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Seven Reasons the Apple iPad Will Remain King of the Tablets

Companies / Tech Stocks Mar 02, 2011 - 08:58 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleDavid Zeiler writes: Apple Inc. (Nasdaq: AAPL) today (Wednesday) is expected to launch the iPad 2 - the latest iteration of a tablet device that has revolutionized the mobile computing segment.

Indeed, while most of its competitors have yet to release even their first tablet attempt, Apple is already at work on its third, which shows just how entrenched Apple's lead is in this relatively new and fast growing market.


The debut of the iPad last year ignited a tablet market that had languished for nearly a decade. Apple sold 3 million iPads in the three months following the device's April release, compared to just 2 million total tablets sold in all of 2009.

As with the iPod and iPhone before it, the iPad transformed its market and established Apple as its trendsetter.

Research firm IHS iSuppli (NYSE: IHS) expects sales of media tablets like the iPad to skyrocket from 17.4 million units worldwide in 2010 to 202 million in 2015. It sees the overall tablet market (which includes "PC-type" tablets with more robust computer abilities) to grow from 19.7 million in 2010 to 242.3 million in 2015.

With so much potential in this relatively new market, competitors - such as Samsung Electronics Co. Ltd. (PINK: SSNHY), Hewlett-Packard Company (NYSE:HPQ) and Research in Motion Limited (Nasdaq: RIMM) - are releasing tablets of their own.

However, the iPad's competitors, even those using Google Inc.'s (Nasdaq: GOOG) Android operating system, face an uphill battle in their quest to knock Apple from its early dominant position in the tablet segment of mobile computing.

It's true that the iPad's share of the tablet market dropped to 75% in the fourth quarter of 2010 from an unsustainable 95.5% in the third quarter. But it's likely that iPad sales will stabilize at a high level, with Apple holding at least 50% of the market for years to come.

Here are seven reasons why...

The Superior Seven
1. Apple's Head Start: The iPad was so radically different from previous tablets it essentially created a new product category. That immediately put all competitors in catch-up mode, just as the iPhone did to cell phone makers in 2007. With the iPad established as the standard, rivals must come up with markedly better products to lure customers away from Apple - "just as good" won't be enough, as Microsoft Corporation (Nasdaq: MSFT) discovered when the Zune couldn't budge the iPod in the MP3 player market.

Better still, the iPad's early lead has resulted in an unexpected beachhead in the business market - historically a segment Apple has ceded to companies like Microsoft and Dell Inc. (Nasdaq: DELL). Almost two-thirds of companies in the Fortune 100 have either deployed or tested the iPad, despite very little push from Apple.

Barclays Plc (NYSE ADR: BCS) analyst Ben Reitzes calls it "the consumerization of IT" - employees bringing their iPads to work have jump-started wider corporate adoption.

"We believe Apple has a large lead in terms of driving this trend, while it presents challenges for traditional PC vendors," Reitzes told All Things Digital.

Now, as Apple unleashes the second version of the iPad, most competing tablets haven't even made it out the door. Only Samsung (Galaxy Tab) and Motorola Solutions Inc (NYSE: MSI ) (Xoom) are currently shipping tablets considered worthy iPad alternatives. We're still waiting for RIM's PlayBook and HP's TouchPad, among dozens of others. And you can be sure Apple is already working on the iPad 3.

2. More Software: The App Store launched in July 2008 to service the iPhone market and quickly became a hit with developers, who flooded it with free and 99-cent apps. Google's Android Market, though launched just a few months later, lagged far behind until last year. Still, the Android Market offers only about half as many apps as Apple, while the rest of the field barely registers on the radar.

3. Better Integration: Apple makes the iPad's hardware as well as its iOS operating system, allowing it to maximize performance and the user experience. Hewlett-Packard, having acquired the WebOS when it bought Palm last year, will also try this approach. However, HP lacks Apple's decades of experience and is unlikely to execute it as well. RIM has some experience integrating the hardware and software of its BlackBerry line, but the PlayBook will be its first attempt at a product that isn't a phone. And the PlayBook's operating system is new to RIM as well - it will be based on the QNX OS it acquired last year from Harman International Industries Inc./DE/ (NYSE: HAR)).

4. Market Fragmentation: The proliferation of operating systems - you can add Windows to the list of Android, QNX BlackBerry and WebOS - and even more manufacturers (at least 40 companies have announced tablets or plans for one) will baffle and overwhelm customers. With the tech media pitching in by comparing every new tablet to the iPad, Apple becomes the one distinguishable constant in a sea of me-too competitors.

5. The Apple Brand: Apple has for years positioned itself as a premium brand with higher quality products and a seamless user experience. Success with the iPod and iPhone, coupled with a resurgent Mac business, has ingrained this concept into consumers' minds. Many consumers perceive Apple as the company that makes the best computers, MP3 players, smartphones - and now tablets.

6. Built-in Customer Base: By the end of 2010, Apple had sold 150 million iPhones and iPod Touches, which use the same iOS as the iPad. Most of those customers have a significant collection of apps that also run on the iPad, a strong incentive to stick with Apple. In January industry analyst Asymco estimated that the 10 billion total downloads from the App Store worked out to 60 apps for every iOS device ever sold.

7. Pricing: All that said, Apple's greatest advantage over its competitors is in pricing. Apple generally charges a premium for its Macs and iPhones, but it has worked hard to keep down the iPad's price.

Of the handful of competing tablets so far, those that cost significantly less than the iPad, such as Samsung's Galaxy Tab, have smaller screens (7 inches versus 9.7 inches). Motorola's Xoom has a 10.1-inch screen, but costs a bit more. So far Apple has kept the iPad competitively priced, and has the means to continue to do so.

Apple has steadily refused to spend any of its ever-growing pile of cash ($60 billion as of December 2010) to pay a dividend or buy back stock. Instead it has used its cash sparingly for strategic acquisitions and large-scale deals with parts suppliers. The iPad has been a beneficiary of both - the key to its uncharacteristically competitive price.

Apple for years has made cost-saving deals with suppliers of flash memory to equip its iPods and iPhones (and now the iPad). In fact, it is the world's largest flash memory consumer. Last month reports surfaced that Apple had used $3.9 billion of its stash to forge a deal with suppliers of touch-screen displays.

Another piece of the component puzzle was put into place in 2008 when Apple bought a small chip design company named PA Semiconductor. Engineers from PA Semi designed the Apple-branded A4 chip that powers the iPad. Keeping the chip design in-house saves Apple more money.

Apple's economies of scale and legendary vertical integration give it unusually strong pricing power with the iPad - an enormous advantage.

Said CEO Steve Jobs at Apple's earnings conference call in January:

"The iPad incorporates everything we've learned about building high value products from iPhones, iPods and Macs. We create our own A4 chip, our own software, our own battery chemistry, our own enclosure, our own everything, and this results in an incredible product at a great price. The proof of this will be in the pricing of our competitors' products which will likely offer less for more."

Source : http://moneymorning.com/2011/03/02/...

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