The accelerating transition to mobile computing devices – such as smartphones and tablets – will drive tech companies to adapt to shifting consumer preferences or risk getting left behind.
Although they haven't yet tossed out their desktop or laptop PCs, more and more people are adopting mobile devices for such activities as checking e-mail, browsing the Web, playing games and interacting with social networks like Facebook and Twitter.
"The post-PC era represents a change in consumer behavior. It's not just the device. It's the social behavior. It's a social trend," Forrester Research analyst Sarah Rotman Epps told USAToday. "The post-PC era represents a social shift and a technology shift."
Evidence of this transition abounds:
- The global smartphone market will grow 49.2% in 2011 following a 74% spurt in 2010, according to market research firm IDC. Meanwhile, Gartner Inc. believes the smartphone market will surge 58% this year.
- Data consumption (such as Web browsing and streaming media) on U.S. wireless carriers like Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) is expected to grow by a factor of 30 within five years.
- IDC predicts 44.6 million media tablets shipping worldwide in 2011, with 70.8 million shipping in 2012. And IHS iSuppli foresees the media tablet market reaching 242.3 million by 2015.
- Annual conferences aimed at those who write apps for the top two mobile operating systems sold out in record time this year – for Apple's June WorldWide Developer Conference (for iOS) in 12 hours; and for Google Inc.'s (Nasdaq: GOOG) May I/O event (for Android) in just under an hour. Tickets for both events have been selling on eBay (Nasdaq: EBAY) for triple their face value or more.
Companies at the forefront of the mobile computing revolution – which includes those taking part in the manufacture of tablets and smartphones, as well as those involved in e-commerce, wireless networking, and cloud computing – will be positioned to reap hefty profits.
Can't Touch This
The sudden rise of touchscreen tablet PCs last year turbocharged mobile computing, which already was getting a strong push from smartphones. With the iPhone and iPad, Apple set the tone for both and appears set to dominate the tablet market at least through 2011.
In April 2010, Apple took the moribund tablet PC market – only 2 million were sold in 2009 – and claimed it as its own, selling 15 million iPads in nine months.
Although Apple's slate-style tablet isn't great at content creation, it offers a superior experience for content consumption, which is the main attraction of tablets.
"The key isn't what tablets do, it's how they do things," writes PC Advisor in its tablets buying guide. "The idea has been to focus on the few things people want: Web browsing, email, Facebook, photos and videos, and to do these things in a simplified manner that makes tablets a joy to use."
It may be too soon to identify any winners in the tablet segment beyond Apple; the limited offerings on the market, such as Samsung Electronics' (PINK:SSNLF) Galaxy and Motorola Mobility Holdings Inc.'s (NYSE: MMI) Xoom have only been available for a few months. Reports of sales have been sketchy, with rumors hinting that units are not moving quickly.
Meanwhile, Apple has struggled to keep up with demand for the iPad 2, which was launched a month ago.
"As Apple is defining the tablet category on an economic model similar to the iPod, we expect the tablet competitive landscape to shape up around a dominant market share for Apple, fragmented competition and a huge ASP (average selling price) gap between Apple and other players," Pierre Ferragu of Bernstein Research wrote in a report to clients.
Conspicuously absent at the moment is Microsoft Corporation (Nasdaq: MSFT), which has promised that the next version of Windows will come in a tablet-friendly flavor. However, Windows 8 is not expected until late 2011 or early 2012.
That leaves some hardware makers, like Dell Inc. (Nasdaq: DELL), building tablets using Windows 7, which is not optimized for touchscreen tablets, or waiting for Windows 8. HP has dodged the issue by using its own operating system, the WebOS it acquired when it bought Palm last year.
But some analysts see Microsoft making a dent in the tablet market when Windows 8 does arrive, putting the companies using Android – Samsung, Motorola, among others – at risk.
"Windows is consumers' No. 1 preferred operating system for tablets," Forresters' Rotman Epps told USAToday. "And yet Microsoft's partners have failed to deliver a Windows experience on tablets that competes with the touch-first, always-on, instant-on experience of the iPad."
Investors seeking to try to capitalize on the tablet explosion may be better served by taking a look at the component suppliers.
Semiconductor companies that make the chips inside the devices include Qualcomm Inc. (Nasdaq:QCOM); NXP Semiconductors NV (Nasdaq: NXPI); Texas Instruments Incorporated (NYSE: TXN), which announced last week a deal to buy National Semiconductor Corp. (NYSE: NSM); STMicroelectronics N.V. (NYSE ADR:STM); and Broadcom Corp. (Nasdaq:BRCM).
Smartphones Neck and Neck
Although tablets have gotten most of the media attention over the past year, smartphones are by far the most pervasive mobile computing product. Handset makers will ship 450 million smartphones worldwide this year, compared to 303.4 million in 2010, according to IDC.
The smartphone market is much more of a horse race than the tablet market, however. Apple jolted the market in 2007 with the iPhone, but rivals have developed compelling alternatives.
In fact, breaking the market down by operating system, phones using Google's Android have taken the lead, though it's very close. Android phones lead with 29% of the U.S. market as of January, according to market research company Nielsen Holding NV (NYSE: NLSN). That's left Apple and RIM's BlackBerry tied with 27% each.
But while the three major players are close now, the 2010 trend lines show Android rising, BlackBerry declining, and Apple more or less holding steady. Android leapt from 7% in December 2009 to 27% in December 2010; BlackBerry fell from 35% to 27%; and Apple inched up to 28% from 27%.
If Android keeps gaining market share, the top three Android handset makers – HTC Corporation (PINK: HTCXF), Motorola, and Samsung – figure to benefit most.
But what of Microsoft?
As with tablets, Microsoft is something of a wild card. After ridiculing the iPhone in 2007 instead of redoubling its own efforts at developing a mobile operating system, Microsoft fell behind. Many of its partners dropped Windows Mobile for Android (which was both better and free), dropping its U.S. market share to 10%.
But you can never count Microsoft out.
In February, Microsoft and Nokia announced a partnership that will put Windows Mobile 7 on Nokia devices starting early next year. The deal should help both companies, since Nokia's Symbian operating system is inadequate for today's smartphones and Microsoft needed a new hardware partner.
If a prediction by IDC pans out, the partnership could rock the smartphone market. IDC sees worldwide share for Windows Mobile rocketing to 20.9% in 2015 from 5.5% this year, with Android edging up to 45.4% from 39.5% and Apple slipping a bit from 15.7% to 15.3%.
Again, the biggest winners in the smartphone race will be the component suppliers, essentially the same group of companies that make the tablet components.
Making the Connection
Of course, hardware is only half of the mobile computing story. Advances in software and wireless connectivity have enabled the mobile revolution just as much as innovation among the device makers.
Perhaps the most important external element to mobile computing is the wireless networks such as Verizon, Sprint Nextel Corporation (NYSE: S), T-Mobile and AT&T.
After successfully managing the transition of collecting the bulk of their revenues from landlines to cellphones, the carriers now face another sea change, as free Web-based calling services threaten to upend the current revenue model.
Fortunately, the carriers already charge many mobile computing customers for Web access, which will become an even greater portion of revenue in the future.
In the last five years, the carriers' revenue from data consumption has increased five-fold to $46.8 billion. That consumption will grow an average of 92% in each of the next five years, according to networking equipment maker Cisco Systems Inc. (Nasdaq: CSCO).
It would seem a revenue bonanza, but the carriers have struggled to keep up with the demand on their networks. Collectively the carriers spend $200 billion a year on infrastructure – and yet connectivity issues persist.
The carriers are now building out new 4G networks, which promise not only greater speeds, but also 20 times the capacity of the current 3G networks. Unfortunately, by the time the 4G networks are complete in 2015, data traffic will have grown to match it.
Much of the traffic will be driven by users accessing data in the cloud, mostly by streaming music and video.
"There's a tidal wave coming … that's being carried by these 4G networks and cloud computing environments," AT&T chief Randall Stephenson said at the Mobile World Conference in Barcelona in February.
Solutions are few. One thing that will help is the additional spectrum the government has made available for mobile broadband.
Innovative technology, such as Alcatel-Lucent's (NYSE: ALU) lightRadio cube-shaped microcell, could also help by creating more access points in areas of concentrated use.
AT&T is taking the quick and easy route to expanding capacity by attempting to purchase rival T-Mobile from Deutsche Telekom AG (PINK ADR: DTEGY). If that deal goes through, it could give AT&T a significant edge versus Verizon and put tremendous pressure on what will become the distant No. 3 carrier, Sprint.
With the popularity of smartphones and tablets soaring, mobile computing is growing at an exponential rate. The companies that have moved quickly to exploit this growth should profit handsomely from it.
With the iPad, Apple Inc. (Nasdaq: AAPL) has a huge lead and solid ecosystem in the tablet market, making it a solid play despite its run-up in price over the past year. Apple is also well positioned to benefit from the continued growth in the smartphone market with the iPhone.
The top Android handset makers, Samsung Electronics' (PINK:SSNLF), HTC Corporation (PINK: HTCXF) and Motorola Mobility Holdings Inc.'s (NYSE: MMI) should gain from Android's rapid increase in market share this year.
AT&T Inc.'s (NYSE: T) purchase of T-Mobile should give it the edge in the mobile broadband race assuming that regulators approve the deal. But prospects look dim for Sprint Nextel Corporation (NYSE: S), destined to be the distant No. 3 carrier in the United States.
The biggest winners of all may be those companies that make the components for mobile computing devices. Corning (NYSE: GLW), which makes the Gorilla Glass used in most tablets and smartphones, is a particularly good bet.LG Display Co. Ltd. (NYSE ADR:LPL) and Toshiba Corp. (PINK:TOSYY) make the LCD screens.
Other companies that figure to benefit are the semiconductor manufacturers: Qualcomm Inc. (Nasdaq:QCOM); NXP Semiconductors NV (Nasdaq: NXPI); Texas Instruments Incorporated (NYSE: TXN), STMicroelectronics N.V. (NYSE ADR:STM); and Broadcom Corp. (Nasdaq:BRCM).
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