iPad shift may wreak havoc on parts of tech sector
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.