Quick Thoughts: Begun, The Tablet War Has!
– Apple, Google, and Microsoft are dreaming of a tablet Xmas, with differentiated products aimed at an increasingly segmented market.
– Google is using thin margins and engineering triage to undercut Apple from iPhone to iPad by 20-50% with Nexus products that narrow Apple’s advantages
– Surface has great promise as a real productivity tool, but could be slow out of the box due to software availability
– Scott Forstall’s exit was inevitable, but still a major loss for Apple as it grapples with integrating cloud-based functionality to its user experience.
Greetings from downtown NYC Zone A with a full charge on my Galaxy Tab. The daily trek uptown to scrounge power is surreal – kind of like Mad Max, except everyone is pretty polite about it. Still, underneath the avalanche of Sandy news and electioneering, there has been a lot going on in the TMT universe. So thanks to LTE and my hard working associate Artur, who has power, water and a working PC with broadband access in Stamford, I can offer some thoughts on TMT news this week including new tablets from Google and Microsoft as well as a management shake-up at Apple.
Google cancelled its major New York press event Monday because of the storm but pressed on announcing its new line of Nexus devices via blog post: the Nexus 4 (a smartphone), the Nexus 10 (full size tablet), as well as a refreshed and lower priced version of the Nexus 7 (mini tablet). With the Nexus line, Google is going for the jugular with a low margin strategy to deliver performance at a lower price point than Apple. While the Nexus arsenal matches and even surpasses the performance of Apple’s line of iPhones and iPads on many benchmarks and specs, Google had to make tradeoffs on others to balance the user experience with its price point objectives.
In terms of Smartphones, the Nexus 4’s quad-core Qualcomm Snapdragon processor is very likely faster than Apple’s dual-core A6 chip on the iPhone 5. Nexus 4 also offers a higher resolution at 1280 x 768 versus iPhone5’s 1136 x 640, a comparable pixel density, and more battery capacity at 2100 mAh versus 1433 mAh. And with a $349 price point for an unlocked version of the 16GB version, it undercuts the latest iPhone by $300 without subsidies. The key tradeoff? Google is taking an unusual step by offering the Nexus 4 sans LTE in order to offer flagship performance at a discount. LTE chipsets are the second most expensive component behind displays on the average smartphone bill of materials and forgoing the technology can take down the BOM by as much as 10%. Also while LTE is becoming more widely available in the US, deployment is still nascent in much of the world. The bodes well for the device’s success in European markets where carrier subsidies tend to be smaller and the phone distribution channel would favor lower priced unlocked handsets. It remains to be seen whether American consumer tastes will favor a high performance smartphone without LTE support.
Moving to tablets, the Nexus 7 tablet was refreshed a little over three months after its initial release in the wake of Apple’s iPad Mini announcement. Like the Nexus 4 it too offers a faster processor than its Apple counterpart with NVIDIA’s quad-core Tegra 3 versus the dual-core A5 in the iPad Mini. It also makes a tradeoff with a smaller display at 7” versus Apple’s 7.9” and a plastic bezel while Apple features glass and aluminum. But despite being slightly over 3mm thicker, the Nexus 7 has a superior display with higher resolution and pixel density than the Mini. Sacrificing glamour for added performance, Nexus 7 undercuts the 16GB Wi-Fi version of Apple’s iPad Mini by $120 and the iPod Touch by $100. The larger and newly announced Nexus 10, ups the ante on Apple’s Retina display with a pixel density of 300ppi versus the latest iPad’s 264ppi. It also offer stereo speakers compared to Apple’s single mono speaker. Other than Apple’s use of sleeker materials and iOS, there are few further technical differences. Processing power is similar with both Nexus 10 and iPad running dual-core ARM Cortex-A15 based chipsets. Google is likely selling at a narrow margin as a 16GB Nexus 10 undercuts a similarly equipped iPad by $100 at $399 and matches the pricing on the more dated iPad2.
Google’s Nexus line up packs a punch in terms of performance and offers some of the first serious competition to challenge Apple’s dominance of the tablet market. It’s likely no coincidence the shortfall in iPad sales Apple reported relative to consensus estimates a couple weeks back was driven by competition from the likes of the Nexus 7 and Amazon’s Kindle during the previous quarter.
Long awaited tablet entrant Microsoft finally released its Windows RT driven Surface tablet last week. Windows RT is a slightly stripped down version of Windows 8 meant for ARM based tablets, with a full Windows 8 version due in Q1 2013. Early reviews of the Surface and Windows RT have been lukewarm, praising it in concept but criticizing the OS for its 10 GB size, unavailability of apps, and lack of backwards compatibility. Some of this criticism may be premature as the product needs a little time to reach its full potential. Though a delay in uptake may be a hurdle for nervous investors in the short term, we find Mister Softy to be very well positioned in the longer term. There is clear demand in the marketplace for a tablet segment geared to productivity. Like Google targeting the cost conscious consumer, Microsoft is leveraging its deep expertise in the enterprise market to make a more business friendly tablet device. It owns the most popular productivity apps and has one of the largest enterprise software sales teams in the world. Given its past support of new products or more appropriately spending into profitability as was the case with Xbox and some of its online businesses, Microsoft isn’t likely to exit the tablet space without an effort. For Microsoft it is not a question of if the Surface will take off, but when.
On to Apple, the blogosphere lit up during the storm with news of the departure of Scott Forstall, a protégé of the late Steve Jobs and the key Apple executive behind iOS. Speculation of Forstall’s departure first surfaced in May when he sold 95% of his Apple holdings. Apple’s executive suite is famously comprised of several massive egos that were kept in check under Jobs. From what most Apple observers agree upon over the last 14 months, Forstall’s ambition, personality, and propensity to engage in conflict were wearing thin under CEO Tim Cook. Failures around Siri and iOS maps were the last straw. With Forstall out, Cook has charted a new course for Apple marked by less dissention and a unified forward vision. While it was the right thing to do in the scheme of things, this is still a major loss of talent for Apple and evidence that Apple will be different going forward. Forstall led the development of iOS from conception to full-fledged platform championing the seemless user experience. It is unlikely he will be unemployed for long once he leaves his advisory role at Apple in 2013.
For Apple, integrating new cloud functionality has proven to be a difficult task with both Siri and Maps under Forstall. It is not clear that Forstall’s ego or Apple’s newcomer status to cloud operations are to blame or that anyone else can do better. With Jony Ive taking on some of Forstall’s responsibilities around “Human Interface,” the next version of iOS will look very different featuring less of the “skeuomorphism” favored by Forstall and the late Jobs. It is not obvious if Ive’s skills and leadership can be successfully parlayed outside of his expertise in hardware and work better for users. Apple has some rough waters ahead.
Okay, now to trek back uptown to find a place to recharge!
For our full research notes, please visit our published research site.