http://www.businessweek.com/articles/2012-03-21/ipad-the-pc-killer

Opening Remarks

IPad: The PC Killer


IPad: The PC Killer

Photographs by Bloomberg

(Corrects name of Bloomberg Industries)

After he unveiled the iPad at a San Francisco conference center in early 2010, the late Steve Jobs spent a few minutes asking people holding the device for the first time what they thought of it. A reporter suggested it might make consumers forget why they needed a laptop computer. Jobs shrugged his shoulders and said, coyly, “We’ll see.” Jobs was a master not just at anticipating paradigm shifts but creating them. If tablets eventually did eclipse the laptop and desktop businesses, Jobs was determined that Apple (AAPL) would reap the windfall.

That day has arrived. On March 19, the same day Jobs’s successor, Tim Cook, declared Apple would disburse some of its $98 billion cash stockpile as dividends, the company announced it had sold 3 million new iPads in their first weekend of release. The product is expected to bring in $38 billion in sales in 2012, according to Piper Jaffray (PJC) analyst Gene Munster. In the fourth quarter of 2011, Apple sold 15.4 million iPads—more than the number of PCs sold by Hewlett-Packard (HPQ), the world’s No. 1 maker of Wintel PCs. If you consider an iPad a PC substitute—and many consumers certainly do—then Apple, which also produces the iMac and MacBook, is now the biggest PC maker in the world.

The most astonishing part of the iPad era is how completely Apple still controls it. There were plenty of smartphones on the market when the iPhone first appeared in 2007, and it quickly drew new competitors, most notably Android devices. The iPad’s trajectory has been different. Despite loads of new tablets from Samsung (005930:KS), HTC (2498:TT), Motorola Mobility (MMI), HP, Dell (DELL), and others, the iPad still holds 66 percent of the market, according to Gartner (IT). “The whole industry has been going nuts, trying to figure out how to compete with Apple,” says Robert Brunner, a former Apple design chief who now runs design firm Ammunition Group. “You can see the fear in their eyes.”

Apple’s dominance of the tablet space certainly represents a blow to the collective egos of PC manufacturers. But the iPad, by combining technical ingenuity with mass-market appeal, is doing more than simply eroding the profits of some of the world’s most successful computer companies.

The idea of tablet computing has been around for decades. Microsoft (MSFT) made a big push in 2000. Pre-iPad, the things didn’t work terribly well, and no one was really sure whether a mass audience would use them. The iPad has shown that there is in fact a gigantic, succulent market for these devices. Yet the finest computing minds outside Cupertino have failed to come up with a true rival. What’s so hard about tablets?

Part of the problem facing the non-Apples of the world is historical baggage. Big phone makers, such as HTC and Samsung, were never computing experts. As for PC makers, in the 1980s and 1990s, when Intel (INTC) and Microsoft ruled, they had little choice but to focus on cutting costs in order to eke out a profit after paying the bill for those Pentium chips and Windows licenses. Kerry Chrapliwy, a former executive in HP’s PC group, says that if a product did not turn into a blockbuster overnight at HP or Dell, it was often killed. “We were always fighting the philosophy at HP of, ‘How do I get this product to market at the lowest possible cost to the highest volume of people?’ There was not enough focus on delivering the right experience to people.”

Apple, by contrast, “had a worldview that said, ‘We’ll suck it up for three or four years and make it happen,’” says Roger McNamee, a co-founder of technology investment firm Elevation Partners. Apple actually began thinking about a tablet nine years ago, when Jobs saw the progress his engineers were making with multi-touch displays. Users could do various tasks—read an article, check a stock quote—without booting up or typing. The tablet project was shelved when Jobs chose to focus first on the iPhone. Smart move: When Apple returned to its tablet project, it was able to repurpose the same iOS software and App Store infrastructure used in the iPhone. Combined with advances in battery life and screen quality, the iPad was at once familiar and radically new to consumers—an instant hit.

There are only a handful of potential challengers to the iPad. Amazon.com (AMZN) has had success with its Kindle Fire, which at just $200 is half the price of the entry-level iPad. But it’s less an iPad wannabe than a delivery vehicle for Amazon’s services. Should Google’s merger with Motorola Mobility be approved, Google (GOOG) could combine Android and services such as YouTube and Google Maps with Moto’s hardware, giving it Apple-like control over its entire ecosystem.

Another possible competitor to the iPad may come from Apple’s oldest nemesis: Microsoft. This fall, the software giant plans to unveil Windows 8, a radical rethinking of its flagship product that’s designed to run on both PCs and tablets. Microsoft seems to be sticking to its PC approach, licensing Windows 8 to other hardware makers. But the company has found success by melding its own hardware and software to create Xbox, which lost money for years but is now profitable. It might be able to adapt that model to make a competitive tablet. “You can at least imagine Microsoft pulling something like that off,” says McNamee.

For the rest of the PC industry, however, the tablet age could prove catastrophic. In recent years, PC makers have relied heavily on corporate consumers to hold on to their shrinking market share. Now even that’s under pressure. Among big companies, such as United Airlines (UAL), which is equipping its pilots with iPads, Apple is making inroads. Apple has used its cash reserves to lock up supplies of key tablet components and has massive economies of scale. Worse for competitors, Apple has left no price umbrella to give them shelter. The company earns a gross margin of 20 percent on every iPad, says Anand Srinivasan, a technology analyst with Bloomberg Industries. While smartphone makers have some room to undercut the iPhone, with its rich 56 percent gross margin, would-be iPad rivals have no such luxury. Even if a competitor did produce a tablet superior to the iPad, profits wouldn’t come easy. “It’s hard to charge the same as Apple and expect to sell a lot,” says Shaw Wu, an analyst with Sterne Agee & Leach.

Owners of the iPad know how the device reduces the number of sit-down sessions at the PC. With the growth of cloud computing—where music and pictures are stored on servers out on the Net—the tablet could well end the PC’s run as consumer tech’s center of gravity. Throw in Apple’s marketing prowess and its vast ecosystem of mobile apps, and it’s not a stretch to say the biggest hurdle standing in the way of the iPad’s supremacy is the capacity of Apple’s factories.

It’s possible that some company could come up with a breakthrough product to supplant the tablet, just like Jobs used to do every few years—though Brunner, the design consultant, isn’t seeing signs of that. “No one ever seems to learn from Apple’s example,” he says. “I keep having the same meetings with executives that just don’t get it. They keep doing the same old crap.” At some point, the Dells and Lenovos of the world may come to realize that the purveyor of glorified toys has become an existential threat.

With Ashlee Vance
Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.
Aley_190
Aley is an editor for Bloomberg Businessweek. Follow him on twitter @jimaley.

Later, Baby
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