Apple iPad vs. netbooks, notebooks, smartphones

This is not just another review of how the iPad bridges the world of smartphones, netbooks and notebooks. Read this cost analysis of 3G enabled netbooks vs. the 3G iPad. How will Dell, HP, Acer respond? Some say the iPad is a game changer with a whole new category of OS and will no doubt cause the definition of PC to be revised. iPad could change everything. How will it change you? Some believe the advent of sufficiently powerful ARM-based processors, running enhanced smartphone operating systems, and offering an extensive list of applications represents a compelling new category of computing devices. The iPad, as the first successful entrant in this space, has the potential to be at the vanguard of this segment and become the benchmark for speed, ease of use, and elegant design that all subsequent offerings will be measured against. (See, also: Will iPad 3 get killed by Android and Windows 8?) This report by investment bank Needham & Co. will examine the iPad as a category creator: the first true instant-on /always-on device capable of bridging the world of smartphones, netbooks and even notebooks. Further, and perhaps more important, is how the very definition of ‘PC' may need to be revised. The real story This report is not intended to be yet another review of the iPad as a consumer device, with a litany of features the generation 1 device lacks (i.e., flash support, a camera, multi-tasking, less awkward name), but rather Needham & Co. has a higher purpose. Specifically, the firm wants to examine the iPad as a category creator: the first true instant-on / always-on device capable of bridging the world of smartphones, netbooks and even notebooks. Further, and perhaps more important, is how the very definition of ‘PC' may need to be revised. Market requirements For the vast majority of users, a PC is a means to an end. In Needham's view, the user seeks three basic elements:

1. the ability to run pre-installed applications (such as browsers, word processing, social networking...)
2. the ability to store files for quick retrieval; and
3. easy means of input and output of information from the device (whether a keyboard, mouse, touchscreen, printing, or some combination)

Users vary the level of each of the elements capabilities depending on the tradeoffs they are willing to make in order to have greater mobility, improved processing power, or higher storage capacities. Genealogy Neehham believes the iPad should not be viewed as just Apple's answer to Amazon's Kindle, a slick industrial design for the literature buff seeking to avoid paper cuts. Rather, the iPad is the product of the relentless transition to mobility and possessing (or having the access to) anything, anywhere, all the time in an instant-on / always-on device. Coming from the PC world, the first tentative (and expensive) moves into mobility, through both notebooks and later through cell phones, proved to the tech world the desire by consumers to be always accessible and have processing power outside of the home or office. Consumers were willing to sacrifice the degree of some of their three core user needs to have this mobility (such as slower speed notebooks for size and portability). Over time, smartphones developed, making the next crucial steps toward adding functionality to cell phones such as email, primitive web browsing... Originally tied to specific functions (such as date planners or just email) sophisticated operating systems began to be developed to achieve these features without overburdening the processing power available on what was basically a phone (lightweight, and power efficient being the operative words). This new category of OS will be essential later in our discussion. Improved ARM processors also began to appear, and (as we see with the A4 from Apple) now have PC-like functionality. Some vendors, such as Apple, successfully layered content onto smartphones and easily installed applications through iTunes and the App Store to make the user experience that more personal. Of course, this was not Apple's first attempt, with the touch screen Newton a colossal failure burdened with poor writing recognition, few apps, and the stylus requirement. Similarly, Microsoft has long been a proponent of tablets with little success. In its report, Needham believes this failure stems from a lack of compelling applications, a clear use case, and the inherent limitations of utilizing an operating system really intended for PCs. Nevertheless, the industry moved forward with other attempts to create categories of devices. Component cost reductions and improvements in processors, combined with an aggressive emerging Asian vendor base, led to the proliferation of netbooks (see Table 1).   Table 1: Worldwide netbook units as sub-segment of portables (2009 - 2013)   Netbooks represented another sacrifice as users gave up even more processing power, start-up times, and screen/keyboard size for a device that was (at least intended to be) lower cost and smaller / lighter. Many users seeking only occasional Internet browsing, email, or light word processing sought out netbooks (even through wireless carriers) as an alternative to larger notebooks or desktops. The successful development and refinement of multi-touch technology (now broadly applicable to notebooks, netbooks and smartphones) is changing the way users are able to input data and manipulate devices to access information. Users today are significantly more comfortable with this technology, and Needham believes more willing than ever, to embrace devices that solely have touch for input (which is different than when the Newton was launched). In Needham's opinion, the firm states in its report all of these technologies have gradually migrated both the technology supply chain to be able to produce iPad (and iPad-like devices) and the user to appreciate the functionality of the iPad in a way many tech bloggers and reviewers fail to recognize. What could be the impact from iPad? Like a Trojan horse, the iPad enters the home innocently enough on the coattails of e-books, email and browsing. But with true productivity software (iWorks) offering word processing, presentations and spreadsheets (that support Office) Needham sees more potential. The iPad offers its functionality within the iPhone OS environment already familiar to millions of users. (Read article on iPhone market share) Unfortunately for Microsoft, millions of users also have experience with its Phone OS (currently Windows Phone 7), and it remains to be seen if the same affection can be found. This leaves non-Apple OEMs such as Dell, HP and Acer to look to Android from Google or Linux for a legitimate, lightweight, open alternative that can have applications written from a vast, independent community. So how should Dell and HP respond? It is always easier to stay out than get out. Needham believes the other OEMs should wait to see how the market reacts to the iPad, its real life use cases and the requests for additional features. Western Digital is the master at letting the market develop before entering with exactly what is necessary. The report goes on to state Needham believes the other OEMs can effectively create a new category form factor, making Needham somewhat less interested in the first Mini 5 from Dell (roughly 5 inches reportedly) for example. These will be expensive devices, and users will likely not chose to be adventurous. Needham also expects Dell to expand this Mini line beyond the Mini 5, but at the moment, the Mini 5 seems to answer a question no one asked (too big for a phone, too small to create content, not that much bigger than an iPhone for movies). At the end of the day, even Apple's 10-inch iPad, is consistent with both book sizes and some of the most popular netbooks. Alternatives taking more of a slimmed down netbook approach are also likely doomed for failure (i.e., Atom-powered running a watered-down traditional PC OS). Merely the fact that the user must boot the device could be a deal breaker (vs. always-on), but slower overall performance, an extremely small Windows taskbar that must be manipulated by hand may be less of a factor in a more full scale device become debilitating here. Overall, Needham writes in its report it is apparent that this class of tablet device the iPhone has started that utilizes a smartphone OS, is powered by an ARM-based processor, and yet has the capability to run both entertainment and productivity apps has significant potential to disrupt the Wintel world. Cost analysis: 3G enabled netbook vs. 3G iPad As mentioned above in Table 1, the industry analyst community continues to have high expectations for the netbook to grow in the coming years. However, Needham believes that most netbook buyers (once again using the firm's three core requirements) were looking for lightweight Internet browsing and email, and might consider the switch to an iPad, especially if updates can be done without another computer. Many netbooks have been returned following disappointing performance. The data plans also present a stark contrast between netbooks and the iPad. (Read: 'Fault lines in iPad teardown cost analysis) Unlike netbooks that are tied to multiyear contracts with wireless vendors, the 3G iPad has no long-term contract, which significantly drives up the price comparison for the netbook (see Table 2). The lack of a 2-year contract is further enhanced by an unlimited data package for less money, vs. a 5GB max under Verizon.   Table 2: Netbook vs. iPad price comparison   Time will tell what the OEMs arrive at for future table / slate devices, but with Apple breaking the contract monopoly of AT&T, Needham expects a very competitive marketplace for data plans in the coming years. Goodbye netbook. We hardly know you With the casual Internet user and road warrior potentially seeing the cost advantages of the iPad, Needham believes the netbook is susceptible more than any other PC device. While the segment was likely to be under pressure regardless in 2010 and 2011 from a corporate PC refresh that will skew towards desktops and mainstream notebooks, Needham expects the iPad and similar devices to further constrain growth potentially as soon as this year. The report states it is difficult at this stage to assess just how much of a mix shift away from netbooks could occur, but over time, the bank mentions it would not be surprised to see half of the iPad / tablet market comprised of former or potential netbook buyers. In terms of the corporate buyer that needs more content generating capabilities, this segment could migrate more to the ultra-thin market, where slim form factors with low-power processors have better performance than netbooks, and come with traditional screens and full-sized keyboards. Either way, the netbook's days of providing the bulk of growth within the PC market are likely past. Now let's take one step further... One of the most interesting elements of the iPad as a content generating device is how Apple's iWork applications (Pages, Numbers, and Keynote) can store files on iwork.com that can be accessed from any authorized user device. This is the cloud in action, and may allow lower capacity versions to be sufficient. The combination of the cloud storage dynamic and a form factor unlike traditional PCs and notebooks, further distances the market away from the legacy PC world. Looking further down the road, Needham sees the arrival of the iPad (and similar devices) as a watershed event that is likely to be followed by more radical changes in breaking the Wintel logjam. Specifically, one of the private companies Needham is particularly close to (read: Needham likely has money invested in the company) is nComputing (www.ncomputing.com), a provider of virtual desktop solutions at extremely low cost. One of the nComputing's more interesting products is its Numo chip that is now being embedded within LG televisions and other consumer and enterprise devices. The ability to deliver PC functionality within an Android OS (for only the cost of a $20 chip) and away from the traditional form factor of a PC is compelling and infectious Needham believes. The bank continues by assuming it is not difficult for consumers to imagine adding onto current cable or DSL service PC processing power delivered through our existing cable boxes. Needless to say, if we can run PC applications, store files, and print, is it not a PC? The answer to these questions could potentially bring about the second PC revolution and broaden adoption to many billions around the globe. To achieve this, bandwidth must be enhanced, data centers scaled, and storage increased. It will be an exciting time for innovative technology companies and investors. To be clear, Needham does emphasize the firm does not believe that powerful local devices (desktop, notebook or otherwise) will be eliminated, but rather it expects new categories of devices, such as the iPad and virtual PCs delivered in non-traditional ways, to represent a growing percentage of PC users and push the boundaries of the industry definitions. Ultimately, it will likely be the PC OEMs themselves that are forced to adapt and contribute to this change (whether organically or through acquisition). Once this change is underway, Needham expects the productivity explosion that happened in the U.S. and other industrialized countries to spread to regions hampered by lower per capital income. (Read article, 'China iPhone market demand projections') Conclusion The iPad, as the first successful entrant in this new product category or space, has the potential to be at the vanguard of this segment and become the benchmark for speed, easy of use, and elegant design that all subsequent offerings will be measured against. The traditional PC market is poised to respond with dozens of tablet / slate designs, however, Needham still expects the netbook to be a casualty in this battle to expand the definition of a PC. Bottomline, Needham expects that during the next 5 years the form factors offering PC functionality will change radically and set the stage for the next major expansion of the PC market. Welcome to the dawn of the age of instant-on / always-on computing. Source: Needham & Co., IDC, Verizon, Apple, VentureOutsource.com, April 2010