Inside the Tablet Wars

By Kyle Spencer - October 24, 2012 | Tickers: AMZN, AAPL, GOOG, MSFT | 0 Comments

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It seems that nothing short of a Security Council binding resolution can keep the Titans of Tech from one another's throats.

The U.N.'s International Telecommunications Union (ITU) recently sat down key representatives from Apple, Google, Motorola Mobility, RIM, Huawei, Microsoft, Sony, Ericsson, HP and Nokia at a “patent round table” in order to plead for an end to the endless courtroom brawls over intellectual property rights.

While morning talks were open to reporters, the afternoon discussion was held behind closed doors under the Chatham House Rule, a gentleman's agreement designed cut through the legalese and allow the Silicon Valley representatives to air their own personal opinions off the record.

The patent debacle has become only the most visible front in what has become the most widespread, ruthless and expensive corporate conflict since the Cola Wars of the 1980s.

Smart phones are yesterday's war. Microsoft (NASDAQ: MSFT), Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG) will spend billions of dollars promoting tablets this Christmas, a full throttle advertising blitz that is, according to media analyst Robert Enderle, “on a scale you don't see outside of presidential elections.”

Microsoft

Microsoft is betting big on its new operating system. How big? According to Forbes magazine, Redmond is spending between $1.5 billion-$1.8 billion on marketing and platform support. That's roughly 600% more that Microsoft spent on the its “Start Me Up” campaign for Windows 95, and that's adjusting for inflation.

So far, Microsoft's advertising has totally crushed the competition. Ace Metrix has declared the new, Glee-ish Surface “clickaholics” ad as the hands-down most effective Tablet ad of 2012. (By comparison, Apple's recent “helpful” ads were ranked the Worst of 2012 by Ace Metrix and...well, everyone.)

Indeed, you can expect to see the Surface everywhere this Christmas, from Times Square to Washington DC's Gallery Place Metro station to your local liquor store.

Bottom line

Whether Surface flops or takes off like ICBM, both Apple ioS and Google Android are going to have to develop more versatile, powerful operating systems just to avoid the inevitable side-by-side comparisons in functionality that are bound to follow.

Microsoft's biggest headache at the moment is signing up the software developers it needs to make its app ecosystem competative. If Redmond can entice enough programmers away from the iOS platform, it's going to be very difficult for rivals to match the productivity apps and security features that Microsoft can bring to the table.

Apple

Apple's best advertising has always been its products. (It certainly isn't this year's god-awful TV ads.) Cupertino is looking to add a fire-breathing dragon to its seemingly impregnable moat this holiday season by launching the iPad Mini.

The new iPad Mini is focused on Education, where the iPad has made significant inroads in recent years. (Apple currently has the world's largest education sales force.) The iPad is slowly replacing traditional textbooks. San Diego bought 25,000 iPads from Apple this year, and the lower price point of the iPad Mini should speed up adoption in classrooms all over America. 

But while the $329 price tag will be a hit with educators, it remains a question mark with consumers.

Historically, Apple's market dominance and eye-popping profit margins have relied on three pillars:

1. disruptive innovation

2. brand identity

3. the “wow” factor

The iPad Mini may be “as thin as a pencil, as light as a pad of paper,” but it isn't disruptive. The iPad Mini's display technology is inferior to the iPod Touch model that Apple introduced over two years ago, and compared to the Nexus 7's quad-core CPU, the dual-core A5 may be yesterday's processor. 

Bottom Line

Tim Cook is relying on Apple's premium brand and superior ecosystem to expand the iPad's market share. A switch in form factor, combined with a lower base model price, may work as a one-off strategy. But Cupertino will have to be more innovative in the future if it wants to preserve the company's current profit margins.  

Amazon

The Kindle Fire was the first tablet to be mentioned in the same breath as the iPad 2. Its low price tag was a major disruption in the tablet market, and set the stage for the 7-inch form factor that Steve Jobs had been so quick to dismiss. While Apple is adopting a K-12 education-centric approach, the new line of Kindles are geared towards entertainment in the home.

Bottom Line

Amazon operates on the Anti-Apple model: For Apple, the hardware is everything. The extensive app ecosystem and fusion with iTunes exists to supplement Apple's new hardware. For Amazon, the hardware is just a terminal: It exists for Amazon to sell you stuff, period. Amazon's contempt for profit margins, combined with the fastest development cycle in Silicon Valley, represents a serious threat to Cupertino's continued dominance of the tablet space.

Google

You know you did something right when the most powerful company in the world is forced to swallow its pride and invent an unplanned, entirely new product just to compete with you. The rave reviews garnered by the release of the Nexus 7 and the radically improved “Jelly Bean” Android OS forced Apple to either release an iPad Mini or forfeit the lower-end market.

Google is apparently comfortable playing by Jeff Bezos' rules. As was the case with the Nexus 7, Google's new Nexus products – set to be released on Monday, Oct. 29, are likely to be released at cost. By discounting internal storage space – the cheapest component to upgrade at the wholesale level  – Google is shackling Apple to a losing strategy. The fat profit margins that investors have come to expect are largely a result of Apple's ability to sell hard drive space at a premium to consumers. 

Bottom Line

Google is playing Amazon's game, but with a different emphasis. Amazon builds hardware in order to tie customers vertically to its iconic web site. Google builds hardware in order to increase the penetration of its Android operating system. Thus far, Google's approach appears to be paying off. According to Digitimes research, Android will account for 60% of the global smart phone OS share in 2012. Including tablets, the total number of Android-installed devices comes to 650 million...and counting. 

Conclusion

While the artillary shells are still raining down, investors may wish to take note of the following macro-trends:

#1, The drop in Apple's share price yesterday reflects Wall St.'s concern that the company is slowly becoming just another premium brand. Tim Cook's "evolutionary, not revolutionary" strategy has allowed Cupertino's competitors to shift the prevailing narrative from "how can we be like Apple" to "What's so special about Apple, anyway?" Next stop: commodization.

#2, the companies seizing market share from competitors are the ones that don't have to worry about the profit margins of their hardware. Amazon and Google are pumping out new products as if they had Santa's Elves under iron-clad contract, without encountering the kind of make or break pressure that margin-conscious companies like Microsoft and Apple are operating under.

#3, the fact that all four companies can afford to win in one market niche and lose in another, and yet still turn a profit that exceeds Wall Street's expectations should serve as a wake up call for investors vis-a-vis the viability of the PC platform. The PC is dead.

The future belongs to mobile. 

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