August 24, 2010 – Portable Devices: Smartphones, and Tablets and Netbooks, Oh My!

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Market forecasters project dramatic growth in portable electronics.  However, the combined expectations for smartphones, e-readers, tablets, netbooks and notebook PCs appear collectively rich, despite declines in other consumer electronics categories, and presuppose only modest market share shifts between these products.  We believe that advances in wireless network speeds and availability, and the emergence of powerful cloud-based applications will obviate the need for a full PC platform for the large majority of users.  At the same time, single-application devices will likely peak and begin to decline, as general purpose platforms achieve performance thresholds and absorb functionality.  We see smartphones and tablets as the biggest beneficiaries – the large majority of consumer PC usage is spent in activities that do not require intensive keyboard input, with the fastest growth amongst social networking applications that gain significant benefit from the portability of those platforms.  For users requiring full keyboards, we believe the rise of faster networks and better cloud application suites will boost netbooks over notebooks

Combining the forecasts for all of the various portable electronics categories paints a rosy picture – 12.6% annual unit growth – that may not take into account the cross-category cannibalization that we believe is inevitable.  In particular, the gentle mix shifts that are implied seem unrealistic given the history of wrenching change – e.g. the rise and fall of paging, the sudden death of the walkman

To that end, we believe that PC based platforms will suffer from a mix shift toward non-pc smartphone, tablet and netbook categories.  The emergence of effective cloud-based applications with access to seemingly unlimited storage and processing capability, enhanced by fast and available 3G networks and the pending launch of even faster 4G networks should render objections to lower-power non-PC platforms moot.  Users conditioned to seek the big hard disks, copious memory and ever faster processors, will gradually place greater value on portability, battery life and cost, playing against the strengths of the Windows/x86 PC architecture

Single application devices, such as music players, point-n-shoot cameras, pocket camcorders, e-readers, or personal navigation devices, face relegation from mass markets to niche markets as their functionality is co-opted by increasingly capable multi-application platforms.  The histories of pagers, PDAs, calculators, and word processors are cautionary tales for analysts predicting happy futures for their analogous antecedents.  In some cases, stand alone devices will persist either for cutting edge aficionados, like professional-level SLR cameras, or embedded in long design cycle products, like automobile navigation systems.  Otherwise, RIP

Consumer computer usage is trending strongly toward applications that do not require intensive keyboard input and can be effectively served via cloud platforms – i.e. social networking, streaming media, e-commerce, search, e-reading, image viewing and editing.  Many of these applications gain added value from mobility, further fueling the market momentum of smartphones and the re-energized post-iPad-intro tablet market, vs. keyboard attached netbooks and notebooks

Recent market trends on netbooks have been discouraging, as consumer and enterprise users with data input needs continue to reach for an extra helping of hard-disk space, processor speed, and Microsoft Office along with their keyboards.  We believe that this is due to a combination of inertia and the not quite yet adequate performance of cloud applications over current networks relative to traditional software suites.  However, this is not a permanent condition – RescueTime reports leading edge users abandoning Office for the cloud-based Google Docs.  Moreover, 4G networks will initially deliver a five-fold improvement in wireless speeds, with the promise of a further tenfold improvement over the next decade, dramatically improving the performance of cloud apps and thus, more portable and cheaper alternatives to the traditional notebook PC

We expect these trends to favor the champions of smartphones, tablets and to a lesser extent, netbooks – e.g. Apple, Google, Qualcomm, Broadcomm, ARM, HTC, Samsung, Motorola, etc..  Also advantaged will be providers of cloud based applications – e.g. Google, Apple, Netflix, Facebook, Twitter, Salesforce.com, Success Factors, NetSuite, Amazon, etc..  Meanwhile, the success of companies with exposure on both sides of this battle – e.g. HP, Dell, etc. – will depend on their ability to manage the transition to a new mobile paradigm.  Finally, companies anchored in the traditional PC-centered model – e.g. Intel, Microsoft, Lenovo, Acer, Asus, Western Digital, Seagate, etc. – will need dramatic change to thrive in the future

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