P1000 Mobile Tablet. 11.02.10 Teardown Analysis - Apple iPad 3G 16GB. 07.13.10

MEDIA (Screen Digest)

� Mobile Media, Julien Theys Mobile Funding and M&A Trends - Q3 2010. 10.01.10 Mobile Hardware Market Monitor - Q2 2010. 09.23.10

� Mobile Media, Jack Kent Android Market Slow to Deliver. 09.29.10 Mobile Market Monitor: Games Q1 2010. 06.03.10

� Mobile Media, Ronan de Renesse Euro Mobile Operators Still Grow. 11.27.10 Mobile Video-New Apps Give TV Operators a Way to Make Video Pay. 09.27.10

� Internet Advertising, Vincent Létang Microsoft-Yahoo Search Alliance Completed in North America. 11.30.10 Internet Advertising Round-up Q3. 11.26.10

To request a meeting with our analyst team, please contact either

iSuppli – Kayle Watson at 914-437-7783 or [email protected]

Screen Digest – Ben Colbeck at 44 (0)20 7424 2832 or [email protected]




I. Convergence and the Mobile O/S

Although there are countless examples of open and closed source software projects, even other related open models such as free and open source software (FOSS), we are going to ignore most of that history and debate in order to focus this report on the distinctions of a converged mobile O/S for tablets, smartphones and other like devices.

The Converged Mobile O/S

We would like to argue that the driving force for a converged mobile O/S has been devices like the iPod Touch and later iPad (announced January 2010). Clearly, the iPad's O/S traces its routes directly to the iPhone's smartphone O/S. However, Apple's iOS cannot be labeled merely a smartphone O/S as the Android presently is today, since it's powering a range of connected devices beyond the iPhone: iPod Touch/Nano, Apple TV and iPad. Hence, we consider Apple's iOS as the best working example today of a Converged Mobile O/S or "Mobile O/S" for short. The key distinction between a Mobile O/S and a smartphone O/S is its ability to work with a diverse set of converging consumer electronics platforms and also handle the more media-intensive applications expected from form factors like tablets. Android is a close but distant second as a Mobile O/S, having really only made the transition beyond smartphones with Google TV, where it's still rolling out the platform (the Android Market won't be available until early 2011 on Google TV). Android is presently struggling with the tablet form factor, as its current smartphone O/S incarnation is still struggling to handle the larger screen sizes of tablets (please refer to 11.12 in Chapter 7 for more details on Android’s O/S delays).

In our estimation, the current litmus test for a Mobile O/S is its ability to handle tablet devices, since a typical media use case can be almost as demanding as a traditional compute device, at least as it pertains to watching HD video (sans more intensive games), while its form factor, processor, connectivity options, and power constraints make tablets a cross between a notebook/netbook and smartphone. We surmise that for a mobile O/S developer, once their tablet-capable O/S is truly in place, other consumer electronics form factors (TV, MP3, automotive) should be easier to come by if Apple's iOS development history is any measure. Apple has already been able to port its iOS to multiple device types. As Android nears its O/S tablet release in early 2011, it is already being mentioned for portable game devices, (embedded in) cars, and MP3 players. Thus, Apple's iOS and Android both show that the role of a mobile O/S is quickly evolving to and from converged devices like tablets to support further evolution in connected devices (e.g. WiFi through representative devices such as MP3 players, TVs, set-top boxes and soon cars and possibly refrigerators) as well as mobilized devices (3g/4g).

While Apple is the de facto leader in Mobile O/S, Apple is neither the industry driver nor the guaranteed victor. Apple's just the first car on the road and there is a long, long journey ahead. The underlying technology evolution (e.g. semiconductors and connectivity) that powers such devices has really been the enabling factor for a Mobile O/S. However, Apple has been an important agent of change and its iOS is showing consumers new possibilities with seemingly old device types. Technology has been the driver and it's the same technological evolution that is now enabling once dissimilar devices (e.g., PDAs vs. notebooks, MP3 players vs. mobile handsets) to become increasingly similar in function and capability. The similarity that exists today between Apple's tablet, smartphone and MP3 player are prime examples of how consumer electronics are blurring together. And it's just not externally - from a teardown point of view, Apple's devices are internally similar, plus or minus a screen and touch interface. The same convergence trend that we are now discussing at a product level is also visible at a company and industry level, where hereto the implications are staggering, as once distinctly different industries are being forced to compete with one another.




Nokia's 20-F, dated March 2010, highlights this confluence of devices and industries:

Traditional mobile voice communications, the Internet, various means of messaging, media, music, entertainment, navigation, location-based and other services, personal computing and other consumer electronics are converging in many areas into one broader industry. Increasingly, people are using mobile devices to access digital content and web services and share their experiences. Converged mobile devices are based on programmable software platforms, can run applications such as email, web browsing, navigation and enterprise software, and can also have built-in music players, video recorders, mobile TV and other multimedia features. Increasingly, such devices are becoming more affordable for a wider population. The software that powers converged mobile devices has also become increasingly sophisticated, providing greater opportunities for the development of services, including applications and content, that enrich the experiences people have with their mobile device. A consumer’s choice of device is increasingly influenced by the quality and compatibility of the software and/or services and the resulting user experience, in addition to the quality of the hardware. During the past several years, the converged mobile device market has been characterized by growing volumes, high average selling prices and attractive profitability, as well as intense competition particularly from new entrants, and heightened media and consumer attention.

The capability and affordability of mobile processors are probably the most important aspects in this technological convergence, as mobile processors evolved and enabled more computing functionality. This evolution has created new competitive overlaps (see figure below). Affordable flash memory for storage is also important in this evolution along with a whole host of other low cost, low power semiconductor solutions.

Figure 1: Tablets Are at the Forefront of the Converge in Consumer Electronics

Source: iSuppli Corp. | December 2010




Convergence at one time described voice, video and data services being delivered to the home vis-à-vis broadband networks and the new services that would result from the confluence. While that trend still exists, the convergence of consumer electronics devices and industries are now coming together at a fast pace, with the tablet form factor being a tangible representation of that convergence, since it is part smartphone and part netbook/notebook. However, the implications of the convergence in consumer electronics go well beyond tablets, as the trend could lead to the growing importance of Mobile O/S in a large number of consumer electronics devices where previously the O/S didn't exist or wasn't a factor before. Thus, it's a time of great risk and opportunity for all the players across the impacted consumer electronics food chain, which is why so many of them seem to be rushing to deliver (or be a key supplier to) a next generation tablet, smartphone or both, like the iPad/iPhone, while also attempting to keep their design options somewhat open, as it is still so early in this product's life cycle.

O/S Framework Makes CE Devices More Compelling

The mobile O/S provides a framework for (1) consumers to cheaply and effortlessly create custom use cases for a device through apps which greatly exceed the utility of an internet browser alone, (2) developers to create and monetize apps, (3) content providers to distribute content and adds another convenient option for consumers to access content; and (4) interconnectivity between connected devices (and thus, even more new use cases). Imagine an eReader with this type of O/S bundled with a competent processor, the use cases increase dramatically from simply reading books and surfing the web (assuming WiFi+browser). Without the structure of the O/S, a connected device is simply an Internet browser and a mobile handset is merely a phone or at most a PDA. For many consumer electronics devices, the O/S by itself, if added to an e-reader, gaming console, or TV set-top box means a significant increase in capability (e.g. increased consumption options, apps).

One has only to look at the demos of MeeGo's tablet UI now circulating to see how a mobile O/S can improve upon Windows 7, a well developed operating system, with tablets specifically. And undoubtedly the role of tablets and other converged devices will expand the opportunity set beyond what we now can foresee. The evolution in tablet uses/roles isn't limited to the traditional consumer. Examples are already cropping up of the wide range of applicability of the iPad, from uses for as young as toddlers to applications in retail sales where new apps have created new use cases, beyond just media consumption. These new tablet roles, powered by the mobile O/S, exceed what was previously possible from compute devices and smartphones. Many are waiting to see if RIM and HP will be able to deliver new compelling enterprise solutions when their next generation tablets come out in 2011.




The Dizzying Rate of Change

As I was researching this report, I was drawn to recent presentations on the connected home, which have seen rapid change as a result of the ubiquity and low-cost nature of WiFi. Consumer electronics have undergone a revolution from analog to digital to now to networked devices.

Figure 2: The Evolution in Consumer Electronics Devices to Networked from Digital


Although the battle for which broadband standard will ultimately serve most in-home networks will undoubtedly be waged for a long time to come, the consumer electronics battle has already taken another quick step forward in its evolution from the chart above as a result of the mobile O/S. As of year-end 2009, there wasn't one converged mobile O/S in the marketplace by our definition and even more precisely, in homes.

Today, Google and Apple both have products with a converged mobile O/S running on home networks, which would not be a great leap to say they may someday impact IETV-specific O/S design choices made by companies like Samsung and Vizio. Sony is already experimenting with an Android TV and Samsung has already publicly stated that it’s pondering it too. Television is just one example, but a great example of how devices that didn't previously require a Mobile O/S may soon require one, as a result of convergence.




The Mobile O/S can enable a greater set of uses/features as compared to a device-specific O/S built around a more narrowly defined use case, particularly if the mobile O/S comes up with an ecosystem that has hundreds of thousands of applications. As consumers quickly assimilate that a connected device with a mobile O/S is more functional than a connected device with a more limited O/S or simply a browser, we suspect it could quickly become difficult to sell feature rich connected devices without a mainstream converged mobile O/S, depending on the significance of the new alternative/secondary roles.

On this basis, TVs specifically may hold out longer than other simpler consumer electronics given how much more important the primary experience, watching TV, is over today's secondary experience, IETV. If that traditional use case were to evolve as a result of new apps and functionality, undoubtedly, a mobile O/S would become more compelling. In our minds, IETV hasn’t come as far as it needs to in order to bring about real consumer interest.

That said, we believe TVs (by bringing them under a converged mobile O/S with relevant and new apps) are probably the next important catalyst in this evolution toward a broader and more unifying CE platform that encompasses significantly more devices (discussed in more detail later); however, TVs have historically been very hard to crack with such interactive/internet functionality. Little has stuck beyond the EPG/IPG and DVR in the TV world. Numerous interactive TV ventures have tried and never really taken off as well as second set-top ventures. The next year or two will likely have more failures than successes in this area. However, in the end, we expect one of these mobile O/S players to get the formula right and transition TVs into a new paradigm, well beyond simple Facebook and Netflix widgets.

Figure 3: Converging Connected Device Landscape

Source: iSuppli | December 2010




O/S Competitive Landscape

Figure 4: Comparison of Leading Mobile O/S

Source: iSuppli Corp. | December 2010 Legend: ○ No support/Not available, ◔ ◑ ◕ Varying support levels; ● Supported; - Undisclosed




Nokia

Nokia's Symbian O/S and its latest incarnation, Symbian^3, are the most notable exclusions from our earlier O/S landscape chart. Symbian is the largest smartphone O/S when measured by handset shipments. However, most of the Symbian smartphones in circulation are more akin to the Palm PDA of old than to the user experience represented by the iPhone and Android smartphones. Symbian^3, released in 2010, came a long way in terms of bridging the distance between Nokia and its higher-end smartphone competitors. However, Symbian^3 does not yet seem ready for tablets, the focus of this report.

In the case of tablets specifically, Nokia has had "tablets" for years, but none like the current iPad or what we and others presently mean by the term tablet (meaning a converged mobile consumer electronics device). On those terms and deciphering recent press reports, the general consensus seems to be that Nokia recently tried to launch a "Z500" MeeGo tablet but met with carrier resistance to support it. However, rumors are abundant and facts are scant about the Z500, so it's hard to have any solid takeaways other than Nokia does not yet have a dominant smartphone O/S with Symbian^3 or tablet version of any sort, whether on Symbian^3 or Meego.

Nokia did say in its November 2010 earnings call, however, that it will launch its first MeeGo device in 2011 and indicated they plan to update the market on their strategy in February 2011. We suspect that the device is likely to be a tablet rather than a smartphone, although Nokia has yet to clarify. We base our reasoning on how compelling MeeGo tablet demos have appeared to date. Nokia does have a MeeGo smartphone in the works, according to numerous press reports, with most of that speculation centering around a June 2011 release date, near the next expected iPhone installment.

MeeGo, on top of two capable partners (Nokia-Smartphones; Intel-Processors), does seem to have some real potential as a tablet O/S, but it's hard to say much at this point with the O/S still essentially vaporware; however, videos demoing the alpha version are impressive. For background, MeeGo was made commercially available on the WeTab earlier this year, although the 1.0 version wasn't really commercially viable and lacked the tablet UI, which is now being developed and refined for launch early next year. The one advantage MeeGo may have over the smartphone O/S is that it was essentially designed for tablets from the onset, adding smartphone support along the way. That design difference seems to shine through in its early peeks at its yet to be released tablet UI, which seems very tablet centric.




Microsoft and Windows Phone 7

Windows Phone 7

With Apple's iOS and Android more the known quantities, Windows Phone 7 got off to a slow start in October 2010 and partly as a result, it has the most room for a positive 2011 surprise, at least in smartphones. That said, Tina Teng, our smart phone analyst is forecasting Windows Phone 7 to lose ground in 2011 relative to other smartphone O/S, forecasting the smartphone category to increase shipments by 30% to 322 million units, ahead of Windows 7's 14% gain. Windows 7 does not yet have a lot of handset OEM backing. Roughly two months after launch, though in the middle of the holiday selling season, there are only 4 Windows Phone 7 smartphones available in the U.S., per Microsoft's site: Samsung Focus (AT&T); LG Quantum (AT&T); HTC Surround (AT&T); HTC HD 7 (T-Mobile). The Dell Venue Pro (not yet available), is expected on T-Mobile sometime during the holiday season. The four available handsets are all priced at $199 including two-year carrier commitments. Samsung is expected to devote more of its smartphone line-up to Windows Phone 7 in 2011, which should help.

The market is still somewhat confused as to what Microsoft will do with Windows Phone 7 as it pertains to tablets. Initially, the impression given from Microsoft was that Windows 7 (not Phone 7) would be used successfully across a wide variety of form factors. At present, most of the compute ODMs seem to be designing tablets around traditional Windows with few if any plans out there for a real competitive Windows Phone 7-based tablet.

(Tina Teng): Microsoft reinvented the smartphone platform and leveraged Microsoft’s other businesses—including Windows Live, Office, Zune HD, and Xbox Live. What truly differentiates Windows Phone 7 from other products is Windows’ tight integration with Microsoft products across different user bases. One base is the enormous pool of Office-product users, and the other is users of game-console hardware for Xbox 360, which has a 24% share in the gaming console market. Before any Windows Phone 7 products become available on the market, Microsoft has announced 63 Xbox LIVE games on Windows 7. What puts the Windows Phone 7 at a disadvantage is the lack of backwards compatibility with Windows Mobile 6 and 6.5. Applications purchased for Windows Mobile cannot run on Windows Phone 7, and consumers will naturally not want to buy the same application or software twice. To provide a uniform WP7 experience, Microsoft is reportedly putting restrictions on UI design, which OEMs use for differentiation. iSuppli expects that Microsoft will eventually become more flexible if such restriction is the main roadblock to WP7 adoption, and Microsoft will gradually incorporate some UI native features into WP7.

Traditional Windows and Tablets

Anyone can see that Microsoft's advantages in tablets would come from its dominance of the PC O/S market. In January 2010 at CES, Microsoft CEO's Steve Ballmer highlighted a few Windows-driven slate PCs in development for 2010, highlighting an HP prototype tablet running Windows 7. Almost a year later, neither a dominant-Windows tablet product and/or tablet tailored O/S exist. Windows Phone 7 clearly isn't yet a tablet O/S, much in the same way Symbian^3 may power Nokia's N8 but isn't a tablet O/S. Ultimately, it turns out that the HP prototype touted at CES was also another tablet device that never really made it to market.

In October 2010, Microsoft CEO Ballmer publicly talked about the need for tablets to feature Intel's next generation Oak Trail processor for longer battery life as well as the possibility of using Windows Phone 7's touch UI in tablets, which many view as a departure from the company's strategy to rely on regular Windows for tablets. As an aside, a quick look at the Windows tablets now in the market place reveals battery life as an issue, with most possessing a range of 3-5 hours of battery life (vs. ~10 hours for the iPad). Intel's smartphone-based processor competitors had a jump on battery efficiency. Battery life should improve for Microsoft tablets in 2011, considering Intel is now reportedly in production of its Oak Trail platform Atom-based processors (Electronista, Nov. 24, 2010). New Oak Trail-based tablets are expected to be released in January 2011 and they are likely to be running the MeeGo O/S (and Windows too). Please refer to 10.15 in Chapter 7 for more details on Intel’s Oak Trail processor.




In a world where the tablets are a relatively small sliver of the combined smartphone and PC markets, the implication is that tablets play a unique role, such as media consumption. Surely, this view is largely based on the iPad, which makes it easy to envision how tablets will play an important role as a third or fourth device in a home. Thus, the device's use case almost by default is more specialized. In this type of market, Windows could struggle, as it’s really not well suited to do anything new in a tablet form factor; consumption-only is not Windows’ strength. This scenario also fairly reflects what most imagine 2011 will be for tablets in general and the rationale behind Microsoft’s struggles specifically. Our iSuppli “base case” assumes roughly 20mn shipments of Windows O/S tablets in 2014, discounted because our analysts do not believe they have the basis to forecast more Microsoft success without Microsoft having a fully evolved converged mobile O/S.

However, we don’t think 2011 is a good portrayal of the future of tablets and especially Microsoft’s competitive footing in tablets. If the demand for tablets continues to be strong, as most expect, tablets, when bundled with a keyboard and mouse, may quickly move from a new device category to being an evolutionary transition for notebook and netbook form factors. In this way, tablets could start to significantly cannibalize older form factors, more so than we or others presently forecast. In this scenario, Windows might do extremely well as an operating system for tablets, given that the role of the tablet wouldn't simply be for a specialized use case (as media consumption), rather all the traditional creation (vs. consumption) uses we associate with notebooks and netbooks. Thus, purchasers would want and be able to network the tablet device with their desktop (giving Microsoft a device ecosystem in tablets to leverage) and use the tablet more heavily for work, study and play than tablets running smartphone O/S, bringing Microsoft's advantage in PC applications software more into play.

We support our view with the following additional considerations. nVidia CEO Huang is on the record saying that “if you connect a wireless keyboard and mouse to a tablet, the difference between a tablet and notebook is pretty marginal, arguing that tablets will be quite disruptive to notebooks and entry-level desktops.” Another aspect to consider is that Microsoft didn't really write Windows Phone 7 for tablets (despite releasing the O/S well after the iPad’s launch). It easily could have called it a tablet UI if it wanted to use a smartphone UI to address tablets. Obviously, Microsoft is signaling that it does not want to follow Apple and Android down this path. Thus, Microsoft wants to address tablets directly through a future release of Windows (or Tablet version, but our bet is on traditional windows). While most simply see Microsoft as behind in its approach to tablets and undoubtedly in many respects it is, it does suggest Microsoft’s approach is very measured. Case in point, Microsoft was likely thoughtful when it chose not to take its newly released smartphone O/S and call it a mobile O/S as the prior version was labeled. It also refrained from announcing to the world that it has a tablet solution ready, despite having a smartphone O/S like many of the companies now attempting tablets. In fact, Microsoft changed the name from “Windows Mobile” to something more restrictive, “Windows Phone”. Given the power of its installed base and the need for content creation to be part of an extremely large tablet opportunity, we see promise in Microsoft’s approach. We surmise that Microsoft sees a very large future for tablets and doesn’t want a marginal and incompatible (to Windows) smartphone O/S as its tablet offering. In iSuppli Financial Services, we give this scenario (tablets to exceed expectations, cannibalize more form factors and Microsoft to be ultimately better positioned than now perceived) a far greater likelihood than most industry analysts, whether internal or external. On this basis, we believe the likelihood of Microsoft being able to do quite well with tablets is high, particularly if it’s able to deliver a future iteration of traditional Windows that also is capable of powering a full tablet UI. A tablet UI coupled with full Windows compatibility, running the same or at least a fully compatible version with desktops and notebooks would be a game changer in the tablets space. And when our software future is coupled with nVidia CEO’s hardware argument (that a tablet will essentially be a notebook), you end up with a device capable of content and creation with an improved touch interface that is 100% compatible to your existing work and play applications. On this basis, we can easily buy into lofty tablet projects and even wonder if perhaps they are too conservative. However, in this scenario, much of this growth would also simply come from cannibalization of the existing mobile PC form factors, allowing traditional PC OEMs and ODMs to be well positioned to continue their roles and retain share.




HP, Palm and WebOS

Although Microsoft Ballmer started 2010 by hyping an HP prototype slate running windows (that was never released), we're now ending 2010 with the expectation that HP will release both a WebOS-driven tablet and Windows tablet in 2011. It's hard to say what to expect when very little has been leaked about the planned WebOS tablet. Given that we've already seen what's possible with both Windows 7 and Windows Phone 7 as operating systems (sans the battery efficient Oak Trail processor), our excitement around HP delivering a Windows-based tablet in 2011 has definitely lessened. Like RIM, another tablet hopefully with a proprietary O/S, small user base and a comparatively small ecosystem, HP has the challenge of creating an exciting mobile O/S for a new tablet, motivating consumers and enterprises to buy it, while convincing apps developers that the aforementioned steps will come together without fail. It’s not an easy roadmap to follow, let alone with a relatively new proprietary O/S, even if full featured.

(Tina Teng) The market was impressed with the transformation that Palm made from Palm OS to WebOS 1.0 in 2009. After Apple brought out its iPhone in 2007, Palm introduced the Palm Pre—the first WebOS-based device. The Palm Pre was the first to introduce some new features: multi-touch support, aggregated views of all social information, a sleek user interface, universal search, and a wireless charging station. However, Palm had a difficult time expanding partnerships with carriers, and its limited variety of apps is a drawback to consumers. Launched in 2009, by July 2010 Palm’s app store (Palm App Catalog) offered only 3,000 official available applications. Even with the launch of a well-developed WebOS, Palm was still unable to secure its position and profitability. Hewlett-Packard (HP) came to rescue Palm by acquiring its advanced WebOS. With the $1.2 billion deal, HP intended to leverage WebOS’s capability to penetrate into other cloud-based devices and services, including medical equipment. HP brings improved multitasking, Node.js, and the HTML5 to WebOS 2.0, which will be available in late 2010. Developers can now write WebOS applications and also service in JavaScript through the built-in Node.js runtime environment. However, it is still questionable whether WebOS in smart phones can gain any market share under HP’s leadership.

Please refer to 04.30 in Chapter 7 for more details on HP’s acquisition of Palm.

As an aside, HP released the HP Slate 500 Tablet PC in the fall of this year, operating on an Intel Atom processor using Windows 7 Professional. It features an 8.9-inch display, weighs 1.5 lbs, 64GB flash storage and reportedly has 5 hours of battery life. Price $799 (no 3G connectivity). The device is a good representation of what a high-end Windows tablet looks like at this point in time.

Blackberry OS

(Tina Teng) PlayBook, RIM’s recent answer to the tablet market, is based on QNX Neutrino architecture, and prompts the industry to wonder whether RIM will gradually migrate smart phones to its BlackBerry Tablet O/S in the near future. The company already offers a new application development platform that broadens HTML5, CSS3, and JavaScript support; the developed applications can run on both the Tablet and BlackBerry O/S.

RIM launched its first touch-screen enabled smart phone with multi-touch capability based on the BlackBerry OS 4.7 in 2008; the company’s innovative approach, SurePress, included clickable touch screens, but reception was resentful rather than favorable. Although the next release, Storm2, offered a significantly improved SurePress (based on OS 5) in late 2009, the company was unable to make big splash, because it failed to recognize core features desirable in the smart phone market. Recently, RIM invested R&D in a major UI makeover of the OS 6.0 release, and intends to draw in consumers by offering more gesture capabilities, social media integration, and support for all IMs. The new OS also provides universal search, implemented widely in other OS platform.




Software vs. Hardware

While we could attempt to quantitatively prove using our teardown data that the hardware capabilities/features and overall bill of materials (BoM) value is not a major determinant in the success or failure of a smartphone and by extension, a tablet, the point is so obvious that we hope we can skip the exercise. Most high-end smartphone BoMs come in at near $180 today and have little substantive difference in features, particularly to the consumer. As we doubt consumers are motivated, given the large number of features on any one smartphone, by a slightly larger screen, more efficient battery, processor brand or megapixel count. Surely, if one smartphone is excellent on many of those elements, it would be compelling from hardware alone. However, that really isn't typically the case since the handset makers and compute OEMs rely on essentially the same set of semiconductor component and display suppliers as well as the same handful of EMS players. Thus, it's hard to differentiate on hardware, when hardware is the least proprietary element of the puzzle. Two exceptions:

Samsung, the most vertically integrated player (memory, AMOLED screens, hummingbird processor), is able to have more in-house control of its BoM compared to any other OEM. And for the moment, Samsung has access to AMOLED screens, when most others do not. However, we believe it's a stretch to argue that Samsung's Galaxy line is successful as a result of its hardware advantage/vertical integration, though the Galaxy smartphones do have nice screens. Even Samsung's success to date with smartphones and tablets, at least as it pertains to the consumer purchase decision, isn't driven by a hardware hard advantage. If you compare an HTC EVO to a Samsung Galaxy smartphone, it's difficult to derive a meaningful hardware advantage for Samsung. However, if you look at the Galaxy Tab, the relative advantage is obvious. Samsung was the first to truly mimic Apple’s approach to the iPad. Samsung did this by simply replicating its smartphone O/S experience on its tablet, unifying the experience. Unfortunately, Android isn't quite ready for tablets, but that's another matter.

Apple has its A4 processor and knack for product design. While Apple was first to this iteration of mobile processors with the A4 in the iPad, it may have a somewhat proprietary ARM processor (that is still earning high marks on battery life), but it's hard to argue that it maintains a proprietary edge. There are numerous examples of non-Apple smartphones and even tablets now running and rendering websites faster than Apple devices. That said, Apple does have a scale-driven cost advantage as it leverages the same processor across so many different devices; however, many Android devices should see similar scale benefits. Product design is just too subjective to assess in this context but surely Apple gets high marks.

To date, Apple is highly differentiated by its 4:3 screen choice. Many questioned the wisdom of this selection when the iPad was first introduced. Au contraire. While 16:9, the preferred format of most of the competitors to date, is ideal for movies, it is a far less desirable configuration for eBooks, eMagazines, web surfing, and a host of other multi-media applications. Hold it up next to a book and it’s a natural match with the printed page, providing a degree of instant familiarity to the end-user. With respect to the competition's 10-inch screens due out relative early in 2011, we are expecting most to be 16:9.

Rhoda Alexander, Tablet Analyst

While the A4 contributes to the iPad's solid battery life (10 hours vs. the Samsung Tab's 7 hours), iPad consumers have a good idea of what they're purchasing before they buy it because many likely come with familiarity to Apple's iPhone O/S and iTunes, its commerce and content management ecosystem. As a result, there are significantly more apps and content available on the iPad than any other like tablet device, none of which are due to hardware. Our point is that consumers know this going in before purchase. They also know if they already own an Apple device, the new device purchase can be managed from the same software that they already use, allowing the new Apple device to leverage content, purchases and organization from an existing device with no incremental effort. Hence, the O/S and ecosystem are big draws, since the software more than unique hardware differences translate into tangible applications and uses.




Open Source vs. Closed Source

Figure 5: Leading Open Source Mobile (Tablet) O/S


If history is any lesson, open vs. closed is largely an argument around timing. It would be hard to argue that Microsoft would have done better with Windows or Apple as its O/S if either were open source. However, Google's approach to battling an entrenched and for the moment still superior operating system with its open source project has been nothing short of impressive. Consider Android's problems: 1) still a smartphone O/S (tablet version not yet ready); 2) O/S fragmentation due to OEM customization (e.g., proprietary user interfaces) and monolithic kernel design; 3) carrier confusion with competing apps stores and unique interfaces that may feature favored apps (e.g., Verizon using Bing for searches on its Android devices); and 4) many Android key apps/functionality are not yet on par with Apple's (since Google allows app developers to compete over core functionality such as an email client, visual voice mail, etc.); FaceTime is poised to be an example of this, particularly if Apple puts that app up for wider release (please refer to 09.10 in Chapter 7 for more details on Android fragmentation).

A telling anecdote that brings home Android’s fragmentation issues is captured by the saga of Angry Birds, one of the top selling mobile games. On iTunes alone, Angry Birds has garnered 30 million downloads at $0.99 per as of Nov. 29, 2010). First released on iTunes in December 2009, Angry Birds quickly became a mainstream sensation, topping Apple’s UK App Store in Feb. 2010 and the US App Store shortly thereafter where it remained until October 2010. The game was then ported to the Android platform in October, 2010, where it was downloaded over 1 million times in the first 24 hours of release. As successful as Angry Birds was on the Android, soon after its Android debut, lower-end Android devices experienced severe performance issues running Angry Birds. According to Angry Birds developer Rovio, who wrote in its blog: “we worked hard to bring Angry Birds to even more Android devices. Despite our effort, we were unsuccessful in delivering optimal performance.” In the end, the company decided to develop a lighter solution to run Angry Birds on lower-end Android devices. Undoubtedly the Angry Birds developer was grappling with Android fragmentation, the challenge being to find optimal performance on one device, while struggling with that same problem across many devices. In the last earnings call, Apple CEO Steve Jobs referenced the struggles of another Android developer, who tweeted they had to contend with more than 100 different Android versions across 244 handsets. In that context, it’s easy to understand why the Angry Birds developer ultimately had to solve some of its Android problems by making a simpler version for some Android handsets. These examples bring home Android’s fragmentation struggles.

Even so, Android has quickly caught up to Apple in global smartphone shipments by our count and is set to surpass Apple in 2011 or 2012. In the U.S. alone, many sources are reporting that Google's Android has already passed Apple in terms of quarterly sales. Apple also has iPads and iTouch devices not in those smartphone tallies which definitely prop up Apple's user iOS base. Nevertheless, with an arguably inferior product in many key respects, our point is that Android seems on track to pass Apple in smartphones, barring disruption from another new O/S entrant. Android's strength is that with so many more partners than Apple on the handset side, such as Samsung, HTC, Motorola, LG and Dell, it's able to penetrate more carriers and reach more end users. Android is also more diverse in its approach to the market, as a result of its diverse set of partners, whereas Apple arguably is running a lower volume, more premium model.




Therefore, if Google didn't start, fund and drive Android as an open-source project, it would likely never have received the handset OEM support to become successful. It was also that simultaneous belief in a collective effort by Google and its partners that a combined approach was the only one likely to catch Apple, and that their proprietary approaches, if attempted on their own, may have worked against one another. Intel and Nokia were obviously taking notes, as MeeGo is open source, as well as the Nokia-led, Symbian O/S.

However, Google's ability to profit from its O/S is somewhat different than Nokia's with Symbian by nature of it being Google:

Google is somewhat unique in that it profits from growth in search in general as well as mobile search from essentially any handset and O/S given Google Search, YouTube and other properties. Android phones serve to increase the odds that the traffic goes to Google. Another benefit of having more Android devices is smaller payments to Apple to keep Google as the exclusive search. Google's display network, which serves non-Google properties, also benefits from increases in general internet traffic.

It doesn't end there, Google dominates targeted advertising with AdSense, which Apple is trying to take on with iAds. Android's success only helps. AdSense is a market leader in both web-based advertising and in-app advertising. Thus, although Google AdSense can make money off any smartphone O/S, it helps reduce the risks of competing O/S-born advertising competitors, like iAds, if Android is more successful.

Both PC and Smartphone OEMs see the potential in selling more units as converged CE devices grow and evolve their respective markets. Smartphone players, which have historically avoided software/platform competition, are now wary of their industry going the way of the PC industry, where Microsoft and Intel made a killing while PC OEMs were increasingly commoditized. It wasn't that long ago where a mobile handset maker could sell a feature phone almost irrespective of the O/S. Nokia's reluctance now to give up control of its O/S and join Android is undoubtedly based at least somewhat on the history of PC OEMs. Of smartphone OEMs, Nokia also has the most to lose given its dominant market position in mobile handsets. Handset OEMs like HTC have everything to gain, which is why it’s not surprising to the upstarts looking to ride the early O/S leader, Android.

HP's O/S perspective has to be somewhat similar to Nokia's, though HP has more to gain than lose. However, the primary difference is that Apple has a very refined smartphone O/S, maximizing the capabilities of the platform, a platform based on taking a PDA to another level. With smartphones, Android has succeeded by merely trying to replicate Apple's achievements. Tablet O/S entrants face many of the same competitive challenges that a smartphone O/S rival would beyond the O/S itself, such as building an ecosystem with content and apps. The opportunity to innovate is clearly greater with tablets than smartphones, if only because Apple never really tailored its smartphone O/S for the iPad. As we have already said, citing MeeGo, the ability to impress and wow with a new tablet O/S is surely greater than trying to exceed what Apple has already accomplished in smartphones.

Figure 6: Some Famous Open Source Success Stories





Interconnectivity

It's hard to discuss interconnectivity without bringing up the ecosystem, which is our next chapter. However, it's an important topic particularly as more consumer devices, such as TVs and automobiles, take on O/S originally born from smartphones and tablets. And since the O/S typically runs on disparate consumer electronics devices, some discussion is warranted in our O/S chapter.

Originally, Apple's iPhone was launched with a new smartphone O/S. However, at launch, Apple was able to leverage its iPod user base by offering new iPhone users 1) content sharing, through the same iTunes control point, between Apple devices; and 2) an ecosystem, vis-a-vis iTunes, already rich in music and video content. However, Apple's devices really never communicated with one another. It was iTunes that made the process of adding additional Apple devices easy and advantageous.

However, Apple's devices still weren't interconnected. Apple is just starting to show the advantages of its device ecosystem (e.g. interconnectivity of Apple devices) through features like AirPlay and its Remote app, and could take this advantage to another level if it expands FaceTime to its entire device ecosystem beyond its iPod Touch and iPhone. An early first step in the process of promoting interconnectivity was Apple's Remote app, which allows the iPhone to control iTunes running on a PC, enabling you to control audio and video, assuming someone wants that content originating from a PC, irrespective of where one outputs it. However, that's the downfall, as most iPhone/iPad users probably aren't equipped to have iTunes as their media entertainment center, limiting Remote's appeal. With that first step, Apple has taken a very large step forward with Airplay and Apple TV. Airplay is an O/S feature, which has been upgraded across the iOS platform, enabling Apple devices such as the iPhone, iPad and iTouch to instantly take any content (such as movies or pictures) or apps (such as an action games) on their device and easily display it on their television, assuming Apple TV is also equipped. With iOS 4.2, Apple added AirPrint, the ability to wirelessly send print jobs. It's obvious that interconnectivity promotes stickiness, similar to how some of Apple's early iPhone subs may have been pre-sold on the platform as a result of already being wed to iTunes’ device interface as a result of their iPod.

So far, Microsoft hasn't really been able to use Windows to leverage its smartphone success, as Apple has been able to do with its suite of CE devices, since its phone operating system does not truly interconnect with PC devices in a way that's materially different from other incompatible smartphones, though the latest Windows Phone 7 does have an Office app. Today, for Microsoft, the leverage from PC to Smartphone is still largely branding and only marginally in the way of increased functionality from the association with Windows. Microsoft does have its Zune ecosystem, which is interesting (and provides leverage) for smartphones and tablets; unfortunately, Zune never had much of a user base, leaving Microsoft without the customers to leverage, but with a relatively strong commerce/content ecosystem.




II. Ecosystems

Commerce/Content Portals

Figure 7: Comparison of Leading Mobile Commerce/Content Ecosystems

Notes: 1. Screen Digest, 2. FYE Sep. 2010, Apple 10K-October 2010

Source: iSuppli Corp. | December 2010 Legend: ○ No support/Not available, ◔ ◑ ◕ Varying support levels; ● Supported; - Undisclosed




The term ecosystem is used so much in technology today that in some ways the term has evolved into an over- generalization, particularly since the term means something different to each and every one of the major tablet players.

To Google, ecosystem describes its internet presence and how its search, YouTube, AdSense, DoubleClick, Android and other properties work together to drive traffic across the various internet platforms. When talking about the Android ecosystem, this presumably means its commerce/app store, though we should point out that Android Market has little in the way of media content (sans Amazon music); content in the case of Android Market means apps for smartphones. Android is trying to address these weaknesses with recent reports saying that it’s working on adding books.

For Apple, ecosystem could mean its device ecosystem, and how iTunes (the software program, not the commerce portal) can manage those separate devices. Apple’s ecosystem could also describe its App Store, when being compared to Android, or its iTunes software client and commerce portal, which includes the App Store but has movies, TV shows, books and other content. “Among tablet manufacturers, Apple’s ability to serve customers through its own vertically integrated content store and billing platform also makes it unique,” Jack Kent, Mobile Media Analyst – Screen Digest.

The goal of this exercise is to point out that all of the companies vying to capture some of the tablet market have some sort of ecosystem, but the term can be used so nebulously that it loses almost all meaning, at least in an analytical context. In this chapter, we want to differentiate ecosystems by their content and commerce capabilities. Other relevant metrics such as installed base (which is different from unit sales) as well as the commerce/content portal’s device reach are also meaningful factors, which we assessed in the prior chart for some of the major ecosystems.

The (connected) device ecosystem like AirPlay on iOS, enabled largely by the O/S was addressed in the prior section, so this chapter does not cover interconnectivity and the power of a CE product suite. The type of vertical and horizontal web-property collection which describes Google is not really the focus of this section either, as we’re focused keenly on the mobile ecosystem, as it pertains to differentiating the tablet at/before sale and increasing customer utility thereafter.




Smartphone ≠ Tablet

Apple’s iPad has a very mature ecosystem in iTunes, which was launched in April 2003 (Windows – October 2003). iTunes also hosts Apple’s App Store. iTunes features a very robust Hollywood catalog and music library, most of which was built before the iPhone, in support of iPods. iTunes is supported by Mac and Windows-based software clients, which provides (1) improved accessibility to the store versus the limitations of a web or smartphone app interface; (2) PC-based access (expanding the use potential substantially beyond iPhone, iPads, etc.) to media content (which most Smartphone ecosystems don’t offer, even if they possess a limited PC client, since they only have smartphone apps to sell); and (3) a unified platform for other CE devices to interface with and access content. From an evolution standpoint, with the iPhone, iTunes picked up its App Store building on the music/film library with the iPod as a foundation. Jack Kent, Mobile Media Analyst Screen Digest adds, “Apple’s ability to build a market for paid mobile applications from an audience that already used and trusted its iTunes billing system (which provided a wealth of customer credit card details) has been vital.” When the iPad rolled out in April 2010, Apple focused on adding magazines and newspapers specifically for the iPad. And when Apple TV was launched, iTunes got cheaper TV shows ($0.99) and social networking. Our point being that iTunes was designed to serve a large number of devices, picking up content along the way. Didn’t they say Rome wasn’t built in a day? Apparently, iTunes wasn’t either.

Why Google Lost the Beatles to Apple, ZDNet November 2010

Amazon and Google didn’t stand a chance. This says a lot, actually, about the market position of the iPhone (and the iPod and Apple TV, although these are a bit less important to Google). If all of your music lives in iTunes because Apple so thoroughly dominates this market and you bought an iPod 3 years ago, what sort of phone are you going to buy? Maybe an Android if you have some compelling reason to do so, but the iPhone starts looking awfully attractive when you’d like to manage all of your digital content in one place.

In fact, if you want your phone to also be your music player (and why wouldn’t you?), then what would you rather do? Buy all of your music (and movies and TV shows) through iTunes and sync everything [also vis-à-vis iTunes] automatically to your iPhone and iPad? Or find your MP3s, mount your Android device, copy the music (and videos) to the device, unmount the device, use an App to find all of your content, and then play it? Some device manufacturers have software to make it easier, but Apple obviously has a giant advantage in this sort of convergenceN Why did Google and Amazon lose out? Because it’s all about the ecosystem. Until Google has a desktop or even browser-based application that can integrate with various digital content sources and automatically get all of that content onto your Android devices and Google TV, Apple will have the advantage. A big advantage.

Let’s compare this evolution to Google’s Android, which as we all know is largely a smartphone O/S with a smartphone ecosystem (e.g., apps-based commerce portal). Thus, what does Google have? It has its Android Market and a deal with Amazon (since 2008) to provide music and little else. YouTube is always reported to be considering a movie rental service of some sort. However, the general argument out of Google is that it doesn’t want to get into the pay-for-content business, but at some point, it just may have to in order to compete. As an aside, there is a third-party app for Android, called DoubleTwist, that is trying to fill the iTunes-type PC client vacuum. Considering this, imagine a tablet buyer. In this early stage of tablets, a coherent UI strategy, such as Samsung mimicking Apple’s approach with a similar smartphone/tablet UI, receives praise. However, at some point, we think media tablet purchasers are going to realize that there isn’t much in the way of traditional media available on many of these smartphone ecosystems and that’s probably not a good thing. RIM is another example where it may ultimately need content, if its tablets are going to appeal to consumers beyond enterprise.

The ecosystem offerings in general that are available are severely wanting for tablet buyers, though generally acceptable for smartphone customers, since the thesis isn’t one buys a smartphone to watch movies, read newspapers, etc. However, one does buy a media tablet for some media consumption. On that basis, very few tablet OEMs seem well positioned to actually service those media customers with media. We know it’s still early and these players have time to improve on accessibility and content; we hope by this point to have helped clarify which players have more work to do and what type of work needs to be done.




III. Tablet Device Forecast

A Brief Look Backward

Figure 8: iPad’s Year One vs. Other Major CE Product Launches

Source: iSuppli Corp. | December 2010 Note: We estimate iPad sales at 13.5 million units in CY2010; 20mn iPads is an estimate.

Black Friday through Year-end

According to a mid-November Bloomberg report, regarding fears of weaker than expected iPad sales, they pegged the Street at 6 million units on the high and naysayers near 5 million. For the iPad, iSuppli is predicting 6 million units for Q4 2010, which would give the iPad roughly an 80% full-year share by our estimation. We are not too optimistic on the closest rival, Samsung’s Galaxy Tab, given Android’s present state (e.g., not ready for tablets). Some analysts became markedly negative on iPad sales immediately before Black Friday, then essentially reversed that stance in the aftermath of the weekend, as numerous reports surfaced about Apple’s uniquely strong in-store traffic. Internally, our analysts were upbeat almost across the board about Black Friday generally and about Apple in particular. In spite of the street’s oscillation, our tablet analyst, Rhoda Alexander, remains confident regarding our 6 million unit estimate for Apple’s calendar Q4.




A Great iPad Start = Higher Expectations

While the iPad’s success has increasingly led to higher and higher expectations for tablets, we thought it would be interesting to compare those higher expectations against the mobile PC portion of our compute forecast in order to attempt to assess cannibalization, though we address the topic in greater detail later.

As background, the magnitude of cannibalization of PCs from tablets will be debated for some time. Some interesting studies such as ChangeWave (Investorplace, Nov. 2010) say consumer interest in buying netbooks is down, based on their monthly measurements. Others say if Mobile PCs (netbooks and notebooks) are growing in 2011 from 2010 then there cannot be a material iPad impact. Forgetting the flawed logic of the latter argument, even internally, we have differing views as to the magnitude of cannibalization that is likely to occur, as well as the implications (winners and losers) of that cannibalization. An example of how divergent the views can become is our alternate tablet forecast case, presented later herein.

That said, we have prepared an analysis of our iSuppli forecast evolution (see below) since the iPad’s launch for both tablets and mobile PCs in 2010 and 2011.

Figure 9: iSuppli iPad/Mobile PC Forecast Evolutions (thousands*)

Source: iSuppli Corp. | December 2010 *Dec 1 Mobile PCs adjusted up for Windows tablets; preliminary PC forecast

As the forecast history shows, we believe there has been some cannibalization of netbooks from tablets. However I think that it’s important to note that the magnitude of cannibalization has not been as “1:1”, as this chart implies. Nevertheless, the comparative forecast history is an interesting data point in the debate about cannibalization. One of the key reasons for our reduced notebook forecast has been reduced consumer demand, with the majority of that change not attributable to tablets. We think that the post recession blues and austerity measures are having an effect here. Tablets have undoubtedly helped grow connected devices overall by expanding the use cases, especially these media consumption tablets, and that effect is not evident in the forecast revisions because of other factors. We think our position (less than 1:1) is also supported by the demographic of iPad purchasers (who to date are arguably different than typical netbook buyers). We do realize that tablets are the new / shiny / exciting tech gadgets out there and they are capturing some sales that would otherwise go to netbooks. The challenge remains that it’s difficult to quantify the exact impact. It is also worth remembering that some folks who have purchased tablets may be disappointed with the experience as the device does not offer them quite the level of flexibility or features that were looking for; as owners falling into this category could possibly return to a netbook at some point in the future. Finally, certainly in the case of iPad, it needs to have a PC to work with (sync content/contacts/emails/obtain firmware updates) so there is a symbiotic relationship between the two platforms that needs to be remembered. Tablets are likely a third or fourth device for a household, not a PC replacement.

Matthew Wilkins, Compute Platforms Analyst




Forecast Rationale (Base Case): Media Tablets Are Very Successful, Modest PC Overlap

Figure 10: iSuppli’s “Base Case”: Media Tablets Excel but Don’t Replace Mobile PCs

Notes: All figures represent shipments. Mobile/Desktop PC figure preliminary forecast as of December 2010. Mobile PC figures adjusted down for Windows tablets (~20mn units in 2014), otherwise tablet units double counted. Source: iSuppli Corp. | December 2010




Figure 11: Detailed Tablet Consumption Forecast


Forecast Rationale by Analyst

Our tablet, compute and smartphone forecasts are generated by 3 separate analysts who work individually, collectively, as well as in teams with other iSuppli analysts across the supply chain to shape their unit shipment estimates for their respective areas.

Tablets (Rhoda Alexander)

Rhoda has a detailed view of the tablet market, providing her forecast rationale/ assumptions by year.

2010: Apple hits a home run, pairing compelling applications with attractive hardware making iPad the must have product for back to school and holiday purchases. Apple is strongly ramping up production, but Q4 demand is still expected to outstrip supply. Product performance exceeds user expectations. Apple owns the market as competitors scramble to reconfigure designs (often pulling new tablets before or shortly after release). Most meaningful competitive introductions have been pushed to H1 2011. eBook pricing tanks in response to the iPad invasion – it is possible to see $99 eBooks by Xmas.

The most significant hardware competitor to the iPad to date appears to be Samsung with its Galaxy Tab, but expect sales of that unit to be hampered by the inclusion of Froyo. Strong factory shipments of Galaxy Tab but sell-through indicators point to softening end demand. Some negative reviews, primarily focusing on poor app conversion or lack of apps, as well as some difficulties related to the smartphone O/S (e.g., 7-inch screen limitations under current Android). In related news, Toshiba's Folio was pulled from Dixon's shelves in the U.K. in November due to unacceptably high return rates. Near year-end, we are seeing a move across retailers in Europe to discount the Galaxy Tab in an effort to increase sales, a red flag of excess inventory and weak demand.




2011: See eReader and tablet markets start to merge. Tablets erode share of netbook market. Look for Apple to do a strong push into the education market, building on the already strong relationship they have in that sector. The iPad could be particularly compelling in the primary grades, where its intuitive interface is well suited to younger users. Expect strong expansion into business and corporate markets, with many of these being additive usage, replacing tasks that had historically been handled on paper, rather than directly competing with notebooks/netbooks. Commercial sector has been watching tablet development for years aiming to replace some paper tasks but previous versions were too slow, too expensive, and had a significant software cost associated with custom application development. Proliferation of applications, instant on, user friendly interface, power curve, and affordability all contribute to the appeal.

Win 7 applications and tablet products start to appear but the majority of non-Apple products are on a mobile O/S. Android, Palm, MeeGo, and Blackberry based tablets provide more competition, driving down price, accelerating apps development in the Android universe.

Chance of multi-size model offerings of iPad becomes less likely in the wake of Steve Jobs' recent derision of the 7-inch form factor. More likely is a change to the existing form, with some reports they will go to MacBook Air type form of molded metal for a thinner and lighter casing. Component orders indicate they are ordering the thinnest microphones available. The MacBook air type casing could also indicate a move to a flatter edge, which would allow for incorporation of USB. Expect to see Apple incorporate cameras (and FaceTime) and possibly some haptics to improve the soft keyboard as they look to leapfrog over competitors' efforts.

In the non-iPad universe, a version with Chrome OS may appear mid- to-late year. HP and others will introduce their competitive product. Big push on projected capacitive production but demand for capacitive screens continues to outstrip production. Apple has substantial share of production on tap, making it difficult for others to expand. Apple looks to be moving to expand and maintain their market lead in 2011. Look for more 10-inch alternatives as iPad competition experiments with larger screens.

May see some OLED introductions but size, cost, and availability will likely limit this to more show than sell. One additional issue to consider in our 2011 forecast is that the cost of touch will drop across all 3 alternatives, more rapidly in more aggressive alternatives. Expect a mix of projected capacitive and resistive touch technologies, with projected capacitive dominating.

2012: Increased use of haptics make electronic touch closer to actual experience. 3D and OLED moving onto tablet platform. Look to Amazon to perhaps do something there with the Bumptop acquisition. Explosion of applications. Clone product alternatives increase in China. More regional competitors - Europe, China, LA. Big challenge will be on content, whether competitors can assemble enough compelling applications to compete with Apple. Other challenges will be on application configuration, with wide variety of screen sizes and pixel format offerings. Emergence of display alternatives, offering much longer battery life and outdoor viewing capability.

2013: Price competition increases. Average media tablet price falls below $250-$275 at street level. Apple will still maintain a price premium. More dual panel notebook/netbook alternatives will push up convertible tablet number. Emergence of more dual-screen clamshell/convertible alternatives. Possibly Apple might come out with something of that type by then for their notebook line - if so, convertible portion of the market will likely grow more quickly. Fast growth of tablets in the clamshell space might slow some of the expansion in the slate form factor market. Not clear if both those markets can thrive simultaneously.

2014: More likely timeframe for emergence of dual-screen alternatives. Also likely timeframe for more OLED versions to push into market. Most likely market for them to first enter is slate, due to expected price premium. More touch intrusion into creation devices, with hard keyboards.




Compute Platforms (Matthew Wilkins)

With respect to the tablet/PC forecast, Wilkins indicated that his compute forecast shows that PC OEMs will still be successful and healthy (through 2014). Products may look different physically - as a result of advances in display technology and continued integration at the semiconductor level - but the tasks will be very similar to that now. One thing that could cause PC OEMs to lose sleep is if the feature set of consumption media tablets were to continue to increase beyond what he now envisions, since this would imply a market with potentially more overlap with netbooks than forecast, increasing the risk to sales.

In terms of winners and losers in his space, Wilkins remarked that “HP is likely to be successful in Tablets and that could bolster it both in its PC and printer businesses. Its Palm acquisition and WebOS should give it a sufficiently differentiated offering in the market. So far, I think HP-Palm could turn out to be a very wise acquisition.” With respect to Apple, he acknowledges Apple’s success and market position derived by practically creating the category, but doesn’t believe iPad specifically created a halo effect for Apple products in other areas, because the iPod and iPhone have already done this.

With respect to non-tablet development in netbooks, Google’s 2010 entrance could alter the landscape: 1) will deliver a Linux-derived O/S with major backing; 2) “Chrome OS” could generate interest; 3) very low cost platform; and 4) ARM and X86 support.

Wilkins has also produced an interesting analysis quantifying his perception of netbook cannibalization risk. Because we cannot yet forecast with great precision what Netbook sales will be lost to iPad-style media consumption tablets until consumer buying preference data is more available or we have more history, he has chosen to estimate Netbook sales at risk to an iPad-style media consumption tablet. His sensitivity analysis covers what percentage of Netbook shipments are at risk of being lost to iPad-style media consumption tablets.

Figure 12: Netbook Cannibalization Scenarios





Figure 13: Netbook Cannibalization/Shipment Risk – Most Likely Scenario





Smartphones (Tina Teng)

Teng recently released an important topical report on smartphones, “Wireless Communications: Smart Phones, The Center of Your Social Life”, covering smartphone growth by segment, feature preferences, and a detailed look at an OEM’s rationale in choosing a smartphone O/S platform. Much of the analysis presented in this section is from that report.

With respect to tablet competition/cannibalization, Teng sees the tablet as a form factor rather than a device type. Smartphones and consumption tablets (as opposed to creation) share some similarity in usage scenarios. Consumption tablets are devices primarily used for Web browsing, social networking, email, and consumption of multimedia content such as eBooks, movies, video, music, games and pictures. While not a hard and fast rule, these devices typically employ a mobile operating system similar to those found in smart phones. However, in the current market, smart phones possess a slick, compact form factor intended to be pocket-sized, making smart phones unlikely to be cannibalized. Instead, smart phones will soon adopt flexible screens, foldable dual screens, and multi-core processors, slowing down consumption tablets’ momentum.

Figure 14: Converged Device Comparison





Broader thoughts on smartphones

For the past two years, industry players have been aggressively building up strength in software development, app store infrastructure, and mobile content (internally or via acquisition). By September 2010, Research In Motion (RIM) made three acquisitions to enhance its platform integration in automotive and telecommunication operators’ infrastructure. Some OEMs who can better leverage their software capabilities also choose to acquire semiconductor companies to strengthen hardware development and integration capabilities.

iSuppli estimates that the smart phone market will see 36% annual growth in 2010, representing 19.2% of all handset volume shipments, presenting tremendous growth opportunities for device manufacturers, operators, semiconductor vendors, and platform providers. All nodes of the value chain are being lured by the smart phone’s higher ASP—10% above average gross margins—as well as by its value-added hardware components and associated demand for additional data-centric services. Thanks to the various convergences to be found in the smart phone, even entities with no past experience in cellular phone design—computer manufacturers such as Apple, Dell, and Acer, as well as PND manufacturers such as Garmin—have announced products meant to compete in this high-growth market, primed for a 5-year compound annual growth rate (CAGR) of 22.7%. Meanwhile, with the evolution of semiconductor technology and consumer demands in an emerging market, new low-end smart phones will start to take a meaningful market share in 2010. iSuppli estimated that low-end smart phones will post a 5-year CAGR of 86.6%. OEMs are targeting emerging markets and new smart phone users with a competitive ASP of below $150. These handsets will have the same core features of smart phones—data connectivity and limited capabilities—making them more affordable for consumers who do not want to sacrifice a basic data plan.

Other Relevant Smartphone Developments

• A user-friendly UI has become an essential element to create stickiness and enhance brand recognition with consumers. Besides creating stickiness, such UIs provide seamless integration across applications, staying one step ahead of the user’s activities. To further extend brand association, some OEMs build brand-name apps linked to app store fronts. In addition, players in the industry are attempting to strengthen their capabilities in software development, app store infrastructure, and mobile content (whether in-house or via acquisitions).

• OEMs such as Research In Motion, Nokia, and HTC focus less on improvements to the UI and more on enhancing service offerings, whether through their own app stores or through operators. In September 2010, Research In Motion made three acquisitions to enhance its platform integration with automotive and operators’ infrastructures. Since 2009, Nokia has made several acquisitions to enhance the overall user experience of the Ovi app store. These improvements include a geographic search solution, a social networking platform, and deeper service integration with operators’ platforms. HTC is leveraging its internal software talents to develop branded UIs (TouchSense, TouchFLO, and TouchFLO 3D); the company recently acquired Abaxia to offer customized software for strategic operators. Companies like Apple and LG have chosen, instead, to enhance hardware capabilities, so as to ensure deeper integration of hardware and software integration. To further achieve vertical integration, Apple acquired P.A. Semi and Imagination Technology. The semiconductor talents gained thereby led to the Apple A4 processor implemented in the iPhone 4. LG acquired Decawave, which highlights LG’s strategic move to enhance location-based features.




Alternate Scenario: Creation Tablets Create More Opportunity and Cannibalization

The alternate scenario rationale, a product of iSuppli Financial Services, is considerably different than the rationale that underlies our tablet and compute forecasts, representing iSuppli’s base case. What we refer to as iSuppli’s base case (presented earlier) for tablets is the culmination of forecasts from our market intelligence analyst team. Both viewpoints, though mutually exclusive, work together to help explain how tablets could evolve and thereby impact PC/smartphone OEMs and their respective supply chains.

Figure 15: iSuppli - Tablet Base Case


In Financial Services, we tend to believe the tablet market could be substantially larger long-term than our iSuppli base case, though with respect to 2011 (the short-term) and possibly 2012 we’re well in sync as to our view on tablet evolution. Where we differ is in the long-term view, since we believe and argue that tablets are likely to have the same content creation capabilities as any notebook or netbook once they’re well bonded to a wired or wireless keyboard and mouse and operating under a competent O/S (e.g., not a smartphone O/S) capable of running and accessing all of one’s programs and files, whether for work or play. A smartphone-based O/S will always struggle to become a creation-based platform, even with a keyboard or mouse, since it’s simply largely incompatible with most PC-based work and play applications, excluding Microsoft’s ActiveSync functionality (which enables compatibility with Outlook for email/calendar). In contrast, iSuppli’s “base case” if you will, assumes that tablets are very successful in 2011 through 2014, though the lion’s share of shipments are of media consumption tablets, operating on O/S like iOS, Android, Blackberry and MeeGo (as opposed to traditional Windows or even Mac OS) and that the market for creation tablets (aka regular Windows) remains limited.




In a world where creation tablets are thus equivalent to netbooks and notebooks, the market for tablets almost by definition has to be substantially larger than our base case presently implies, since our base case forecast is admittedly almost all consumption-based media tablets. Implicitly, we are assuming in our alternate case that much of the long-term growth will be coming from tablets operating on a more evolved O/S than say iOS is today, since the O/S itself would limit one to largely consumption activities. Hence, this contributes partly to our long-term Microsoft bias (in tablets), even with Microsoft’s stumbles to date in tablets we still believe it is more likely to assume that Microsoft will figure out how to design a functional tablet UI than it is to assume Apple figures out how to evolve iOS and an iPad into a creation platform that is 100% compatible with the Widows-dominated PC universe. Obviously, Apple could combine iOS and Mac OS at some point, which we think is logical as well.

The obvious risk in our theory is the undeveloped Windows Tablet UI; however, given what Intel/Nokia and RIM have been able to accomplish with their respective tablet UIs in development, it doesn’t seem like a big reach to assume that Microsoft will ultimately be able to develop a tablet UI for Windows capable of leveraging existing Windows devices, file formats and applications software. We also cover other angles of this scenario/rationale in our O/S chapter, under Windows.

Figure 16: iSuppli Financial Services – Tablet Alternate Case





Furthermore, relative to our iSuppli base case, under this alternate rationale we see substantially greater potential for cannibalization of notebooks and netbooks in 2012 through 2014. However, we don’t see that as necessarily bad news for PC makers. Granted, with cannibalization comes risks. In the alternate scenario, we envision substantially more opportunity for PC OEMs and ODMs in tablets than we believe our iSuppli base case scenario portends. Implied in our last statement is our concern that although the base case is a relatively good unbiased forecast for media tablets (assuming a media tablet world), we still believe there is more downside than upside risk to our base case notebook/netbook forecast as a result of tablet cannibalization. We believe iSuppli’s base case essentially says Windows doesn’t work as a tablet O/S, and that the present smartphone tablet landscape is a clear direction of how tablets will evolve near-term, just with substantially bigger numbers year after year. Naturally, we don’t believe this base case view of the world is good for most PC makers, since the encroachment is coming heavily from Apple, Android, et al. Forecasting possible PC cannibalization is tricky at this stage of the game, leaving Wilkins with no easy task. Our tablet analyst, Rhoda Alexander, commented on the difficult task of quantifying cannibalization, saying that (1) no one yet knows what portion of netbook/notebook consumers would be totally satisfied by a consumption device; and (2) even seemingly additive devices like media tablets may ultimately cannibalize more than expected by deferring spending and other purchases. To be clear, we still see a large important role for media tablets in expanding the market in this alternate case, as different O/S will enable different functionality and user benefits. Importantly, media tablets are also cheaper than notebooks, similar to netbooks on a BOM cost basis (thus, there is a similar role for inexpensive netbook tablets running Windows).

Getting back to this scenario, in a world where tablets evolve into true, full-featured computing devices, we see this as essentially the same operating environment that the PC makers have been in for two decades (though with the low margins of recent years) with merely an evolution in PC form factor. Thus, we believe this scenario provides long-term advantage to the PC makers. However, in either scenario, 2011+ are risky transitional years for PC makers as they’re definitely in a worse short-term position (vs. Smartphone born tablets) at the onset of 2011, while they await a new truly tablet-supported O/S from Microsoft.

MeeGo is very interesting as an O/S, relative to a smartphone O/S, and seems to be planning to deliver a true tablet based user experience, which is quite exciting. It actually could be the first major UI designed specifically for a tablet to hit the market. Even with that advantage, however, we suspect it’s going to be no easy task to convince a consumer to purchase a new tablet running an O/S with no other pre-existing devices (e.g., no device ecosystem) or MeeGo app base (though MeeGo will leverage Nokia’s OVI store). Although MeeGo is Symbian^3 compatible in terms of apps, it remains to be seen how the smartphone apps will work aesthetically on new tablets (ask Samsung how that worked on the Galaxy Tab). Either way, there are probably not too many newer Symbian apps, released for the N8 and later, to leverage, irrespective of possible resolution and DPI issues. We believe it’s likely the apps that a tablet user would want to use generally have to be released for the tablet specifically, or at least designed with a tablet in mind, even iPad’s history shows this (where smartphone apps were compatible day one, but not necessarily optimal for tablets).




The advantage that Apple, Android and RIM should have is their ability to leverage their smartphone ecosystems with tablet customers, whereas something like MeeGo has comparatively little to leverage. At present, Windows is unable to exercise its tremendous advantages (installed PC base, PC apps software, widely supported file formats) because its basic tablet O/S does not exist (thus, no tablet apps or touch ease of use) and its hardware dependence on Intel has kept its mobile devices too stationary (as they really don’t have the battery life to be competitive vs. Apple). Thus, today Windows tablets are failing as tablets; hence, no market share. If Windows had a tablet UI and a more battery efficient processor, we believe Windows could be a serious force in tablets. Both of those requirements don’t seem overly difficult in our estimation.

There is tremendous potential for full, creation capable tablets, particularly in corporate environments. Additive devices are anathema to corporate IT as each additional product has support costs associated with it. The ideal tablet for the corporate customer would be a hybrid device that would seamlessly migrate from the desk to the road to the home office or hotel room. This tablet would run fully configured business applications, not just abridged mobile versions of those applications.. The ideal tablet would migrate from being a light, easily transportable personal device on the go to being the interface with larger screens at the office, home, or hotel, easily transitioning to be a virtual keyboard and touchpad for the larger screens.

Rhoda Alexander, Tablet Analyst




Where is the real opportunity? The Connected Life.

In this report, we have touched on the fact that a mobile O/S is expanding to encompass more device types, while quickly becoming integral. With that, the increased functionality of such devices is creating new use cases that are making these newer smarter devices indispensable to consumers. We have also weighed heavily on the debate surrounding tablet cannibalization, concluding, at least in Financial Services, that tablets are ultimately a form factor of computing devices. Though due to the new, improved tablet form factor, interconnectivity and apps, tablet devices will expand the utility and use of computing devices, somewhat analogous to the way smartphones have revolutionized mobile handsets. Therefore, the distinction between consumption and creation is likely only a hot topic of discussion for the next 2-3 years at most, as we expect its relevance to ultimately fade away as our “it’s only a form factor” notion becomes reality.

As we too weighed in on the consumption versus creation debate, many of the arguments, namely our alternate case, relate to the interplay between smartphones and PCs and how much market overlap really exists. Thus, that market opportunity is heavily about market share, as well as of course, growth from the expanded use case of tablets. What may be lost in the tablet discussion is the bigger potential of smarter, connected, unified consumer electronics that is also simultaneously occurring with the evolution in tablets, opening the door to new and interesting questions such as: Where’s the growth? How will devices change? What should these CE and O/S players be aspiring to deliver and become? Is a mobile O/S too limiting of a concept? Are we really talking about a unified CE device platform in homes, operating under a platform or unified O/S? And of course, pertaining to the companies with superior solutions - who will harvest the opportunity?

Thus, the tablet is relevant because it is a unifying device and it is important because 1) tablets are a physical combination of both a smartphone and a compute device (a tipping point for convergence, from the semiconductors out); 2) tablets represent another major device (in terms of usage time) in a household running a unifying mobile O/S; and most importantly, 3) tablets have made Apple, Google, HP, Intel, Microsoft, Nokia, Samsung, Sony et al keenly aware that the world has changed and all these companies are all direct competitors, if they had not already come to that realization.

We believe the future is interesting and quite different from today, particularly as it relates to a typical home, our home life, and how technology will play a role in all of our daily activities, whether that is something as mundane as automatically logging one’s exercise routine or some sophisticated “agentry”, which we use to describe a new app or O/S capability, where concierge services, such as allowing a call from a loved one through, while screening out another call, come into play. Homes, even faster than lifestyles, have always evolved with technology, from coffee makers to microwaves to Wi-Fi, and we expect the near future to be no different. We strongly believe that CE devices, encompassing a very broad swath of the devices in one’s home, will increasingly possess commonality. And by commonality, we mean they will likely run a unifying (which we now call mobile) O/S. The implications, as with tablets, is that more CE device types, such as TVs and automobiles, will start to deliver some common experiences (e.g., O/S, UI and apps) and possess some common chipsets. Thus, hardware and software similarity will exist in devices that previously had none. We believe this will occur because consumers will be drawn to a platform solution for their lives, encompassing TVs, cars and other devices, beyond tablets, smartphones and PCs, since interconnected and integrated solutions will create new compelling functionality, which once in existence, will become a requisite. For instance, a smartphone’s lifestyle apps (e.g., dining, fitness, social network, etc) may make a smartphone more indispensible today to some, versus their mobile handset functional capabilities a few short years ago.




If we discount all that has transpired, TVs are probably the next important catalyst in this evolution toward a more unifying CE platform and solution. However, personally, I am not impressed with IETV today, although our display team is quite excited, so I need to stress this is my personal opinion. Today, IETV is more a feature set, designed to sell TVs and sustain price points, with little substance behind it. The apps haven’t yet shown themselves to be so lifestyle, TV-centric as to be essential. They’re typically PC/smartphone apps, such as Facebook, which are also accessible on your three other screens (PC, smartphone and tablet), but do not leverage the convenience, form factor, mobility, or device in some unique way. However, the TV has always been the gateway to media and to the home. And for a unified CE solution, undoubtedly, we believe the TV will be the key hereto. Therefore, the first step will be designing a TV-centric UI, hopefully built on a mobile O/S to give the TV added functionality, followed by real, thoughtful apps that take advantage of TVs advantages of centralization, hours of passive viewing and screen size.

Figure 17: Our Unified Consumer Electronics Future: The Connected Life





For a number of companies, the challenges presented by this unifying evolution are great, as some will struggle as a result of their organizational structure, which by design may be too functionally divided (say TV design/division management is totally independent of smartphones direction) to see the connected, integrated opportunity and approach it organizationally with the same internally unified vision. Although this opportunity is very large in potential devices, consumers are not likely to pay a lot incrementally to “unify” their refrigerator, washing machine, coffee maker and exercise bikes, etc. Thus, Microsoft, although a leader in compute platforms, may find it difficult to transition its high ticket, high margin business model to other simpler CE solutions, where the O/S, software and chips need to be priced significantly cheaper and have lower margin. And although we don’t think suppliers will be able to charge a lot incrementally for the O/S and these empowering chips, consumers do pay, at least initially, premiums for differentiation and innovation, so there are meaningful opportunities beyond simple growth. Thus, some of the largest strategic challenges are organizationally unique.

Apple and Google were obviously early to the vision. However, the evolution to a unifying platform isn’t likely to happen in homes for 4-7 years, although signs of this evolution will sprout in two to three years in the form of TVs, automobiles, and other devices running a unifying O/S, if we want to discount tablets today as a sign. We believe it is still early enough in the evolution that those companies that are further behind in developing a Mobile O/S, such as Samsung and Microsoft, could still emerge as a leader. However, there isn’t much time, especially given how Google is approaching a broad spectrum of CE devices with Android and Apple which is slowly yet innovatively building out its interconnected CE suite. Given our timeframe, we think it’s important to ponder these issues now. Because from an equity point of view, we don’t think our view is too far off from being relevant. Our view on timing is that the equity markets could start to focus on the larger unifying CE opportunity beyond tablets within two years.




Compelling Data Points

Although we would like to rely solely on our proprietary data and analyst team’s insights to assess the tablet opportunity, there are too many important studies/data points, outside of our scope, and worthy of mention, particularly in the context of forming a complete view of the tablet opportunity.

• Most early demographic studies on media tablet (iPad) buyers, even as recent as summer 2010, show the consumer profile being skewed toward the wealthy. However, Q4’s gift giving could be the first step toward evolving to a more mainstream (and mass market) consumer demographic. NPD had an interesting pre-launch survey which showed the same; Yahoo released some early stats as well. Wired magazine had a survey which also had a significant skew. Clearly, iPad’s premium pricing has still kept the device out of many mainstream consumers’ hands, as purchase demographics still don’t seem to be normalizing based on published studies. We are forecasting a significantly lower ASP for tablets in 2012 and beyond, arguing that forecast volumes will be helped by a more affordable, competitive pricing environment. Anecdotally, Joe Abelson, our head of Displays research, noticed a change in the type of iPad consumer over the Black Friday shopping weekend, observing “many prospective iPad buyers were not technically knowledgeable, and often came from an older generation; in a number of conversations with sales staff it seemed that these customers were looking to gift the product during the holidays.” Another forward looking study supports Joe’s observation, that the iPad may finally start to transition to mainstream consumers as a result of the holidays. A study highlighted by Electronista (Nov. 2010) indicated that a Nielsen poll found that kids ages 6 to 12 asked for the iPad over game consoles as a holiday gift, a sign that tablets may just make the transition from a play device for the working to a true play device in Q4.

• Nokia’s impressive smartphone shipment (and market share) statistics may overstate its significance as a convergence device/player. There are numerous mobile html/advertising traffic usage reports, whether one looks at NetApplications, AdMob, Mobile Mix, or Millennial Media, that show actual smartphone traffic from Nokia Symbian devices to be at most on par with devices like the iPhone (in total usage, which is somewhat hard to fathom given the cumulative shipment disparity favoring Nokia) and in some cases, substantially below. Given Nokia’s large installed base of smartphones (the highest in terms of shipments), the low usage speaks volumes about how most Symbian devices are used. This is important to consider when extrapolating some level of tablet success based on smartphone track records. Some of the distortion may be a result of sampling due to Nokia’s strong presence outside the U.S. Thus, the other side of the coin is that the more sophisticated smartphone O/S are delivering more traffic and usage per device. Nokia’s new N8 (and other next generation smartphones to be released) will improve the company’s prospects.

Symbian's problem is that only a small share of its shipments are used as actual smartphones, i.e. with a data connection and with transactional elements. Many Symbian users (especially in emerging, pre-pay markets) are simply unaware they have a smartphone while another segment is perfectly fine with sideloading content with the PC. This might sound odd today, but it's the way things were before iPhone came along with a bundled data plan required from operators wanting to carry the device.

Julien Theys, Mobile Media Analyst - Screen Digest

• Enterprise iPad – there may be signs of life. BoxTone surveyed 1,200 IT professionals (50% of respondents Fortune 100), finding that seventy-three percent expect to deploy the iPad and other iOS devices within their organizations in the next 12 months, with more than a quarter expecting to rollout “immediately”. Other similar data points exist. Mobile connectivity provider iPass “survey of 1,100 customers showed that 13 percent already have iPads in use (mainly brought in by employees) and two-thirds expect iPads and similar devices to replace (27 percent) or supplement (39 percent) the laptop as their primary computing device,” according to Infoworld, Nov 2010.




• iPad scores highest consumer satisfaction score ever (for a device) and the source is reputable, ASCI. In September 2010, the ASCI scored the iPad as the highest scoring consumer electronics product ever tracked. The ASCI started their polling of individual products after the iPod, so the comparison unfortunately doesn’t exist.

• “iPad is the favorite device for reading, but rarely (16%) used outside of home”, per a UK Consumer study conducted by Cooper Murphy Copywriters (MobiADNews). Thus, not surprisingly, tablets are being used more like a connected device; the higher cost of a mobile device and service is a deterrent. This data point fits our alternate case that creation will likely evolve (since tablets aren’t being used like smartphones) and lead to significant PC cannibalization.

• Sybase study (at iPad launch) says number one reason cited for iPad purchase: “52% for conducting work”, per FinanceTechNews April 2010. Media consumption came in second at 48%. More than 70% of participants said they could access “less than 10%” of their company applications via smartphone. Hence, the opportunity for a creation tablet device. We realize it may be hard to see the creation case when the only tablet device selling well is one running a smartphone O/S with limited creation capabilities (with or without a keyboard and mouse). Nevertheless, the market opportunity is there for a tablet device that is capable of creation; thus, the creation tablet requires two elements: 1) compatibility to existing office applications and data; and 2) some form of external keyboard and mouse. As a result, we see Windows ultimately having the long-term edge.




Supporting Data and Forecasts

Connected Devices

Figure 18: The Addressable Market of Connected Devices Continues to Expand; Tablets at the Forefront

Notes: WW Unit production of platforms that are potential Targets for embedded connectivity and an O/S. Mobile/Desktop PC figure preliminary forecast as of December 2010. Mobile PC figures adjusted for Windows-tablets (~20mn in 2014). Source: iSuppli Corp. | December 2010 (Connected Devices Database Q3 2010) *Figures are units in millions.




Mobile Handsets

Figure 19: Smartphones represent 30% of all handsets by 2014, up from 16% in 2010

0

250

500

750

1000

1250

1500

1750

2000

2008 2009 2010 2011 2012 2013 2014

Ha

nd

se

ts (

un

its m

n)

Mid to High End Smart Phone Low End Smart Phone Feature Phone

Entry Level ULCH Grey market


Smartphones

Figure 20: Smartphone Shipments by O/S; Could Tablets Be Just as Fragmented? Unlikely

Source: iSuppli Corp. | December 2010 (Wireless Communications Q3 2010 Topical Report – Applications and Trends in Smartphones)




Figure 21: Smartphone Shipments by O/S (millions)


Figure 22: Smartphone Shipments by Handset OEM (millions)





Mobile Landscape

Figure 23: Varying Approaches to Monetizing Mobile

Source: Screen Digest | December 2010




Figure 24: Mobile Communications Valuation Complex

Source: iSuppli | December 2010




IV. Insight from Teardowns

What separates a tablet from other devices?

Apple’s New Design Paradigm: The User Experience Comes First

Figure 25: Apple’s New CE Design Paradigm


We are witnessing a shift in consumer electronics design that has in turn created a new supply chain paradigm. Previously, all electronics started with a circuit, that was placed on a PCB, which had a case and I/O wrapped around it. In the end, every piece of electronics has been a wrapped motherboard. Apple and Foxconn changed all of this, with Apple’s iPad and iPhone 4. These devices start with the human machine interface (HMI), encompassing not only the touch interface and form factor, but also battery life, speakers and everything else essential to the user experience. If you’re constantly re-charging your battery, for instance, you’re not interacting with your device. With these new Apple devices, it is clear to us that Apple started with everything important to the HMI then worked backwards, placing the electronics and chips last. This shift in design process is visually apparent in the layout of both the iPad and iPhone 4, where chips and components are densely nested in the inside, accommodating HMI trade-offs. This design appearance is not evident in other devices, though we believe Samsung is already starting to adopt this process. The benefit is a more emotionally bonded end-product. However, this comes with a cost. This design style requires substantially more custom components, compared to other devices which are more off-the-shelf, and favors higher volume players, in order to rationalize the incremental cost increase and still remain competitive on price.

Derek Lidow, CEO iSuppli




Figure 26: The HMI First, “Nested” iPhone 4 Figure 27: Lenovo IdeaPad Exploded BOM View





The HMI Cost

The major difference in tablets versus smartphones and mobile PCs) is the cost engineering that goes into human-machine interfaces (HMI) – in the example of the Apple iPad, that HMI cost contribution can make up nearly 50% of the overall materials or BOM costs [& similarly for the Galaxy Tab]. As opposed to more conventional computing devices like laptops, the motherboard usually makes up 50% or greater of the overall costs. Essentially, engineers used to design around the CPU whereas tablet designs begin with the touchscreen, placing user experience first and foremost in the process – a paradigm shift that Derek Lidow, iSuppli’s CEO, has espoused. Basically, by shifting the HMI from keyboards + touchpads + screen (in laptops) to just the screen (as both input and output device), manufacturers can now afford to spend more time and money on developing and producing an interface that engages the user. This design theory is borne out in our cost analysis of the iPad and Galaxy Tab.

The other teardown observation worth sharing is regarding semiconductor components where we’re beginning to see integration taking out some IC providers; for example, the new QTR transceivers from Qualcomm integrate BT and FM solution in the HTC G2 smartphone – therefore, it’s not a stretch to see these solutions being designed out in the short term. MEMS parts are an exception because they don’t use the typical CMOS fabrication process.

Wayne Lam, Teardown Services Analyst

Figure 28: iPad 3G 16GB - HMI Cost Analysis (HMI ~45% of BOM)





Tablet BOM Analysis versus Mobile PCs and Smartphones

Figure 29: BOM Cost Analysis – Tablet/Notebook/Netbook/Smartphone Comparison

Notes: tablet BOM is a composite of the Apple iPad 3G 16GB and Samsung Galaxy Tab; notebook BOM figures do not include netbooks. Source: iSuppli Corp. | December 2010




Figure 30: Summary Tablet BOMs





V. Supply Chain Repercussions

Processors (Francis Sideco)

Figure 31: Processor Revenue Forecast, 2009-2014


iSuppli’s processor revenue forecast, per the chart above, includes:

1. Digital Signal Processors (DSP) that are designed to be optimal for signal processing rather than control functions (e.g. Texas Instruments OMAP)

2. Logic ICs that are designed for specific end equipment types (e.g. Samsung ARM-based Apple A4, Samsung Hummingbird, Qualcomm Snapdragon)

3. Microprocessors (MPU) that are usually x86 based and are mostly used in the compute space (e.g. Intel Atom, AMD Phenom).

Apps processors can belong to any of these three categories – DSP, Logic ASIC/ASSP, and MPU. The mobile handset processor revenue is a subset of total processor revenue. This figure has some value as a comparison with mobile handsets, and in particular smartphones, since most media tablets share a similar mobile architecture.

The tablet market in 2010 belongs to Apple, which means the iPad’s processor suppliers, Samsung Electronics (ARM based A4: $11 per) and Infineon (baseband: $9 per,) are also in the driver’s seat. As competition heats up and new manufacturers enter the tablet market in 2011, the tablet processor landscape will begin to encompass more suppliers, reflecting the inevitable decline in Apple’s market share.

For consumer electronics OEMs as well as the processor suppliers that enable their devices, tablets represent both an opportunity and a potentially disruptive force in their markets. Consequently, never before have we seen so many processor makers looking to ready processors for the same device type: Intel has the Atom processor that Nokia is likely to use for its upcoming MeeGo based tablets. Texas Instruments has the OMAP apps processor, which we could also see in a Nokia device. Qualcomm has the Snapdragon. Samsung has the Hummingbird. nVidia, which is traditionally a graphics processor company, is also looking to establish presence in the tablet processor space with its Tegra line.




To size the tablet processor opportunity, we forecast that the apps processor will cost on average $10 for the next few years. On this basis, we estimate the tablet apps processor opportunity at $1.9 billion in 2014, a substantial increase from 2010’s $176 million estimate. Per iSuppli Teardown Director Andrew Rassweiler: “Prices for apps processors stay approximately in the range of $12, when a device is first released, to $7, near obsolescence. In general, this price cycle, starting at $12 and falling to $7, is fairly steady from year to year.” Our teardown history also supports our pricing: Samsung’s Hummingbird apps processor- $12; and Apple A4- Processor $11.

Figure 32: Tablet Apps Processor Revenue Forecast (millions)


The same per chip pricing generalization could be used for basebands (which enable mobile connectivity), though not all tablets require basebands. For reference, “42% of iPad purchasers selected the 3G model [which uses a baseband] according to NPD,” per AppleInsider Nov. 2010. Considering that the majority of the current iPad buyers are affluent users (See Chapter VI: 05.14 - Early demographics on iPads skew to the affluent), we believe the 42% figure should come down in time as tablet prices drop and more regular consumers (who on average travel less and thus have less need of 3G) adopt the device. In the future, this mix is likely to shift as tablets could use embedded modules instead of chipsets for 3G connectivity. But if the demand for 3G is strong and consumers become attached to the tablet’s 3G capabilities, the potential payoff for basebands is substantial. The baseband opportunity in tablets will also vary, depending on whether the market evolves to more consumption based tablets or creation tablets. The affordability of data plans is obviously another important factor, which we assume are constant for this analysis.

If our tablet base case scenario plays out, mobile handset apps processor makers will see the most benefit, as the opportunity is truly incremental with essentially no cannibalization. OEM preference for certain device operating systems and architectures also plays an important role in what platform the tablet maker will choose for its products. According to iSuppli Wireless Analyst Francis Sideco, “every company is different. While Apple will likely want a very discrete partner such as Samsung and Texas Instruments, Samsung and LG could go with Qualcomm due to Qualcomm’s smartphone specialties.” Sideco also mentioned that the ability to control the software/hardware integration is yet another deciding factor when tablet makers choose processor suppliers.

iSuppli Compute Analyst Matthew Wilkins believes: “from the MPU perspective, the view from Intel is that the Tablet category is additive. I think there is no doubt that Intel will be just as successful in compute come 2014 as it is in 2010. Then when we consider the company is focusing on entering both the tablet and smartphone/phone space with its IP, it is playing in all the games.” Wilkins further commented on AMD, the primary Intel MPU competitor: “from the AMD standpoint, the official line is that the company is "waiting to gauge the size of the opportunity" in the tablet market before committing/entering. This strategy is similar to the approach the company took in addressing the Netbook segment. The reality there is that AMD was late coming to the Netbook party. I do not see AMD's compute business being smaller in 2014 than it is currently.”




Flash (Michael Yang)

Figure 33: Flash Memory Revenue by Category, 2009-2014


The chart above presents iSuppli’s latest preliminary revenue forecast for the Flash Memory market. There are three categories in this space, NAND, NOR, and MCP. NAND Flash is by a long shot the driver of the market. In relation to our discussion on tablets, we will focus on NAND Flash as it is the most relevant.

Figure 34: The Insatiable Appetite for NAND Flash

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2009 2010 2011 2012 2013 2014

Un

its

Millio

n 1

GB

Eq

uiv

Removable Flash Storage Cards

Tablet PCs

SSD (Solid State Disk)

MP3 players/PMP (Flash based)

USB Flash Drive

Mobile Handset (Embedded Flash)

Other





NAND Flash is a type of non-volatile memory in which data is electrically erased by large arrays of bits rather than bit by bit. Usage wise, NAND Flash is commonly found in removable flash storage cards, mobile handsets, MP3 players, solid state drives, as well as tablets. The demand for NAND is ever increasing as electronic devices require more and more storage capacity. By 2014, iSuppli forecasts that the demand for NAND will reach almost 88 billion units (1GB equiv) from 12 billion units (1GB equiv) in 2010.

Figure 35: Tablets Produce Incremental Growth And Help Make NAND Affordable Elsewhere


The tablet category is one of the major driving forces of the NAND. According to iSuppli Flash Analyst Michael Yang: “upcoming tablets are equipped with raw NAND, eMMC, or SSD (we will discuss eMMC and SSD in more detail later), with an average density per tablet rising to 65 GB per device in 2014 from 28.5 GB per in 2010, the tablet NAND space is quickly becoming sizable. As more consumers migrate towards tablets and manufacturers pop up from multiple segments of the technology industry, NAND demand keeps raising.” Companies such as Samsung, Toshiba, MIcron, and Intel all have SSD products now available or on the way to support the tablet, netbook, and slim laptop markets.

The tablet opportunity withstanding, Yang likes Samsung and Toshiba in the NAND Flash market. According to Yang, “Samsung and Toshiba have the most intellectual property around NAND flash, capital resources, and strongest R&D teams.” Having worked at major chip companies such as Intel (who Yang says has exceptional operational processes) and Samsung, Yang commented, “if there was a war in the flash sector, it’s hard to bet against Samsung given their fierce corporate culture.”




The Flavors of Flash

Figure 36: The Evolutionary Path of SSD in PC, Notebooks, Netbooks and Tablets


eMMC could be found in almost all mobile handsets, with average density rising to 18.5 GB per device in 2014 from 8.9 GB per in 2010. As eMMC evolves, it will enjoy greater scale, as its supply expands from MLC to TLC flash, which are inherently cheaper and have higher density despite being slower, making it ideal for handsets and consumer electronics that looks to expand storage capacity to meet the needs to rising content consumption. Although eMMC is a driving force in the mobile handset space, we don’t expect eMMC to have the same importance with tablets. The major bottle neck for eMMC is its slow transfer rate (<1GB/sec). As tablets evolve and improve to handle more computing responsibilities, their requirements for transfer speed will outpace what eMMC could provide. Yang feels that eMMC is usable for the current generation tablet devices, embedded SSD products (along with raw NAND) is a much better fit for future tablets.




Solid state drives (SSD) incorporate NAND flash, with the flash memory representing on average 61.5% of a SSD’s bill of materials. The SSD also contains an embedded processor (controller) that executes the firmware-level codes. Traditional SSDs have found it tough to gain traction among consumers as the price and density considerations have kept hard disk drives (HDD) far ahead. However, considering NAND flash has gained ground in tablet and smartphones, a result of instant-on and low-power advantages, newer, smaller packaged SSDs have a chance to seize new opportunities that traditional SSDs missed. As we said earlier, companies such as Samsung, Toshiba, Micron, and Intel all have SSD products now available or on the way to support the tablet, netbook, and slim laptop markets.

The slim SSDs utilize a slim case-less form factor by exposing the PCB to offer increased flexibility in industrial design, an example is the Apple MacBook Air which uses the space savings for a bigger battery. From a tablet standpoint, we believe embedded SSD represents a significant opportunity: 1) small size fits well with the tablet form factor; 2) NAND flash costs continues to trend downward for the foreseeable future (2014 1GB equiv: $0.29 vs. 2010 1GB equiv: $2.13), addressing SSD’s biggest problem—cost; and 3) fast transfer rates please consumers, as the SATA interfaces supports up to 6GB/s transfer rates, eliminating the eMMC bottleneck.




DRAM (Mike Howard)

Figure 37: 2010 a record year for DRAM


2010 is lining up to be a record year for the DRAM industry. In other years, the first half of the year is typically the softest period for DRAM due to lagging demand after the holiday season, but H1 2010 has been nothing short of extraordinary, in terms of revenues, as robust PC sales drove ASPs to record levels ($2.77/GB in Q1 2010 and $3.03/GB in Q2 2010 vs. 2009 ASP $2.13). As we close out 2010, iSuppli anticipates annual ASPs to take a slight step back from the freakish H1 levels, but remain high enough while coupled with strong unit shipments to present the industry’s first $40 billion revenue year since 1995.

The largest application for DRAM is and will continue to be PCs. Mobile DRAM (mDRAM), a subcategory of DRAM, has recently received a lot of attention because mDRAM is what’s used in smartphones and tablets, two products that are primed to grow substantially in the coming years. While mDRAM’s portion in the overall DRAM market is still relatively small today, the category is growing. iSuppli estimates that by 2014, mDRAM will account for 14% of the entire DRAM market on a bit basis as mDRAM will account for a greater share of revenue since it is a premium product and requires more silicon/bit.

Figure 38: Mobile DRAM (mDRAM) to Increase its share of total DRAM





The mDRAM space is poised to become more competitive in 2011. Mobile handset OEMs have traditionally leaned toward mobile memory suppliers that provide both NAND and mobile DRAM (mDRAM) with in-house manufacturing capabilities. Currently, there are only 4 companies that fit that bill: Samsung, Hynix, Micron, and Elpida. Recently, Kingston and Phison created a joint venture focusing on the mobile memory market. Despite significant challenges, both Kingston and Phison have strong roots in memory and could move in to provide mobile memory for Chinese handset makers since most of the Tier-1 handset OEMs have been courted by one of the four major players. We expect to see a more heated environment for mobile memory in 2011 as competition and die shrinks drive further cost reduction.

However, despite the tremendous growth in mDRAM, tablets still represents a relatively small portion of the total DRAM market. Per iSuppli DRAM Analyst Mike Howard, “while tablets may be the tech product in the spotlight today, they are still a long way from challenging smartphones in terms of total DRAM consumed. It’s simple math: tablets ship in the tens of millions, smartphones in the hundreds.”

Figure 39: Tablet DRAM still a relatively small portion of overall DRAM





Display Systems (Vinita Jakhanwal, Joe Abelson)

Figure 40: Internet Access Device Display Revenue 2009-2014 (Millions)


For tablets, primary display suppliers include LG Display, Samsung Mobile Display / Samsung Electronics, and Chi Mei Innolux. The figure above represents our display industry forecast for display revenue associated with internet access devices. Tablets are presently included in this display classification.

Joe Abelson, iSuppli Director of Display Research, shares his views on how the growth in tablets will impact the display supply chain:

“What is a tablet if not its display? More than with any other device, the relationship between the user and the content on his or her tablet exists entirely because of and through the touch-enabled display. Not coincidentally, the display module and touch screen are also the costliest elements in a tablet system, accounting for 40.66% of the total direct material cost of an iPad Wi-Fi 16GB according to iSuppli’s teardown analysis.

As tablet sales surge into the tens of millions of units, certain display manufacturers will benefit greatly. Currently, the primary display supplier to Apple’s iPad line is LG, with Samsung as a lower volume second source. In 2011, Taiwan’s Chimei Innolux (CMI) is expected to become the third supplier to the program. This is not surprising, given that CMI is owned by Hon Hai, whose Foxconn division is Apple’s main contract manufacturer.

Other companies benefiting from the early success of the iPad include Corning, whose protective Gorilla Glass is the final surface of the display – the one you actually touch. 3M supplies several films that help to brighten and enhance the image quality of the iPad.

Should Android-based tablets gain significant traction, it’s easy to presume that Samsung’s just-released Galaxy Tab will be a market leader. As one would expect, Samsung tablets use Samsung displays, as well as materials from Corning and 3M. It’s not yet known which suppliers will be used in other yet to be released branded tablets from RIM, HP/Palm, etc., but volume displays will almost certainly continue to come from LG, Samsung, CMI, and AUO, another display leader. Other TFT LCD suppliers who have access to Gen 5 fabs and have IP for wide viewing technologies such as IPS are also likely to be part of the tablet value chain.”




Other Tablet Component Suppliers

Figure 41: Select Tablet Component Suppliers by Function





VI. Tablet-Related Valuation Comps

Figure 42: TMT Valuation Comps by Sector

Note: Forward estimates and valuation metrics are based on consensus estimates Source: iSuppli Corp. | December 2010




Figure 43: Tablet-Related Equity Sectors (CE, Computers, Handsets, Display, IP and Storage)





Figure 44: Tablet-Related Equity Sectors (Semiconductors)





VII. Key Developments

11.12 - Android’s Tablet O/S version delayed; iPad continues to lack real competition

For some months, we had been expecting the next release of Android’s O/S, to accommodate larger-screen tablets (beyond the 7 inches now supported by Android). That release was supposed to be Gingerbread 2.3. Recent news is indicating that Gingerbread is due imminently (some even expected Gingerbread as of yesterday), though speculation now suggests that this latest Android O/S will be a rather minor smartphone update. Tablet support apparently is looking like an early 2011 proposition, as part of another new Android O/S release labeled Honeycomb. The current version of Android is 2.2 (aka Froyo).

Although Apple’s iPad is almost a large iPhone, it isn’t a large iPhone with many applications, from games to newspapers and magazines, perfectly optimized for the iPad’s considerably larger screen. The experience naturally is different, not to mention the on-screen keyboard is large enough to be more like a traditional keyboard, instead of an oversized smartphone layout where pecking is complicated by a few more inches of screen size. Nevertheless, Samsung’s 7-inch tab shows some of the potential possible of an Android tablet, but ultimately will likely fail to become the first real iPad competitor that we’re all so patiently waiting to see. The Samsung Tab follows Apple’s iPhone/iPad relationship. However, it ultimately was limited by Android’s own limitations, as 7-inches is very quickly starting to look like it’s too small of a form factor for media consumption and a host of other activities (e.g., children’s applications), as applications look more like they’re for a smartphone than for a media/entertainment experience.

Across the supply chain you can hear grumblings about next generation Android tablets. Reasons for optimism for Android still abound. In Nvidia’s recent 3Q call, CEO Jen-Hsun Huang expressed his optimism for the category as well as touched on the flurry of activity he’s seeing on the Android side:

• [Regarding the delay of some tablet projects until early next yeara] if you're going to give that wonderful product [the iPad] a run for its money, you better build something absolutely exquisite. And so whether it's the quality of the work of the craftsmanship that our teams are working on or the capabilities of these devices, they have to be absolutely groundbreaking or why would anybody come to buy them? And so I think that the extra time that was necessary to build these devices and build the [Android] operating system and all the applications and the system software necessary to do it, and obviously we're not going to talk about what they are right now, but they're going to be absolutely magical.

• There's a lot of tablets that are going to get built that aren't really going to ship.

• This isn't a fad. It is clear now that touch computing and tablets is a wonderful way for a lot of consumers to enjoy content. And by being able to connect a wireless keyboard and a mouse, the difference between a tablet and a notebook is pretty marginal. And so I think that going forward, you're going to see this tablet device being quite disruptive to both notebook as well as entry desktop.

Every single company I know is working on a tablet. There's a -- car companies working on tablets. Consumer electronics companies working on tablets. Computer companies working on tablets and communications companies working on tablets. I don't remember the last time in the history of computing where a singular device is being worked on by all the industry. The medical industry's working on tablets. This is a revolutionary form factor and I think it's a foregone conclusion this is going to be probably the largest computing segment.

Thus, although the long-term prospects for Android tablets may still be great, the immediate impact of the Android’s tablet version delay is that it’s going to be another quiet quarter for Android tablets, allowing Apple to dominate the category for at least another quarter or two, if not longer.




10.15 - Intel sees path to tablets through new atom-based “Oak Trail” processor.

Oak Trail, slated to hit the market in early 2011, is Intel’s code name for its comeback strategy in tablet processors, a market dominated by Apple (and its ARM-based A4) so far. Oak Trail was first announced in June 2010, at the Computex show in Taiwan, Oak Trail is an Atom based system on a chip, or SoC, solution designed specifically for tablet devices, and not just Windows-based tablets. Based on published reports, the chip will consume up to 50% less power than previous processors, offer full HD video, and work on three O/S platforms: Android, Windows 7, and MeeGo.

Intel seems serious about getting into the tablet game given that a tablet sale today is not likely to include an Intel processor and could also represent a lost PC sale, which likely included an Intel-based processor. Thus, it’s an important market to Intel and one where things to date haven’t fared well. Recent comments by Intel CEO Paul Otellini stated that the company will, “utilize all of the assets at our disposal to win this [tablet] market.” Microsoft CEO Steve Ballmer shared similar enthusiasm on Oak Trail, calling it, “an important part of our roadmap.”

As an aside, Intel’s Atom processor revenues were down 4% sequentially in its latest Q3 results, which most construe as a sign of tablet cannibalization.

iSuppli Computer Analyst: Matthew Wilkins:

“Apple has been so successful with the iPod Touch/iPhone/iPad-products because there is a continual stream of new things to download/run/play/watch. The company has very cleverly taken the focus of the user away from the device itself, instead looking at the apps. This cannot be ignored by any player serious about tablets.” Matt goes on, “I think Intel’s tablet processor, specifically Oak Trail, approach of “whatever OS you want – Android, Windows 7, MeeGo” is potentially born out of frustration that Apple has sold almost 10m+ iPad units YTD and Microsoft still isn’t talking about – let alone shipping or demonstrating – viable competitive OSVLet’s be honest, Intel is pretty smart. The company knows perfectly well that the media tablet market is being defined right now, and if the company isn’t a player ASAP, it will only get tougher to get into the market in future years. Microsoft’s lack of an OS is almost pushing Intel into the arms of Google/MeeGo operating environments.”

Finally, “WinPhone7 almost looks a perfect fit for simple media tablets. It is rather mindboggling that Microsoft hasn’t bent over backwards to get it out on tablets as fast as possible. “

iSuppli Wireless Analyst Francis Sideco:

“It is interesting to note that Microsoft is still reliant on Intel (Oak Trail) in this market and not the ARM ecosystem. One might infer from this that Microsoft’s strategy is to utilize its full OS while the rest of the world seems to be leaning toward a mobile OS. In contrast, Intel has diversified out of the WINTEL relationship and has mentioned support for Android and MeeGo – both mobile OS.” Francis remains a believer in Intel, “If in fact this is true, I am more bullish on Intel’s chances than Microsoft’s. Sharing similar sentiments to Matthew, if Microsoft was smart, it would bring WinPhone7 into this mix and try to solve the screen size scaling problem that is currently plaguing Android (ie. auto font scaling when resizing apps/screens, etc). Such a move would also expand Microsoft’s potential engagements with the ARM ecosystem. However, I have not seen any thing of that sort that might indicate that this is the way Microsoft will go.” Finally, Francis recognizes, “It is also interesting that Otellini mentioned in recent remarks that Intel intends to integrate the recently acquired Infineon 3G and LTE wireless capabilities into Atom processors in the coming years, fitting with our earlier published view on the acquisition.

10.15 - PC market growth remains strong, but not as strong as previously forecast.

PC market growth remains strong, but not as strong as previously forecast. iSuppli’s latest PC forecast revision calls for 2010 total PC unit growth of 14.7%, down from the previous forecast of 16.5%. Our rationale for this forecast reduction is reduced expectations for the Notebook segment within the second half of 2010. Some modest competition from tablets does play into our forecast revision. However, there are bright spots- we expect the Desktop segment to accelerate its year-over-year unit growth, believing that that corporate demand has increased.




10.01 - RIM announces that it intends to launch its new BlackBerry PlayBook 7” tablet in early 2011

On September 27, 2010 Research in Motion (RIM) announced the intended North American launch of the PlayBook tablet scheduled for early 2011. The company showed off the device and gave limited spec information.

The device carries a 7” WSVGA touchscreen display, a 1GHz dual core processor, and a class leading 1GB of RAM. Unlike the competing iPad, the PlayBook contains both front and rear facing HD cameras (3Mp in front and 5MP rear). The device is similar in form factor to the recently announced Dell 7” tablet, and shares obvious physical similarities to the iPad. But that is where the similarities end. Unlike the iPad, this device works with Flash, utilizes a proprietary QNX O/S, and allows multitasking.

This device might not be a game changer for the industry or for RIM, but it is an interesting insight into RIM’s strategy to compete in mobilized computing. This is a relatively radical departure from the handset only company that RIM has been since its inception. After all, RIM does not make PCs, and this is the closest the company has come to entering the computing market.

Figure 45: Side-by-side comparison Playbook, Galaxy Tab, iPad

Source: iSuppli Corp. | October 2010

09.17 - Are Tablets the Next NAND Pillar?

The success of tablets is threatening many competing product categories, from smartbooks and e-readers to Netbooks and portable gaming devices. The lack of differentiation re-entry price, size, feature set, and applications place Tablets in direct competition for consumer dollars from numerous products. Still, iSuppli forecasts total NAND consumption will be 428 million GB in 2010, and increase sharply to 1.7 billion GB in calendar 2011.

One of the effects of the rebirth of the tablet this year is the concomitant decline in Netbook sales. In its Q2 earnings call, Asus announced plans to ship 1.4 million Netbooks in Q3, a sequential slowdown from 1.5 million “mainly due to competition” from Apple’s iPad. Netbooks have been losing steam of late, especially regarding the availability of




models with solid-state drives. But tablets have been cannibalizing some of this demand, and the incoming crop of tablets is poised to become the NAND driver that Netbooks were supposed to be. To be sure, the tablet segment suffers from some of the same weaknesses of Netbooks. As secondary devices with relatively low horsepower and incomplete computing functionality, they sell at high prices. But consumers have been attracted by the iPad’s responsiveness and facility in media interaction, due in part to its usage of NAND flash instead of an HDD. iSuppli forecasts 15 million slate tablet sales in 2010, rising to 48 million in 2011 and 77 million in 2012.

The unique media consumption aspects of tablets have stolen a lot of cachet from Netbooks and their notebook-light experience. Despite having just 256MB of mobile DRAM, the iPad boasts a snappy feel, long battery life, and compelling software that distinguishes it from PCs and keeps the user’s attention. As the holiday season looms with tablets based on Google’s Android OS, increased product selection and app innovation will drive greater affordability and consumer interest.

With this surge in tablet shipments, the amount of NAND required is quickly becoming sizeable. Upcoming products are equipped with either eMMC, SSD, or raw NAND, with an average density in 2010 of 28GB, representing another strain on tight MLC supplies (figure follows). This compares to an SSD attach rate of fewer than 5% in Netbooks and average density below 16GB. As more consumers switch from Netbooks to tablets and manufacturers pop up from multiple segments of the technology industry, NAND demand keeps rising.

Despite its high price and lack of competition, the iPad continues to light the way for the tablet segment. It has successfully leveraged the app-based architecture engendered by the iPhone and other smart phones, to the detriment of x86- based Netbooks. Tablets are facilitating a new usage model that embraces newer ways of experiencing media and the Internet, and iSuppli’s forecasts reflect this trend.

iSuppli NAND analyst: Michael Yang

Figure 46: Tablet NAND density and total GB shipped, 2010-2014

Source: iSuppli Corp. | September 2010




09.10 - Android: Our thoughts on tablet screen-size challenges and O/S fragmentation.

We thought it would be interesting to go deeper into the issues now facing the Android O/S as OEMs attempt to expand this smartphone O/S into tablets and televisions. With Android devices gaining share every day, the structural problems with the O/S have received relatively little attention. For instance, Android’s O/S is a limiting constraint for screen sizes in tablets, and for different but similar reasons, the O/S is a growing problem for app developers.

At the core of the Android O/S is a monolithic Linux kernel (in comparison to iOS' more flexible micro-kernel design) which sets very specific screen resolution criteria. This rigid development paradigm forces Android developers to only develop apps that work on a specific O/S version – the result being applications may have to be re-written multiple times to support different screens on different devices. There are currently 4 different versions of Android O/S (versions 1.5/1.6/2.1/2.2) spread across over a dozen handset manufacturers & dozens of devices; each with slightly different underlying hardware components (device drivers) and screen resolutions. This has naturally led to a “fragmentation” of the O/S, forcing developers to spend resources to re-compile their software code to work on specific devices (i.e. not just 4 different versions of the same app but 4 x n where n is the number of different devices/screen sizes on a particular O/S version).

Thus, for Android app developers, their opportunities and workload grow with each new custom Android platform which may have unique ROMs on top of a new Android update. This creates an increasingly bigger development challenge since the developer not only has to do normal apps improvements, but now must redesign another version of the app for a new, particular version of Android. Interestingly, the rate of growth of Android adoption is out-pacing Google’s ability to control this fragmentation (i.e. via software development tools) since they, by virtue of being Google, are not handset manufacturers and have no control over the end device or hardware.

The screen size issue is related, yet still somewhat different than the O/S fragmentation. It’s related in that current versions of Android O/S support different screen sizes, although no version of Android is presently capable of supporting a tablet with a screen resolution as high as Apple’s iPad. The next revision of Android (Gingerbread) is expected to increase the working resolution level to 1280×720 which will help it address devices such as tablets and smartbooks [and should maintain legacy screen resolution support]. Thus, many of Android’s present screen size limitations will go away for future versions of Android. However, O/S fragmentation will still remain a problem. Apple, on the other hand, has a limited set of hardware and O/S versions, which can all be easily ported to new O/S versions, and are all under strict control of the company. Its flexible micro kernel O/S architecture allows developers to create apps that run on any and all iPods, iPhones, and iPads (and eventually Apple TV). Apple also has a much more mature development tool set for software developers to use, and needless to say – a very healthy apps marketplace that draws in legions of developers. Thus, despite being “closed”, Apple's iOS is actually more accommodating - allowing for apps/content to be written once and offered across all platforms. The challenge for Google is to overcome Android’s limitations in order to give developers and content providers more uniform exposure across a diverse set of devices.

With respect to screen sizes, our argument regarding micro-kernel versus monolithic kernel CAN be overcome with better development tools for Android developers. However, the problem with O/S fragmentation at the device level will remain with Google for the foreseeable future as handset manufacturers continue to customize their devices with their own Android version (i.e. screen size) and custom software configurations – a steep price to pay for an “open” platform. These design issues must be solved before Apple’s exclusivity window at AT&T closes and, assuming the iPhone joins other networks, brings the two competing O/S’ in close combat on more networks.

iSuppli Teardown analyst: Wayne Lam




07.30 - Android teardown analysis show similar parts/suppliers help to lower cost

Figure 47: Major Handset Component Comparison (Android supplier analysis)

Source: iSuppli Corp. | July 2010




Based on our proprietary teardown analysis of the latest flagship handsets from Apple, Motorola, and HTC, including the iPhone 4, EVO, Incredible, and Droid X, it is apparent that the Android platform is driving OEMs to certain chips that are likely the most conducive for OS design. For example, all the aforementioned android handsets use a Qualcomm processor solution. They all also use Atmel for the touch interface, and TriQuint power amplifiers. This is likely not a coincidence. We hypothesize that the choice to use the same suppliers and nearly the same components for many functions is likely due to either price and/or reference designs predicated by Qualcomm. Alternatively, Apple uses an entirely unique set of chips to power their proprietary OS and handset design. Regardless of the reasons, it is becoming increasingly clear that the Android OS is closely associated with certain chips, driving down product manufacturing costs while delivering similar user experiences.

iSuppli Teardown analyst: Wayne Lam

07.20 - Raising iPad Sales Forecast

• We are raising our iPad/tablet forecast considerably as sales to date have exceeded our once high expectations. We now expect iPad sales to reach 12.9 million units in 2010 and climb to 36.5 million in 2011. Apple is dominating the tablet market in 2010, with almost an 84% estimated market share. Although we expect Apple to give up some competitive ground in coming years, we still forecast Apple to have above 50% market share in 2012. We published our prior iPad forecast the day before the iPad’s April 3 release. At launch, our forecast was the high watermark for anticipated iPad success, as we forecast 7 million units for 2010.

• Component constraints (e.g. panels and touch screens) are the limiting factor in our 2010 forecast, not demand. Accordingly, we expect the iPad will be in short supply during the holiday season. Rhoda Alexander, Director of Monitor Research, in explaining her forecast, indicated that “Apple has responded to the strong end-demand for the iPad by ratcheting up its production targets to its Asian suppliers. Our latest calculations indicate a much higher production target for two key components – LCD panels and NAND flash – closer to 19 million units (previously we internally estimated Apple’s 2010 production target at 10 million units). We believe Apple can reach our 12.9 million unit sales forecast within its already announced markets.”

• Our revised 2011 forecast is well above the range of current analyst estimates, arguing that the iPad will be a source of positive Apple news flow for some time. We expect the alleviation of supply constraints, further geographic expansion and likely new model(s) to bolster 2011. The iPad has yet to reach most of Asia and the southern hemisphere. Expansion into those markets leaves plenty of room for growth for Apple and iPad competitors in 2011 and beyond. Expect local favorites, Lenovo, Asus, Acer, and others to give Apple a run for its money in the Asian markets but based on recent crowd reaction to Apple’s store openings in Beijing and Shanghai, there is plenty of room for Apple in China as well. We expect Apple to release its next generation iPad models in 2011 with the April anniversary being a likely target date. Possible new features include an internal camera and more screen size choices.

• Apple is likely to give further insight into iPad sales when it reports earnings tomorrow. We believe the company has already past 4 million units sold. For Q2, we estimate Apple sold 3.4 million iPad units.

• Our analyst expects tablet competitors to start making noise before year-end, as much of the competition delayed product launches following the iPad debut to allow time to reconfigure products. Asus and Acer are expected to release consumption tablets in the fourth quarter of 2010, joining the likes of Dell, JooJoo, and Neofonie’s WeTab, but significant competition from Apple competitors is not expected to be




significant before 2011, when HP and others are expected to enter the fray. Rhoda believes the big challenge for Apple’s competitors will be less about hardware and more about the suite of applications they pair with the hardware. As seen with the iPhone, the rest of the market is still playing catch-up at this point.

• We have not revised our notebooks/netbooks forecast in conjunction with this forecast, though we believe cannibalization is likely to occur as iPad volumes climb higher. eReaders are an area that already has seen a noticeable impact from the iPad, as evidenced by the sharp price reductions in that market. We believe the resources of most consumers are finite and as tablets increasingly approach mainstream demographics, consumers will have to rationalize between various other computing alternatives when buying tablets. That said, our computing analyst, Matthew Wilkins, believes that there is still room for both tablets and notebooks/netbooks to grow, based on presently forecast volumes.

Figure 48: iPad Sales Forecast 2010-2012 (July 2010)

Source: iSuppli Corp. | July 2010




06.25 - As Apple improves its iOS for enterprise customers, RIM’s last bastion could crumble

As Apple improves its iOS for enterprise customers, RIM’s last bastion could crumble under more competitive pressure

One of the major weaknesses of the Apple iPhone had been its inability to meet the security needs of enterprise users. With the release of iOS 4, Apple, along with partners like Sybase on the software side, is addressing some of the iPhone’s enterprise shortcomings. iSuppli mobile handset analyst Tina Teng remarked, “from the list of updated features, iOS 4 is now more business user friendly, which means potentially around 60 million iOS 4 users around the world by the end of 2010. More business apps can help with the business oriented usage scenarios. However, to reach mass business adoption, Apple needs to convince IT departments in big corporations to support Apple products at first.” Apple’s progress on the software side is important because it is software that is giving Research in Motion (RIM) an important advantage with enterprise customers. RIM has already had minor struggles as result of lagging handset designs. If it loses its competitive advantage in enterprise security (e.g., software), increased market share erosion could follow suit.

With that as a backdrop, a recent survey of 2100 business phone users, conducted by Sybase and Zogby International, explored the future potential of iPhones in the workplace. We found the following observations worth highlighting:

• “Approximately 56 percent of iPhone users surveyed were likely to use the device for work purposes more often with the new features, spurring a renewed emphasis on iPhone use for business purposes.

• More than a third of survey respondents who don’t currently own an iPhone and whose employers don’t provide them with a mobile phone, said they would consider purchasing one if new business-ready features became readily available.

• Of those surveyed where employers do provide them with a mobile device, more than half claim they would ask their company to upgrade to an iPhone based on the new features of either iPhone 4 or iOS 4.

• More than half (64 percent) of iPhone owners use the device at least once a week for work-related tasks. The most common work related task conducted by users with mobile phones was making business-related phone calls, while the most common task for iPhone users was checking work email.”

For insight into the enterprise perspective, we utilized our Director of Information Technology, John Pitts. John’s contribution was valuable regarding the enterprise evolution of the iPhone and its positioning vis-à-vis RIM:

“The biggest barrier to Enterprises adding iPhones to their networks was originally lack of Exchange ActiveSync support to allow the phones to securely access corporate e-mail servers. Once Apple signed on to license this technology from Microsoft it opened the gates to the corporate world as it then provided IT departments the ability to enforce security policies such as PIN codes and remotely wipe lost or stolen devices over an encrypted ssl tunnel. For companies with even stricter security policies, a Cisco VPN client has been available for many years that allows encryption of iPhone data to the corporate network. The changes in the new iOS4 platform, such as encryption of data on the device while at rest and new support from 3rd party security vendors, such as Sybase, will certainly add to the comfort level most IT departments have with the device, although I doubt if these changes will cause many IT shops who previously didn’t support the device to suddenly change their mind. The process is gradual.

Relative to RIM, the obvious advantage might seem that many professionals prefer a device with a physical keyboard if they are to do a large amount of E-mail communication. However, RIM’s strongest advantage is really with their Blackberry Enterprise server (BES) which is a great platform for managing large numbers of devices providing IT departments a method to easily maintain corporate policies, deploy software updates and generate reports. Most larger organizations already have this infrastructure in place and are comfortable with the software. Apple and other smart phone manufacturers using Exchange ActiveSync have definitely had an impact on RIM, as demonstrated in their release this year of Blackberry Enterprise Express, a free feature light version of their Enterprise product geared toward mid-sized firms. As other firms such as Sybase with their Afaria product suite begin to offer BES type functionality for other mobile platforms, RIM is likely to see their market share of the enterprise space gradually erode.”




06.25 - New eReader Prices Reflect iPad Effect

Barnes and Noble and Amazon slash eBook Reader prices. On Monday, Barnes & Noble lobbied the first shot of what will undoubtedly become a price war with Amazon over eBook readers. Barnes & Noble slashed nearly $60 off of the Nook eReader to $199 as well as introduced a lower cost WiFi only version of the device for $149. Hours later, Amazon dropped the retail price on the Kindle to $189 from $259. The timing was not coincidental, as on the same day, Apple’s launched its iBook application (via the iOS 4 upgrade), making the free reader available on the iPad, iPhone and iPod.

At the newly lowered prices, our teardown analysis indicates that eReaders are now break-even on the hardware. Our teardown analysis (see Figure 6) of the Barnes & Noble 3G Nook estimates the bill of materials (BOM) at $199.55, even with the new $199 retail price. Similarly, our analysis of the Kindle estimates the BOM at $185, essentially even with the new $189 retail price. Compared to the Kindle, the Nook has nearly 50% more components due to the added sophistication of running full Android OS, inclusion of WLAN capability and running dual displays. The largest cost component of both devices is the e-ink display module (essential for long battery life) provided by PVI, accounting for an estimated 28-32% of total BOM for both eReaders. With these and future price drops, PVI would be affected. The future of the eReader platform will largely depend on whether device manufacturers add technological functions to remain competitive with the more dynamic, multi-function iPad. There is a color e-ink display for the eReader in development, but according to iSuppli analyst Wayne Lam, the technology is at least a year away from market, at best.

In sum, there is no visible short term solution to drive significantly more sales of eReaders, except to use price as a tool. Consequently, at current retail prices, the forward EPS impact is incrementally negative for both companies as many analysts still need to readjust models to reflect the shift from ~20% gross margins to no margin, though both equities were already down more than the broader market on the news.

It’s interesting to note how quickly both companies have moved to the gaming console/razor blade business model. One can only assume that recent eReader sales (post iPad launch) have been below company expectations, supporting the swift pricing change. Eliminating the hardware margins mean that now the Kindle and Nook have to almost solely derive revenues from content. eReaders are selling more books via digital distribution. Although there is no doubt that the iPad is encroaching on eReaders hardware sales, iPads still make equate to ebook sales, though it’s not yet known for whom. The Nook and Kindle apps are available for free on the Apple’s iPad, iPhone, and iPod Touch, which is the only positive here. However, the more likely negative is that Apple iBook application becomes another possible consumer destination, further dividing ebook sales, in addition to the already lost hardware profits.

In the short term, eReader demand could slightly increase on the price cut, though that remains to be seen. However, the longer-term future of eReaders is likely to be more niche than initially perceived. In the very short-term, the price drop could entice consumers to purchase eReaders that cost less than half of the starting price point for an iPad, says iSuppli consumer electronics analyst Jordan Selburn. We will adjust and readjust our eReader forecast in the future as we see more data points become available. But as of now, we have no plans to significantly change our eReader forecast even though the prices have been slashed, which alone is a negative signal.




Figure 49: eReader Teardown Analysis: Component costs and origins (versus iPad)

iPad 16GB WiFi Kindle 2 3G Nook

Teardown Date 4/7/2010 4/1/2009* 4/19/2010

Direct Material Costs (US Dollar)

Main PCB 92.03 46.95 53.10 Display Module 65.00 60.00 59.20 Touch Screen 36.00 NA NA Wireless Module NA 39.5 (3G) 54 (3G + WiFi) Battery 23.75 7.50 7.50 Other - Enclosure/Final Assembly 14.71 14.42 12.20 Interconnect PCB 10.90 NA NA Box Contents 5.85 5.71 6.88 Misc PCB Assemblies 2.04 2.75 NA

Manufacturing cost 9.32 8.67 6.67 Total Cost $259.60 $185.50 $199.55 Retail Cost $499.00 $189.00 $199.00 Hardware Margin 47.98% 1.85% -0.28% Component Origins/Manufacturers MPU Samsung/ARM Core Freescale Samsung Power Management Dialog Freescale Wolfson I/O & Interface TI, Broadcom, Cirrus,

NXP, ST, AKM Epson Epson

Memory Samsung Samsung Hynix Wireless Module Broadcom Novatel Cybertan Display LG PVI PVI *Note: the Kindle 2 teardown is over a year old. Some costs likely have changed.

Source: iSuppli Corp. | June 2010




06.25 - We are positive on PCs in Q2, though panel suppliers are concerned by iPad and Europe.

iSuppli currently forecasts 4.4% growth in notebook PC shipments in Q2 2010, with channel checks suggesting our forecast is possibly conservative. However, separate conversations with notebook panel suppliers reveal their increasing concerns over the iPad and fallout from economic weakness in Europe, giving us some caution heading into Q3.

06.18 - New PC systems touch-screen forecast

Touch is integral to the next evolution of the human/machine interface in the personal computer market. Our displays research team just published a new report that examines the existing and new opportunities for touch-screen displays in the personal computer market. The following represents highlights from our 53-page analysis.

The emergence of the iPad rapidly boosted the projected capacitive touch technology to the unit leadership position in the overall portable and desktop personal computer space but its continued leadership is not necessarily assured. While the technology has a strong lead with a growing number of suppliers entering the market, a number of formidable competitors remain. The first offerings are focusing almost exclusively on 2 finger multi-touch solutions, and basic touch functions—touch, slide, pinch, and expand. Applications are the key to this market and will rapidly move past those basic functions to include such capabilities as full-function virtual keyboards with sensor feedback, pressure sensitivity, and vibration to match sound in movies, games, and videos, and more stylus capable solutions. While the slates represent the fastest area of expansion for touch technology, they are not the only opportunity. Touch capable, all-in-one desktop systems are infiltrating both consumer and business markets. Touch on stand-alone monitors is lagging behind but will become of more importance as touch expands on Netbook and notebook solutions and users strive to treat each screen as touch enabled.

Each touch technology has its own strength and weakness. As the PC platform evolves, these attributes will remain key to the technology selection for the new platforms:

a) Multi-touch capability is rapidly becoming a requirement, rather than a preference for the PC touch market. Many of the initial offerings will utilize a basic two-finger touch solution but this requirement is essential. While there are currently still some products in the market that offer single touch solutions, most of these will be replaced with multi-touch solutions in the next few years. Single touch solutions will continue to compete in the industrial categories, such as point-of-sale (POS), point-of-information (POI), point-of-purchase (POP), kiosks, machine interface, and automatic teller machines (ATMs), which use menus to drive user interaction, but they are unlikely to gain much traction in the commodity business and consumer space.

b) The sleekest mobile solutions are demanding flush mounting or flush top design. Some of the more popular technologies on larger, stationary displays, notably camera based optical and infrared, are not compatible with this requirement.

c) Likewise, optical transmission is a potential barrier to resistive usage on some of the emissive displays, which may favor a solution with higher optical transmissivity, such as projected capacitive. The resistive technology incorporates some of the widest variance in touch-screen performance, varying from very low cost, 4-wire analog solutions to much more sophisticated digital solutions with minimal optical interference.

Key Findings:

• There are some clear, early favorites in the PC market for touch-screens, notably projected capacitive, optical imaging, and resistive. While all three of these technologies will play important roles in touch-screen development for PCs over the forecast period, tomorrow’s touch leader may still be in the development phase.

• Unit shipments of touch-screen modules in portable and desktop personal computer markets will triple in 2010, growing from 4.6 million units in 2009 to more than 15.8 million units in 2010, with the 2014 market forecasted to reach 117.9 million units. Cost and innovation will be significant drivers in this growth, as will the evolution of touch applications.




• The tablet PC category is in a rapid transition, driven almost exclusively at present by the expansion of the slate category. The overall tablet PC category is projected to grow from 2 million units in 2009 to more than 11 million units in 2010, with the slate portion comprising 8.9 million units of that 2010 growth. Overall growth in the slate category could be even greater in 2010, depending on adoption rates for the iPad in regions other than the U.S. and the marketability and release timing of iPad competitors.

• Slates (5 inch or larger tablets): - Apple iPad’s is the elephant in the room, so to speak, accounting for more than 80% of the 2010 slate market opportunity. Initial market response to this product has been strong, currently estimated at sales in excess of 200K per week. Challenging Apple’s lead will take more than offering a less expensive alternative. Tomorrow’s market leader will need a mix of superior industrial design, compelling applications and an expanded touch interface—all of it delivered in an ever-more affordable package. Competitors are gearing up for a fight, though, as demonstrated by Hewlett-Packard’s recent acquisition of Palm Inc., Google Inc.’s acquisition of BumpTop, and the acquisition by Amazon.com of TouchCo.

• Optical Imaging led the overall PC touch-screen market in 2009 in both units and revenue, capitalizing on strong growth in opportunities in the all-in-one desktop space. While resistive technology followed closely behind in the unit category, the optical imaging technology surged past it in the revenue or value segment, due to the larger overall screen size and the higher cost per inch on average. Despite these advantages, optical imaging’s 2009 lead is quickly eclipsed by the rapid surge in growth of projected capacitive touchscreens in 2010, as commodity slates and the iPad in particular, enter the market.

• Consumption vs. Creation: One of the compelling issues surrounding the new slate category is the evolution of the computer usage model. The iPad represents an intriguing mix of two devices that have struggled to gain traction for years: Internet appliances and tablet PCs. In a sharp departure from past tablet implementations, Apple has both minimized and maximized the capabilities of the devices, limiting it as a creation device but compensating this shortcoming by offering a wealth of easily consumable applications. The key to making this alternative attractive is to pair it with a wealth of attractive, compelling content. Most of the competing products now entering the market appear to be mimicking this usage model, designing for consumption rather than creation. While one can work on a slate, the current products are not suited to complex tasks, such as modeling, database development, detailed editing, presentation development, spreadsheet work. Arguably one could accomplish any of these tasks on a slate but the job could be accomplished more easily with a physical keyboard and more computing power than these products currently offer. As the touch interface improves over the forecast period and more devices incorporate pens, that model is likely to shift, with users relying more heavily on slates for both consumption and creation activities.

• Size has been one of the biggest constraints on product adoption. As a result, some of the technologies scale from one end of the size spectrum to the other, with very little impact on per inch cost while others see significant increases as the size increases or fail to scale altogether. Size limitations can be very fluid however, as demonstrated by the expansion of projected capacitive screens from 4-inch and 5-inch limitations to 20-inches and beyond.

iSuppli Tablet Analyst: Rhoda Alexander




Figure 50: Worldwide PC Systems Touch-screen Market, Value by Technology 2007-2014

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2007 2008 2009 2010 2011 2012 2013 2014

Mil

lio

ns o

f D

oll

ars

Other technologies

Surface capacitive

SAW

Resistive

Projected capacitive

Optical Imaging

IR

Active Digitizer


Figure 51: Tablet PC Market Shift, 2009 & 2010





Figure 52: Touch-Screen Industry Value Chain





05.21 - Google Brings the O/S Wars to the Television

Google unveils Google TV, powered by Sony, Logitech and Intel. The plan is for new devices to be in stores by Fall. Today, Google announced its plan to launch a TV operating system/portal, based on Android, which will attempt to seamlessly search, integrate and serve television and Internet content vis-à-vis the television. The Google TV system will be equipped on Sony’s HDTVs and Blu-ray players, while Logitech’s “companion box” will enables Google TV on existing hardware (price not yet disclosed). Both Sony and Logitech devices will be powered by Intel’s Atom processor. Google TV will also deliver games and other applications to the TV through its Android software. One application that Google highlighted was the use of an Android phone as a TV remote, which we presume is similar to the iPhone’s present ability to function as an iTunes remote.

What’s significant about this announcement? Google’s desire to cover everything with Android and work with major players across every platform. Google has already established itself as one of a few major O/S players in a hotly contested battle for mobile devices. Google is showing its existing partners that Android doesn’t have boundaries. The company is eager to forge major alliances to extend the Android platform to other devices and it is not a fast follower, behind Apple. From this perspective, Google TV is significant and so are Google’s current list of partners- Intel, Sony, Logitech, Best Buy and EchoStar.

What’s not significant? Probably Google TV itself. It’s hard to launch any television centric platform without help from the incumbents. Google has only aligned itself with EchoStar’s DISH Network. The big picture challenges also remain. Despite all the talk of Internet-enabled TVs and the rise of Internet content, the reality is that TVs are still used for watching TV, and that’s not likely to change. Although Internet-enabled TV sales are on the rise, so are HD TV sales, which mean those same people probably want to watch HD too. Unfortunately, HD programming comes from your pay television provider. Neilsen’s latest annual study of viewing habits, published May 2010, showed that households watch more than 8 hours of TV per day, up 2 minutes in 2009. If Internet content was truly making a dent in viewing habits, we should have seen some minutes shaved off of Neilsen’s latest viewing figures, but we didn’t. In fact, people are watching essentially the same amount of TV today as they did last year, five years ago, and even more than they did ten or twenty years ago.

We also polled our analyst base for insights on Google’s TV plans: Randy Lawson- this is big news for Intel who has struggled to enter the CE space and another revenue opportunity for Google; Riddhi Patel- connecting TV to the internet whether through an external device or using the TV's own capabilities is definitely going to happen; Joe Abelson- this is the opening salvo in what will become the next big battleground for TV: Apple vs. everyone else; and Jagdish Rebello- I have to believe that in the long term, the CE wireless (and to a certain extent automotive infotainment) industries converge to a common platform to enable content and apps to be transported easily and enjoyed seamlessly across multiple platforms.

Please refer to our detailed note on this development, published separately, for our complete remarks.

05.21 - Dell Streak wants to be your almost wallet-size virtual PC

Dell’s “Streak” is alive and will be available to consumers this summer, following its release in Europe in June. The device, with a 5” screen, will allow users to access their desktop PC through the small portable device , creating a virtual PC, allowing users to operate in an authenticated, secure environment. Should the market adopt this device, it would likely create a new applications ecosystem more specifically tuned for enterprise use.




05.14 - Early demographics on iPads skew to the affluent

Yahoo recently published the results of a survey it performed on iPad users accessing its Web content. According to the data, men currently outnumber women 2:1 among iPad users on Yahoo's network, significantly above the nearly 1:1 ratio for overall usage. Yahoo said, “As expected within the classic early-adopter profile, we identified a male skew in the 35-44 age group among these early users. In fact, among all users, men outnumber women 2:1. Given the economy, people with higher earning power were probably the first to buy the iPad. The first Yahoo! iPad users were 94% more likely to be affluent consumers with solid wealth and strong incomes than typical U.S. Yahoo! users.”

In analyzing what iPad users are looking at on Yahoo's network, the company also found higher-than-average usage for Flickr, with Finance, News, and Sports also seeing heavy interest.

Possibly the most interesting piece of data from Yahoo's analysis is the observation that approximately of 10% of users come from outside the United States. Given that the iPad has only been made available in the U.S. and that Apple has taken steps such as limiting per-person orders and cutting off third-party services facilitating international orders, it appears that a relatively significant percentage of iPads are making it out of the United States.

Yahoo stated, ““During the measurement period, the iPad had only been available for purchase in the U.S. market; however, we observe approximately 10% of IP traffic coming from Europe and Asia Pacific. Specifically, the U.K., France, and Germany are the top countries in Europe, and Taiwan and Hong Kong make up the most traffic in Asia Pacific.”

Figure 53: Survey results from Yahoo’s demographic study of iPad Users

Source: Yahoo | May 2010




04.30 - Google is succeeding with Android, but apparently failing with its own handsets

Google won’t be selling its Nexus One phone through Verizon, opting to with T-mobile and its own website for Nexus One sales, at least until Sprint steps in. We should point out that it’s not clear whether it was Verizon or Google who ultimately made the decision to not move forward with the phone on Verizon’s network. Although there is a lot of speculation as to why Google decided not to continue with Verizon with its Nexus One, Vodaphone is using the Nexus One in Britain, France, Germany, Italy, the Netherlands, and Spain. That said, we are cognizant that Google is not focused on building a handset brand, but rather their brand awareness as a digital content provider and mobile software platform. And on that basis, they are succeeding well with Android. Presently, T-Mobile is the only major U.S. carrier offering Google’s Nexus One, with the handset retailing for $179 with a commitment. For potential purchasers that want to use the phone on another network, Google is offering the phone unlocked via its website for $529. Given Verizon’s 90 million wireless subscribers, Google inability to penetrate the major carrier is a setback to its handset aspirations. Verizon is offering the Droid Incredible by HTC, which Google describes as a “similarly feature-packed cousin of the Nexus One”. Verizon offers the Droid Incredible for $199. Google’s Nexus One is also made by HTC.

04.30 - HP enters mobile O/S race, buying Palm

HP has agreed to pay $5.70 per share or $1.2 billion for Palm, a ~25% premium to recent trading levels, though Palm’s shares have been as high as $18 in the past year. Interestingly, the day after the announcement, Palm’s share are trading at $5.78, indicating that there is speculation in the financial markets, although apparently discounted by a very high rate, that HP could revisit the offer price, as some shareholders are clearly not happy. Given no antitrust issues or difficult closing conditions, we believe it would be more typical for Palm shares to be a few cents or so under $5.70 at this point. Undoubtedly, we will hear more on this side of the story later.

We interpret Palm’s willingness to sell at the bottom as a clear acknowledgment of Palm’s inability go it alone as a vertically-integrated player and license their WebOS Palm’s board has approved the transaction, which is expected to close July 31, 2010. It’s now clear that HP desires to make at least some mobile computing devices without Micrsoft ’s Windows Mobile/Phone 7 or Google’s Android. However, only time will tell if HP is willing to fully commit to a future iteration of Palm’s WebOS for its consumer strategy.

What once was a hardware war in the mobile device category will increasingly evolve into a software/ecosystem battle, at least until we have a few decisive winners. The competition for mobile devices whether on smartphones, PDAs or tablets will increasingly be swayed by software and less so by hardware, until users settle on a few key software platforms. The iPhone has changed the use of smartphones and PDAs from mobile phones with some limited email capability, into far more user-intensive devices. The breadth of applications on devices like the iPhone and Android will increasingly push users to crave familiar experiences with comparable feature sets and to shun less capable operating systems/ecosystems. Just a few years ago, smartphones and like devices were used for simpler tasks, mostly dialing and emails, allowing hardware differences to shine through.

HP might not have bought the strongest player in the marketplace, but it has decided that it wants to at least battle for the lucrative content and search margins that could be a byproduct of its mobile device sales. However, Palm doesn not solve all of HP’s issues (e.g, the absence of a popular software/ecosystem platform for its mobile devices). To be successful and profitable in the consumer tablet devices market, HP can not just be a device manufacturer solely based on the WebOS platform, per Tina Teng our Wireless Communications analyst. Ms. Teng believes that the market is competing on the size of ecosystem and Palm hasn’t gained enough popularity among application and software developers yet. The advantages of having Palm’s app store will not be immediately realized after the acquisition. Thus, HP, with the help of partners, needs to quickly transition the software to other mobilized device platforms and rapidly build content, services and applications for its platform.

We believe HP sees a small, but fleeting window of time to develop consumer interest around a proprietary mobile operating system. Differences in adoption rates of various ecosystems, partly a function of the applications breadth of such mobile ecosystems, will give consumers and application developers an increasingly important dimension to evaluate devices by, which alone could allow software to be a determining element in whether or not a mobile device is




perceived as mainstream or niche. Consequently, HP’s timing with Palm is important, as time would only work against a late comer to the mobile operating systems race.

04.30 - Apple buys Intrinsity

Terms were not disclosed. Intrinsity worked on the A4 processor for the iPad, according to the New York Times. iSuppli’s Dale Ford, SVP Market Intelligence commented, “this seems a bit like `back to the future’ with Apple once again pursuing control of its own processor designs; reminiscent of the PowerPC and Apple’s desire to differentiate its PC by using a non-Intel architecture.” The Intrinisity acquisition may have contributed to recent speculation that Apple would buy ARM Holdings, an issue we published separately on. This move follows Apple’s acquisition in 2008 of P.A. Semi, another fabless chip designer. Earlier this month, Google announced its owned IP-driven acquisition, acquiring Agnilux, a start-up founded by P.A. Semi professionals who opted out when acquired by Apple.

04.16 - Intel executives not so optimistic on tablet pc category

While Apple fans are claiming that computing has been reinvented with the launch of the iPad, PCWorld reported Intel as “lukewarm” on the tablet category. We think it’s still early to predict that the iPad and like devices will see widespread, mainstream consumer adoption. The low hanging fruit is clearly specialized outside sales and warehouse business applications as well as high-end consumers.




End-to-End Market Intelligence

Retail and End-User Brand Value Analysis Institutional Sales Buyer Preference Kayle Watson Consumer Sell-Through 914.437.7783 [email protected] Alternative Energy Photovoltaics Application Markets Automotive Electronics Consumer Electronics Computer Platforms Industrial Electronics United States Wired Communications Global Headquarters Wireless Communications 1700 East Walnut Avenue Suite 600 Equipment Markets Flat Panel monitors El Segundo, CA 90245 Global Manufacturing and Design Phone: 310.524.4007 Navigation and Telematics Fax: 310.524.4050 Projection Systems Signage/Professional Displays Television Systems Wired Communications Wireless Communications

Devices and Systems Semiconductors Displays Teardowns ▪ Application Forecasts ▪ Component Pricing ▪ Audio Systems ▪ Analog and Power ▪ Display electronics ▪ Automotive Systems ▪ ASICs and ASSPs ▪ Emerging Technologies ▪ Computer Platforms ▪ Component Pricing ▪ LCD ▪ Gaming Consoles ▪ Design Activity and Influence ▪ OLED ▪ Mobile Handsets ▪ Inventory Tracking ▪ Monitors ▪ Monitors ▪ Memory ▪ Mobile ▪ Networking Equipment ▪ MEMS ▪ Panel Cost Modeling ▪ PMPs and MP3s ▪ Processors ▪ Plasma ▪ PNDs ▪ Semiconductor Design/IP ▪ Profitability and Costs ▪ Set-Top Boxes ▪ Semiconductor Manufacturing ▪ Small/Medium ▪ Storage Systems ▪ Semiconductor Market Shares ▪ Supply Chain ▪ Televisions ▪ Systems Pricing ▪ Wireless Systems

Copyright and Intellectual Property Notice Copyright © 2000 - 2010 iSuppli Corporation. All Worldwide Rights Reserved. Confidential - Patents Pending. All information and intellectual property contained herein is the sole property of iSuppli Corporation. All content contained herein, including but not limited to, artwork, data, designs, graphic content, illustrations, images, photographs, or text, is protected by United States copyright law and may not be modified, copied, reproduced, republished, uploaded, posted, transmitted, publicly displayed, used to prepare derivative works, or distributed in any way. The copyright in all original material provided in this document is held by iSuppli Corporation. None of the material contained in this document may be reproduced, distributed, republished, downloaded, displayed, posted, transmitted or copied in any form or by any means, without the prior written permission of iSuppli Corporation. Any unauthorized use of any material contained in this document may violate domestic and/or international copyright laws, trademark laws, the laws of privacy and publicity, and communications regulations and statutes. All trademarks service marks, logos, slogans, domain names and trade names (collectively "Marks") are the properties of their respective owners. iSuppli Corporation disclaims any proprietary interest in Marks other than its own. Disclaimer of Warranty and Limitation of Liability The information contained herein is believed to be reliable. iSuppli Corporation and its subsidiaries and affiliates does not guarantee the accuracy, validity, timelessness, completeness or suitability of any information or data made available within this document. iSuppli Corporation disclaims all warranties, express or implied, including, but not limited to, warranties of title, non-infringement, merchantability or fitness for a particular purpose. iSuppli Corporation and its subsidiaries and affiliates will not be liable for any damages or injuries arising out of use of any such information or data, including without limitation, damages relating to any error, omission, or inadequacies of the information contained herein or for the interpretation thereof.

Documents

Tablets - Epicenter for Convergence