iPad shift may wreak havoc on parts of tech sector

August 2, 2010

Apple sold 3.3 million iPads last quarter. That’s one of the best starts ever for a consumer electronic device. The company led by Steve Jobs could sell 25 million of the electronic tablets next year, based on the trajectory of past consumer hits. While Apple and its suppliers are celebrating, many other companies will suffer. Of course, the game’s not sewn up — nearly every large electronics firm has announced or is rumored to be working on rival devices. But the iPad’s lead and momentum means it has a big advantage. In tech, one winner usually takes most of the spoils. With that in mind, Breakingviews has compiled a list of the potential losers — from the obvious to the indirect.

PC makers and sellers: It stands to reason that if companies and consumers buy iPads, they will cut back on competing electronic items due to limited budgets. This effect probably hasn’t fully kicked in. Early adopters are more willing to splurge on a new gadget. Yet Barclays Capital points out there are already signs of cannibalization. The number of lower-priced netbooks fell 19 percent in June compared to last year according to NPD.  HP, Dell and Acer earn little money on selling these devices. But if the iPad starts to cannibalize higher-margin items, selling PCs could become a recipe for losses. Dell, for example, eked out less than a 3 percent net margin last year.
Microsoft: It doesn’t take the IQ of Bill Gates to figure out that reduced sales of computers running Windows would hurt Microsoft. True, the company’s most recent quarterly figures were robust, as users upgraded to Windows 7. But if PC cannibalization occurs, it won’t be pretty. The company’s Windows division has astonishingly high margins — it accounts for roughly a quarter of sales but half of operating profit. A small revenue decline would disproportionately hit earnings.

Intel and AMD: Likewise, a shift from PCs to the iPad would hurt the two big semiconductor makers. Instead of using a chip whose roots lie in desktop computing where Intel has its stronghold, Apple used one from the cellphone world. Intel may catch up in designing low-power chips, but it could lose its quasi-monopoly style margins if it doesn’t. AMD, which chases after Intel yet never catches up, would take a harsher hit.

Software security companies: Apple’s devices are generally perceived as having fewer security holes than Windows. While most PC users install antiviral programs, many Apple users don’t bother. So an iPad shift would hit software sales at security companies such as McAfee and Symantec. True, the more popular Apple’s systems become the more effort hackers will make to crack them. But overall, antiviral vendors look like potential losers.
Hard disk drive makers: Apple was one of the first computer makers to eschew floppy disk drives. Likewise, the iPad could lead the charge away from hard disk drives. The device employs NAND flash memory, which is smaller and uses less power than the hard drives commonly used in laptops and desktops. If the iPad cannibalizes these markets, companies like Western Digital and Seagate would suffer. Moreover, Apple is believed to use a third of the world’s supply of this memory. If it demands more, companies like Samsung would be encouraged to ramp up production. That could be recipe for an eventual price crash and consequent use of NAND in more consumer devices.

Cellphone producers: Apple says about half of Fortune 100 companies are testing the device. AT&T says business demand for the device is robust. Since the iPad and the iPhone essentially use the same operating system, the tablet could act as a Trojan Horse for the handset. Let employees use one and you might as well let them use the other. And since applications developed for the iPad often work equally well on the iPhone, the platform is more attractive for developers. Nokia and Research in Motion appear in danger of losing the app battle — if their phones are regarded as undifferentiated commodities, their profit margins could vaporize.

Bookstores: Other forms of collateral damage may seem surprising. Take bookstores. It seems clear that most texts will eventually be sold and consumed electronically. Amazon, Barnes & Noble and Borders sell devices specialized for reading. Yet the iPad’s launch set off a vicious price war in e-readers — Amazon’s Kindles now sell for as low as $139. That suggests consumers prefer gadgets like the iPad that can read email, play games and download apps that perform other tasks. True, book retailers have iPad apps that allow for easy purchase of electronic books. But consumers can download several and easily compare prices. Increased competition means margins are likely to fall.

Comments

Why is it that the finance people in the USA see everything as a negative? I have never seen such a bunch of sour pusses in my life. Market goes up! Finance news says; watch for double dip watch for double dip.

I bet when the pc came out they wrote about how the pen and paper would soon be extinct. Wise the hell up. Change is good. Change happens. Everyone will survive. And if a miracle really happened and Microsoft would lose is desktop dominance; that would be a great day. We are tired of their 24% margins. Their crap products. Their lack of innovation. They, of all companies, will not be missed.

Posted by RufusDaddy | Report as abusive
 

I think I’ll wait for a Windows based tablet computer that sells for a reasonable price and can run the apps I am used to running. I happen that there are always folks who want to jump on the bleeding edge. I’m just not one of them. You can see why I cautious… the e-readers are now seeing their kingdom crumble just as the cement was setting. They may not realize it yet, but ultra-thin table computers with their greater functionality will drive e-book cost below production costs. Unless someone can build an e-reader for less than 29.95, their toast. Even then, who will want to carry two devices. Of course it is always possible that e-books will “evolve” into table PCs… which will be more of a recast of brand name than an actual technology transformation. Regardless of any deals publishers and bookstores will be forced to sell content go a greater number of devices than just the Kindle or Nook.

Posted by Tom_MacKnight | Report as abusive
 

Way to go Reuters. As if I couldn’t have figured all of this out using common sense. I miss news when it revealed interesting unknown issues.

Posted by kahoeger | Report as abusive
 

Microsoft: It’s already losing the fight with little chance of recovery regardless if the iPad succeeds or fails. Consider how damaged the brand is after so many people have bad experiences with Vista. It’s so damaged that XP versions of PCs sell for a premium over even Windows7 versions! MS wanted to kill XP last summer but Vista and W7 were too clunky for netbooks.

Unless MS blows its cash on strategic acquisitions, there is almost no way it can catch up with open source–even Apple can’t so at least Apple plays nice and stays “niche cool” (while copying open source features and “reinventing” them as it did with Xerox PARC).

MS is now the equivalent of an electric utility–few new users but large installed base who have high switching costs or no alternatives–with a 10-year share price performance demonstrating this.

Posted by PD42 | Report as abusive
 

Apple is much hyped in the media. I like thier innovation. But to succeed in the market long term, you need to make others make money (like vendors, etc).
Let us not forget that apple invented graphical computing but microsoft capitalized it in the 90s.
5 years after the launch of iphone, still apple is struggling to pass 25% market share.
The key is corporations adapting apple which is a possibility in an uptrend economics. But untill then, I would still call it a hype.

Posted by idhayachandran | Report as abusive
 

This article stems from what I perceive as a VERY shortsighted vision. It also fairly REEKS of pro-Apple bias (aka fanboyism) from the author. Yes Apple is selling lots of shiny new iPads. Yes, they are leading a shift into new computing territory. No, the computing world as we no it is NOT going to implode!

There will be competition out, THIS YEAR, from other vendors running a variety of hardware. Expect to see tablets running Android, Windows 7, and WebOS. Expect to see processors ranging from Intel, to Samsung, to who knows who else. Graphics processors from AMD, Nvidia, Intel and others…and on and on.

As to other points, specifically, the doom and gloom prediction of the e-book threat to book sellers…This is just utter nonsense! Barnes & Noble, Borders, and most notibly, Amazon all have a digital distribution sales model in place.

All said, the iPad is changing the way people think of computers, and mobile computing is set to take off like never before. But dont delude yourself or your readers…Apple may be first, but they will not hold on to that leadership position for very long.

Posted by jnemesh | Report as abusive
 

Steve Ballmer has already stated that the iPad cannot touch Windows-based PCs or notebooks, so this article must be completely wrong. It’s being said that the iPad is one of the most useless consumer products that was ever made and iPad sales have already reached their peak. In other words, the iPad is a huge failure. Netbooks are supposedly ten times more useful because they have keyboards, USB ports and run Flash. Plus they’re also much cheaper to buy than an iPad.

All consumers are eagerly waiting for a beautiful Windows 7 desktop tablet that can do everything a Windows desktop PC can and still get 10 hours on a battery charge. Look for Microsoft and some tablet vendor to have this wonderful device ready by September. The Windows 7 tablet project will finally put Apple out of business for good. That’s what happens when a company tries to pass off a device like the iPad to consumers. All they got was a children’s toy. Steve Ballmer will become the next Steve Jobs for giving consumers what they really need. Hehe.

Posted by sirberra | Report as abusive
 

This is an alarmist article if I’ve ever read one.. What if!?! What if??!?!

Last I checked editing music or video, manipulating photographs and playing the latest 3d video games is only something you can dream of with an iPad.

Let alone have fun writing out an essay or even a lengthy email without a real keyboard at your disposal.

Keep your Ipad, heck, keep your Apple. I’m sticking with Win/tel.

Posted by inf0tr8r | Report as abusive
 

Gotta love all the “you’ll have to claw my PC from my dead hands” haters out there who just refuse to admit that Apple is the innovator, and all their old-guard cronies can do is imitate and hope they can keep the loyalists buying their “me too” technology. Very sad.

Posted by wait2870 | Report as abusive
 

Haha nobody is considering the effect this is going to have on those who create viruses. Everybody assumes that macs, phones, and tablets are impervious to viruses and don’t bother securing their computers. next thing we know 30% of all these will be made inoperable by a bored guy in his basement.

Posted by tsubaki | Report as abusive
 

This is all hype. Apple is all hype. This is not new technology. For those who been to Asia before, specifically Japan and China, technology like the iphone and ipad is nothing new. Apple just stamped their name on it here in this country.

Posted by Dahc | Report as abusive
 

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