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If Apple's iPad Wins, Who Loses?


What's in store for Microsoft, Dell, Intel, and others.

I woke up to the headlines:

1. Lines Form Outside Computer Store -- Excited Apple Customers Clamor for New Computer.

2. Apple and Adobe in Dispute Over Display Technology -- Users Caught In Crossfire.

3. Revolutionary New Product Causes Analyst to Materially Raise Estimates for Apple.

But gas up your DeLorean -- those were headlines from the late 1980s.

The store was ComputerLand. The computer was the Apple (AAPL) Mac. And the dispute with Adobe (ADBE) was Postscript versus TrueType.

George Santayana ("Those who cannot remember the past are condemned to repeat it") is rolling over in his grave.

Yes, given the speed at which it mutates, our particular industry history is unlikely to repeat itself exactly bit for bite. Perhaps the better relative observation was Mark Twain's -- that history might not repeat itself, but it does rhyme.

Typically, industry forecasts around new markets/products rarely, if ever, come close to being accurate. Analysts know that just like picking Final Four brackets, no one goes back and holds their feet to the fire for ridiculously optimistic estimates. And everyone loves an "optimist"!

So, for those of you too young to remember vividly the turbulent PC times of the late 1980s and early 1990s, as this industry evolved from teenager to adulthood, a quick reminder… (and for those of us that did, a moment for cautionary pause...)

The Future Is So Bright, I Gotta Wear Shades

As I cruised through the fluorescent glowing iPad analyst estimates Monday morning, it seemed as if each one had a higher estimate than the next for 2010 unit sales. Not to mention 2011. The first proclaimed 5.5 million units (Piper -- 600,000 to 700,000 first day!). The second, 7 million (iSupply), and the third, 8 million to 10 million (Wondelich).

Then I read Apple's comment that it had sold "more than 300,000 on launch day." Whoops…

These sell-side analyst estimates make me shake my head. Again.

But Apple is always conservative, right?

Yes, it's boring, but do the math. If Apple sells 5 million units in 2010, it will have stormed into about 25% of the $11 billion / 33 million unit netbook market. Okay, that seems perhaps possible. If it sells 7 million or 8 million, its market share leaps closer to 40%.

That would be history breaking -- especially for a "nice-to-have" about $600 consumer device in a slow economy.

The iPad is going to expand the netbook market by some factor, clearly. One of my own Marker Advisors partners actually stood in line for one; or more accurately, had his offspring stand in line. Nevertheless, at the present time this market is far more of a zero sum game than most people realize.

So, if the iPad wins (even 5 million or 6 million 2010 units), who loses?

The ASP for netbooks is around $300 to $350/per (33 million units and $11 billion in revenue). The iPad ASP is about $600 (plus accessories). From a price standpoint, it's closer to a typical low-end notebook than to a netbook.

We noticed Microsoft (MSFT) was selling off late last week. It appeared the market was working to discount this very equation. Many seem to be arguing "If the iPad wins, wouldn't it be Windows that loses?"

Windows runs on the majority of existing netbooks (XP anyway), and almost all the existing notebooks. So yes, potential iPad success is likely to take some share from Microsoft. However, by that token, it's also likely to take at least some share from Apple's Macbook.

Been reading a lot about that?

The iPad is unlikely to be a material short-term threat to Microsoft revenue, given the fact that Ballmer & Co. are in the early innings of a historic enterprise product rollout that they are only just starting to monetize. Any loss of the significantly smaller netbook share, in the short term, will be overwhelmed by the success of Windows 7, Windows Server, SharePoint, Exchange, Office (and more) upgrades.

More pressing as it relates to potential threats on Microsoft, we see serious longer-term pressure created by this new generation of netbooks, not singularly the iPad. The greater concern is the likely response by good Microsoft customers -- Hewlett-Packard (HPQ), Dell (DELL), the Japanese and Chinese manufacturers, etc.

They're likely to produce netbooks architecturally similar to Apple's -- ARM-based processor, Solid State memory, and a Unix-based O/S (Linux, Android, Chrome). Not Intel (INTC), Seagate (STX), and Microsoft.

We'll spend more time detailing the "why" in the future, but the bottom line is simple: lower cost. ARM/Linux is a small fraction of the cost of WinTel. Solid State Storage is more expensive (for now), and manufacturers will have to make up for this cost increase somewhere.

Yet the operative word here is "longer term". There are indeed storm clouds on Microsoft's horizon, but the giant has a year or two of great weather before these roll in.

Back to Apple...

In the short run, we expect the Apple faithful to buy the iPad in droves... but decelerate as competitors respond, at pricing more typical to current netbook costs. Two years from now, we would be very surprised to see Apple garner anywhere close to 40% of this market.
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