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Friday, 04 March 2011 02:33

Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet - Including The Pretty iPad, With Proof!

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Apple has announced the release of the iPad 2 and it is an impressive piece of hardware, very nicely packaged and comes with margin boosting accessories (that are actually pretty slick) such as a magnetic cover. With that being said, the RDF (reality distortion field) and FUD (fear, uncertainty & doubt) absorbed and regurgitated by the tech media is simply horrendous and is an example of how difficult it is to get truly unbiased information (not to mention true grit analysis) these days. I truly believe, as in the political and banking rags, many tech sites simply recycle press releases and marketing material from Apple in lieu or performing critical analysis and independent research. Let's debunk some of the myths that I have found on some popular tech sites.

Myth Debunker 1: Apple's incremental upgrade is enough to kill the competition

Most of Apple's competition has shot itself in the foot by taking too long to come to market with a competitive device and appropriate marketing. Why? Who the hell knows, but that is how they run their business. Many of the Android vendors are in a totally different camp, though. They have a markedly superior OS which they bear very little (relatively) development costs for as well as the 2nd largest and fastest growing app market in the industry. In addition, they have the largest global and US reach for said apps. What you do not hear in the tech rags who proclaim how well Apple is doing against Android in the tablet arena is that there has only been ONE official Android tablet running a Google tablet OS released thus far, and that is the Motorola Xoom. It is sold out of every retail outlet that I have been to (and allegedly sold out immediately). The Xoom is acknowledged to be a very capable competitor by most reviews, although it needs some polish. The reason is that it is running BETA software. That is correct! Honeycomb (the Android 3.0 tablet OS) hasn't been released in AOSP (readily manipulable open sourced code) yet because it is still being polished. Motorola (like Samsung did by pushing Eclair 2.1 onto its tablet last year) decided to jump the gun by hacking beta code to get an early release. With this unfinished product it has produced what most consider a real contender (spec wise, it is the most capable tablet device in the retail channel). The finished Honeycomb code is due out in a few weeks, and with it a slew of tablet competitors who didn't want to take the risk of releasing unfinished software. This is why they are all coming out next month, and also why many features of the Xoom won't be ready until next month as well.

Putting all of this into perspective, one should realize that the first tablet either competes with or best the iPad, depending on taste and preference (the Samsung 7" Tab doesn't truly count since it ran cell phone software, again to gain mindshare from Apple, like Motorola is attempting). Looking at how rapid the Android hardware and software development cycle is in conjunction with how rapidly the space is commoditized by Android, it would be foolish not to realize that margins and prices will compress in near real time while tech and capabilities will spike in the same time frame. We are not talking years here, we're not talking a year. Not a quarter either. I mean literally months. Expect no less than two tech refresh cycles on Android before Apple gets to refresh once next year for the iPad 3, along with the commensurate margin compression. To clarify for those who are not getting the point, the iPad 2 is noticeably behind the Xoom in hardware performance and features - the Xoom has already been rooted and overclocked to 1.5 Ghz, which makes it faster than most desktops at mundane tasks. Apple is at least a generation behind in mobile OS capabilities in that the iPad is still just an enlarged version of the iPhone OS with very few differentiating features. I can tell you this from experience after owning several (7) iOS and Android products and thoroughly testing all - which I will demonstrate below.

Myth Debunker 2: The Honeycomb OS is subpar to iOS

This is absolutely nonsense. As stated above, Xoom is running BETA software and can compete easily. The biggest advantage of Android is that it is COMPLETELY customizable AND open. Almost anything that you complain about can inherently be modified, and modified to a great extent. The iOS interface is quite static and confining in relation. I actually have taken the time to prove this by taking a Barnes and Noble Nook ereader and customizing it to run head to head with an Apple iPad. I'll let you judge the results for yourself. This is not pie in the sky rocket science stuff either. My ten year old son helps me in the customization, testing (particularly the games, of which he is an expert) and configuration and has actually decided to start a business selling customized tablets and phones that easily bests anything anywhere NEAR their price range, up to almost double their prices.

Here's the spec sheet below, followed by a few videos that put these specs into real life, real people experiences. To enlarge to print quality, click the graphic to open in a new page, then click again to enlarge.

Note: It actually appears as if my Nook has 1 GB of RAM memory, in lieu of the listed 512k!

Myth Debunker #3: Apple owns the supply chain so no other manufacturer can match them in pricing

This is total bulls1t! If that is the case then why are so many Android phones surpassing the iPhone in features and capabities (both hardware & software wise) for not only the same price but significantly less. Anybody who truly believes Myth # 3 needs to spend some time around the HTC Android phones - subsidized at around $99, they run circles around the latest iPhone. After that, see the BoomBustBlog customized Nookie vs. the Apple iPad videos below. Hardware starting at $200, complete package is put together by my 10 year old (and he just turned 10, may I add) son for sale for under $300 retail. Own the supply chain my ass...

When such nonsensical rumors start making rounds in what I thought were respectable rags in the face of obvious and ample evidence to the contrary, that is when you know the Apple RDF (reality distortion field) is truly pumping at full throttle. Those that are really in the know know that looking towards the future, Apple is not the real threat. The CEO of the hardware side of the recent Microsoft/Nokia alliance (Elop) put it most accurately - recognizing what I have been saying for about a year now, and that is Google/Android is at the forefront of the mobile computing wars – according to Nokia's Elop: "Our first priority is beating Android!".

How is Elop going to address this by using Windows OS? He has to do more than just charge more, he has to produce better product at competitive prices, which keep getting lower. Elop will have to license the Widows OS, which is an expense, one that he would bear to nowhere near the same extent if he used Android. I feel he mistakenly looks at this as Google commoditizing the Android platform, in lieu of the more reasonable perspective of Google commoditizing the entire portable computer space. This is where most pundits are missing Apples Achilles' heel as well. Google can commoditize all day and night because they benefit regardless, as long as the masses are moved to the cloud - and they have willing partners (minions?) to assist in this process with the likes of Motorola, Samsung, LG, HTC, Sony, Acer, Asus, Dell, and about 120 other hardware vendors. Yes, I know Apple can design the hell out of its products from an aesthetic prospective. Yes, I do believe they hit the ball out of the park with the iPad when it was launched. Yes, Apple has very capable management. The fact still remains, they are not immune to the basic laws of economics, and Google's Android business model strikes Apple at its very weakest point - commoditization. Due to Apple's prominent position, this may not be evident to all, but it is more than foolish to deny it when the evidence is ascendant. Androids rise from last to first in a matter of a year and change should be more than enough to out more than just Nokia's management on alert. See some real world examples of the margin busting capabilities of the smart application of Android below. For the record, one of the videos below was actually edited and published on that $295 tablet shown in the video using Google's cloud services via Youtube.

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Cnet's Eric Franklin has put together a list of soldiers looking to fight on the front lines of the Tablet Commoditization wars. Remain aware that only one tablet running Google's Tablet OS has been released, just a few days ago, and it is already be touted as a viable competitor. Just imagine when things get rolling with the release of hundreds of tablets, all running arguably a superior OS to that of Apple's. Be aware that not only do I and my team of analysts crunch numbers regularly, not only do I spend nearly all of my workday on these products, I actually own and use BOTH platforms regularly. I talk to everyday people, everyday - inquiring into their preferences, perceptions and desires. Many pundits and analysts fail to do this.

Name OS Price Release date Screen size 4G?
Acer Iconia Tab A100 Android 3.0 Unannounced April 7-inch Unannounced
Acer Iconia Tab A500 Android 3.0 Unannounced April 10-inch Unannounced
Apple iPad iOS $400-$830 Available now 9.7-inch No
Apple iPad 2 iOS $500-$830 March 11, 2011 9.7-inch No
Archos 70 Android 2.2 $325-$380 Available now 7-inch No
Archos 101 Android 2.2 $350 Available now 10.1-inch No
Asus Slider Android 3.0 $500-$800 May 10.1-inch Unannounced
Asus Transformer Android 3.0 $400-$700 April 10.1-inch Unannounced
Asus MeMO Android 3.0 $500-$700 September 7-inch Unannounced
Dell Streak 5 Android 2.2 $300-550 April 5-inch No
Dell Streak 7 Android 2.2 $200-$450 April 7-inch Yes
HP TouchPad WebOS 3.0 Unannounced Summer 2011 9.7-inch Yes
HTC Flyer Android 2.3 Unannounced June 7-inch Yes
Maylong Universe M-150 Android 2.2 $100 April 7-inch No
Motorola Xoom Android 3.0 $600-$800 Available now 10.1-inch Yes
RIM Blackberry Playbook QNX OS $500 (16GB) April 7-inch Yes
Samsung Galaxy Tab Android 2.2 $300-$600 Available now 7-inch No
Samsung Galaxy Tab 10.1 Android 3.0 Unannounced Spring 10.1-inch Yes
T-Mobile G-Slate Android 3.0 Unannounced Spring 8.9-inch Yes
Toshiba Tablet Android 3.0 Unannounced June 10.1-inch Unannounced
Viewsonic Viewpad 7 Android 2.2 $415-470 April 7-inch No
Viewsonic ViewPad G Tablet Android 2.2 $580 April 10.1-inch No
Vizio Tablet Android 3.0 Unannounced April 8-inch Unannounced

Myth Debunker #3: The PC era is gone

The PC era is not gone, it is most definitely here to stay. It is just being shrunk to fit in both hands. Tablets are PCs, simply ask the inventor of the category, Microsoft - the PC software king. This would be obvious to all who think independently and objectively. What is soon to be gone and gone for good is the expensive, high margin PC. Yes, that includes expensive tablet PCs as well. When putting the Xoom through its initial paces, I thought to myself, "This is a fast, slick, and flexible tablet. It's just not worth $800 of my dollars. It is also not worth $600, nor $500, particularly considering what will soon be available for a lot less that can do as much or more." The same goes for the Apple iPad, and most of the other >$600 competition. Google's cloud computing for the masses, coupled with its disruptive open sourced Android business model has and will continue for the near future, to collapse margins at a spectacular rate while increasing the rate of technology adoption and innovation that will make Moore's law look like an understatement. As a matter of fact, it already has. Check out the computing power of the Nvidia quad core, 3d capable chip to the high and laptop of just 6 or 7 years ago. Over 1,000% increase in power at a fraction of the price and power consumption. The videos above corroborate my personal feelings that cute, pretty slates, beefy powerhouse slabs and competition crushing marketing prowess are cool, but most prefer strong performance at rock bottom prices. This sounds more and more like Android, unless Apple and Microsoft shift gears and do so quickly.

Apple has always thrived as a niche company, and entering a space that is being rapidly commoditized by Android is dangerous and at the very least guarantees margin compression. It is not as if money can’t be made in the space, but it is much easier to make money in the commoditized space when you don’t have to pay for the OS development, you know like the Android adopters. Witness the success of my historically favorite (at least for now) handset maker, HTC after they invested full on into Android and benefited from the commoditization of the high end smartphone…

The margins will shrink even further, even as revenues skyrocket. R&D costs will be massive. There were many who argued with this perspective throughout all of last year. Apple is the best, Android will never outsell Apple, etc. Well, come first quarter of 2011, Android has went from near zero to the market leader in all major markets. The argument that Android will not take over is now mute, it has already done so. Here is the complete analysis of smartphone and vendor handset growth up until Q3 2010. I will parse the numbers and release the most recent quarter soon, and make it available to subscribers. Be sure to scroll through the entire spreadsheet model below using the "<" and  ">" buttons in the lower area of the window. The model is very, very extensive!

[iframe https://spreadsheets.google.com/pub?key=0Ai5WJsM3KjltdGJKRkVRbGdod05pNnlxRW14SU9tTXc&hl=en&output=html&widget=true 620 450]

Benefiting from the mobile computing wars, regardless of the prospective winner!

Long list candidates

We have performed a scan to identify long opportunities in the electronics & semiconductors space that stand to benefit from the mobile computing wars. The scan was essentially searched for companies that are proxy play for the battle between Apple, Google and Microsoft. Our initial list included a set of 125 companies across the US, Europe and Asia, mostly in the following sectors - Semiconductor, Consumer Electronics, Communications Equipment, Integrated Circuits and Computer Hardware.

We performed value and growth analysis assigning rank to each company on various metrics bucketed into like categories (as below) and arrived at a final score for each company based on weighted average rank. The bucks and ranks were as follows -Valuation (20%) (Price-to-sales (3%), EV/EBIDTA (5%), one year fwd PE (6%), two year fwd PE (6%), Growth (15%) (EPS growth), Value & Growth (20%) (PEG ratio), Value (35%) (Net Cash / EV (17.5%) and Net Cash / Market Cap (17.5%)) and Profitability (5%) (Margin). We then excluded 55 companies which did not have ADR / direct listing in US. Of the remaining 70 candidates, we came down to a list of 29 companies based on the attractiveness of their business model, expected growth rate, valuation metrics, price performance, and profitability. We later performed a detailed historic analysis for each of these 29 companies to look into the past performance and see how these companies had performed over the last two downturns (2002-03 and 2008-09) by analysing revenue growth, gross margin and operating margin trends for these companies. After concluding the final analysis we have come down to a list of five candidates that we believe are in a sweet spot to play on the growing smart phone industry. Of the five stocks that we have listed,there are actually a couple that are recommended by the sell side as well - one of the few instances where we agree.

Subscribers should download - File Icon Long candidate #1 - Hardware: The Mobile Computing Wars. Click here to subscribe. There will be 4 more notes to follow over the next 48 hours, and potentially a full forensic report on our prime candidate. For those of you who have not followed me in the past, here is a description of who I am and what my accomplishments are - Who is Reggie Middleton!

Interested parties should also read "The Potential Equity Investments Most Likely To Prosper From the Google/Apple/Microsoft Mobile Computing Battle".

More Reggie Middleton on Google:

  1. The Complete, 63 pg Google Forensic Valuation is Available for Download

  2. Navigating BoomBustBlog Subscription Material To Find The Google Valuation Drilldown

  3. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours

  4. Google 4th Quarter Performance: Strong Performance, & Better Yet Healthy Investment Into The Business

For more realistic, objective contrarian views on the Google/Apple battle for the mobile computing space, see:

  1. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  2. Android is gaining preference as the long-term choice of application developers
  3. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  4. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  5. Apple on the Margin
  6. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
Last modified on Friday, 04 March 2011 10:17

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