Last month’s Consumer Electronics Show turned the spotlight on the new wave of hybrid devices, falling between the phone and the PC. Qualcomm and Freescale pushed their smartbook platform, while ereaders and netbooks continued to gather pace. Then Apple stamped its mark on the emerging segment, launching the iPad. So we can expect to see these new device formats taking a key role at Mobile World Congress too.
On one hand, they are highly attractive to vendors and operators, providing a new market where users’ affections, and even the look of the device itself, is up for grabs. But there is a dark side to this cloud ‘ for operators, tablets and smartbooks could overload the network even more than smartphones did. And for vendors, these products will be cannibals. A new study by Rethink Technology Research found that about three-quarters of their sales will be at the expense of the purchase or upgrade of another device ‘ in many cases one with higher price tags and margins than the tablet.
Vendors will hope these will be companion products, acquired in addition to a phone or notebook, but that means the prices have to be keen, to encourage consumers in a recession to invest in a non-essential item. Even Apple has come in with an iPad entry price far lower than most had expected, and a recent research note from Credit Suisse points out that ‘Apple management noted that it will remain nimble (pricing could change if the company is not attracting as many customers as anticipated).’ Remember, Apple slashed the price of the iPhone by $200 two months after it went on sale.
Apple stands to make margins of almost 43% on the new tablet, so has plenty of room for maneuver, but this will be less true of many other players as competition mounts. Freescale is already gearing its smartbook platform at sub-$199 devices.
The emerging device category will fall into three broad subsections, plus the ereaders. Although these are single-function, they have established many of the norms for the broader market, such as embedded wireless connectivity and integrated content stores. And some vendors, like Amazon, will extend their ereader platform into more general purpose products.
The three multifunctional categories, which will overlap, are the tablet (single-sided, large touchscreen product heavily geared to content consumption, from video to ebooks); the smartbook (often hinged, like a tiny netbook, with some local storage but optimized for web services as well as some downloaded content); the cloudbook (the newest category, to be pioneered by Google for its Chrome OS, and offering an ultra-thin client with little or no local data and apps, doing everything online via the browser and attached to the cloud).
Squeezed prices and margins may be acceptable if these hybrid devices are incremental purchases, but even worse for the suppliers, this will not generally be the case, especially in the first few years. Until at least 2013, consumer spending will remain under pressure, and there will be insufficient confidence in the thin client/cloud usage model for many people to rely on a cloudbook or tablet as their only PC.
These devices will total about 60 million unit sales by 2014 according to the survey, with a market value of $13.5 billion in hardware terms alone, plus about half that much again in directly related content/app sales. But about three-quarters of their sales will be at the expense of users investing in new PCs, netbooks or phones, or upgrading the ones they have. By 2014, only 18% of hybrid purchases will be as additional products, ie incremental revenue to the industry. So this will be a game of protecting margins by reducing costs, and of stealing share from rivals with innovative designs, usability features or content deals. About 16% of the potential netbook market will have been lost to smartbooks by 2013, and 5% of the smartphone segment.
In some cases the hybrids will represent a larger revenue or profit to the vendor than the more traditional gadget, or may steal a customer from another brand. But in others, as the PC world has already seen with the netbook, there will be a direct transfer from a higher value to a lower value product. This will put massive pressure on most vendors to push the cost base down quickly.
Email Peter White on [email protected] for an executive summary and purchasing information for the new report ‘Tablets, smartbooks and cloudbooks: First battlefield in the PC-phone wars’.