Monday, February 28, 2011

Apple's iPad 2: The Price Is Right

Apple has invited the press to an event on Wednesday that will include the introduction of the iPad 2. What will be the most talked-about feature of this new device?

First, let's stipulate that most of the hardware specifications of the iPad 2 are known, more or less, thanks to endless blogger speculation: one or two cameras, a faster processor, twice the RAM, some tinkering with battery, screen, thickness and bezel. In other words, in the big scheme of things, nothing too exciting. Do you know many people who have held off buying the iPad because it lacks a camera, dual-core CPU or 512 megs of RAM? No, me neither.

If this was all Apple had in mind for the iPad 2, it would be a snoozer event. One would think that Apple isn't knowingly going to leave it like that.

When Apple planned for the iPad 1, it had no idea about the success it would enjoy with the device in the quarters that followed. It focused on creating a rock-solid product, which could at least skim the high-end of the market. After all, the iPad 1 came at prices ranging from $500 to $830, or as high or higher than the average non-Apple laptop.

By March 2010, Apple probably planned for under 10 million iPads sold over the next 12 months, a goal which it exceeded handily. This time around, Apple is probably looking to sell 60 million units worldwide starting this March.

When you go from planning under 10 million units to 60 million, you can negotiate much better manufacturing prices. Components can also be optimized for cost, to a different degree. Apple is pre-paying for critical parts, such as memory and displays, taking risk out of the contract manufacturers, which pressures the price down. This probably means that despite some minor hardware bumps (camera, RAM), Apple could remove close to $100 in cost from each iPad.

Here is the bottom line: This logic points to Apple making the key feature of the iPad 2 its price, specifically a $100 price cut. The iPad 2 could start at $399 and range up to $699 for versions with more storage or 3G or 4G modems.

What about the remaining inventory stock of the iPad 1? That's easy: Drop the remaining units on hand by $200 to $299 or so as the shelves clear out.

Apple's ability to take cost out of the iPad 2, as well as superior volume discounts achievable at 60 million annual units, poses a nasty dilemma for its competitors Motorola, Research in Motion, Samsung, Dell, Hewlett-Packard and all the others. The various Android licensees will eventually catch up to Apple's head-start in the market, but 2011 is looking increasingly unlikely for Google's Android to match Apple's iPad volumes. Especially with an Apple $100 price cut, the competitors will have to reload for 2012 or take a gross margin hit.

Apple's competitors are unlikely to get off the ground competing with the iPad unless their tablets start at $199, unsubsidized. The two main reasons Apple commands a price premium are 1) the superior shopping experience of the Apple stores, and 2) iTunes. Right now, Android -- and soon RIM and HP -- are unable to match these two key Apple advantages.

Naturally, Apple has several things up its sleeve other than a $100 price cut for its new iPad 2 series. This is likely to include new software and services, such as a revamp of iTunes, enhancements to MobileMe and NFC (near field communications) payments, to be announced at some points throughout 2011. That said, as far as the iPad 2 is concerned, what will dominate the conversation won't be some new hardware specifications -- but rather the $100 price cut.

These theories of mine are not based on any form of "sources familiar with the matter" or anything equivalent. My statements are purely based on combining various classes of leaks published by the major blogging sites, together with my own logic as to how the market works and what is therefore likely to happen. That said, you can read here what I predicted about the iPad 1 more than a year ago:

Wednesday, February 23, 2011

Apple Is Eating HP's Laptop Lunch

Hewlett-Packard Tuesday night reported a 12% decline in the "consumer" portion of its personal systems group. That's mostly laptops. With this news fresh in mind, I decided to visit 15 of the cafes located closest to the HP headquarters, mostly within a 2-mile radius, to see what the people closest to HP were using in terms of laptops.The survey took me about 90 minutes to conduct, and is, of course, of limited statistical significance. But still, out of the 100 laptops and tablets observed in 15 of the cafes closest to the HP headquarters:

Apple MacBook: 45
Lenovo: 14
Dell: 14
Apple iPad: 9
Sony 6
HP 4
Toshiba 3
Acer 2
Asus 2
Samsung 1

Aside from its statistical limitations, one can, of course, criticize this kind of quick survey from other angles, such as enterprise-vs.-consumer, HP employees or owners don't visit cafes, or don't visit cafes located down the street from HP, or whatever. That said, based on the kind of publicly reported market shares, in which Apple normally scores not too far from 10% and is in a similar category to HP, this kind of quick survey looks like a nasty leading indicator for HP in the laptop sales department.

Why is Apple outselling HP, as well as everyone else, in the laptop category? It's not because of price, because most people can tell that Apple laptops generally start as high as two times that of HP and other laptops. No, people are willing to pay more for Apple laptops as a result of the superior shopping experience in the Apple store, the superior service at the Genius Bar, the easier-to-use services such as iTunes and TimeMachine. Of course, most people know that Apple's actual hardware product design leads the pack by a significant margin.

I decided to visit the largest electronics store located closest to HP's headquarters, within walking distance, called Fry's. It offered numerous HP and other laptops with terrible merchandising, including no Internet connectivity, no batteries, and often missing or incorrect price tags or spec sheets. Product names were incomprehensible and bewildering, such as "XYZ-1200s PQ/55-T" or something similar. Looking at the salespeople and the service desk, I felt like I was about to negotiate the price of a hand-knotted rug on a Sunday bazaar in Damascus. If I were in the market for a laptop today, there is no doubt the deal would happen at the Apple store, and not here.

With Apple clobbering the competition -- HP in particular -- in the laptop department, what's next on the horizon? Let me suggest that laptops built on the Google Chrome OS are likely to take the market by storm, starting this summer and accelerating into 2012. The first Google Chrome OS laptop, which I have had since early December, is superior to its competition in many respects, especially considering that it would probably sell for $299 (my guess). It boots four times as fast as my MacBook Pro and has zero software complications of any kind. In other words, it's basically a maintenance-free laptop, which will likely be sold for the same price ($300) as a comprehensive three-year warranty for a Windows or Mac laptop. With Google Chrome OS, parents and corporate IT administrators would need less time to help children, employees and the elderly fix their PCs.

Apple is eating HP's laptop lunch right now, but with the Google Chrome OS laptops -- built by Acer, Samsung and potentially others -- hitting the market this summer at superior prices and lower cost of ownership, everyone including Apple has reason to worry a lot. Google Chrome OS may just end up the technology story of the year, and nobody is talking about it yet.

Friday, January 28, 2011

Nokia's Big Operating System Choice

Nokia claims that it will unveil its long-term operating system roadmap on Feb. 11. We all know why this is crucial. Most of us have not seen a Nokia smartphone user since before the last Iraq war, and Nokia smartphones no longer show up on airport radar or sonar systems.

Just by looking around, one must conclude that Apple, Android and BlackBerry have a joint 99% or greater market share, with Nokia being focused on some obscure lagging-indicator geographies in far-away lands.

The U.S. may be in the process of spending and regulating itself into an economic basket-case, but in the area of smartphones, it holds the indisputable thought leadership position. Apple and Google lead the way, with Canadian neighbor BlackBerry still growing like a weed, and the main competitors are Hewlett-Packard (Palm WebOS) and Microsoft -- not some company in Scandinavia or Asia.

So let's handicap Nokia's options for trying to salvage a future for itself. There are four major options at hand for Nokia:

1. Android. Sometimes it's best to not over-think it. Android has already, in a short time, become the most well-developed smartphone ecosystem, despite several important flaws, including lack of corporate/government grade security. Android gives the user the greatest amount of choice with respect to form factors, hardware vendors, and carriers.

Most major smartphone reviewers have been asking for more models such as Samsung's Nexus S, which offers the "pure" Google experience without any value-subtracting interface overlays common to devices produced by vendors such as Samsung itself, HTC, SonyEricsson, Motorola and others. It gives the end user a superior software experience, and upgrades to the latest versions of Android faster than any other device.

In addition, Nokia would be able to enter the market the fastest by offering this "pure" Android experience just as with the Samsung Nexus S. It could do so in a variety of form factors -- portrait keyboard, landscape keyboard, no keyboard, small screen, big screen, etc.

Nokia could also write its own software overlay to Android, as most other major vendors have done. While I think this would be a waste of time, because consumers just don't want it, it's certainly possible.

It is also more than fully possible to do both - first, offer the pure "Nexus-like" Google experience in the interest of go-to-market time, and then add its own "special sauce" some months or a year thereafter.

2. Microsoft. The problem here is that Microsoft defines the end product very tightly. Screen resolution, placement of buttons, and even some of the chips, are determined by Microsoft -- not vendors such as Samsung, HTC, Dell or LG. It is therefore unlikely that Nokia would be interested in this arrangement.

That said, Nokia's new CEO Steven Elop comes from Microsoft, and perhaps he could cut a new type of deal with Microsoft. Perhaps Nokia would be able to get an exclusive version of the OS, where it could differentiate more than the existing batch of products that became available last October/November.

3. Acquire someone. With Palm gone (to HP last year), there is now only one musical chair left that Nokia could reasonably acquire, and that is Research in Motion, which would be expensive. It also would solve almost every problem Nokia has with its position in North America, smartphones in general, and a future OS for both smartphones and tablets, as a result of RIM's recent ownership of QNX.

That said, RIMM stock is way too cheap for RIM to want to sell out at a price anywhere near the current $62. The premium would have to be absolutely astonishing, well over 100%, for RIM to accept such a deal. It is, therefore, extremely unlikely.

4. Continue with some combination of its existing operating systems: Symbian and MeeGo. If Nokia does this, it is equivalent of walking into the desert without a hat and lots of bottled water. Nokia would face a steady continued decline into further irrelevancy.

What would be the stock impact of these choices? If Nokia does any combination of 1 (Android) and 2 (Microsoft), the stock should rally significantly. If Nokia does 3 (acquire RIM), the stock impact should generally be positive, but will depend on the price at which RIM would be willing to sell ($150/share?). If Nokia does 4 (Symbian/MeeGo), one can safely short Nokia all the way down to zero, sort of like Kodak or one of those PC/mainframe companies of the 1980s, the names of whom we have all now forgotten unless we look them up on Wikipedia.

Bottom line: The good news here is that Nokia has good choices, and that they are not mutually exclusive. Nokia has the scale to go with BOTH Android and Microsoft -- hey, HTC is doing it, so why couldn't Nokia?

Tuesday, January 11, 2011

BlackBerry PlayBook vs. Android Tablets

Among the numerous thousands of new products and announcements at CES (Consumer Electronics Show) Las Vegas 2011, there were only two that really mattered, in terms of moving the ball forward for the tablet category. These were the first display of Google's Android 3.0 Honeycomb software, showed for the Motorola Xoom tablet, as well as the first hands-on with the BlackBerry PlayBook.

The Android 3.0 Honeycomb software will become available on more devices than I could possibly list, probably no later than some time in the third quarter of 2011. That said, Google's "hero device" is the Motorola Xoom, which is said to become available by March 2011, with additional versions (LTE, etc.) in the second quarter. So what was Motorola able to show at CES, on the Xoom?

At CES, people were not allowed to touch or play with the Motorola Xoom, and it did not carry even an early version of the 3.0 Honeycomb interface. The tablets shown by Motorola and Verizon Wireless simply ran a handful of videos showing what the interface is intended to look like, which is like showing a drawing of a fantasy car. As far as I could tell, these videos were similar to what Motorola had already posted on YouTube.

In other words, from a software perspective, these "demos" were pretty useless. Actually, as I watched the Verizon Wireless representative try to run the video demos in front of me in the Verizon booth, the Motorola Xoom crashed almost every minute. Clearly, the new Google tablet software isn't ready yet.

From a hardware perspective, though, we did find out one thing: The Motorola Xoom tablet requires you to carry an additional power cable, beyond the MicroUSB that powers almost every smartphone in the market today -- Motorola, BlackBerry, Samsung, HTC and others. This seems to be a major drawback of all Android tablets I have seen so far: A new power cable that's different from every smartphone's power cable.

In contrast, RIM showed the PlayBook the way it's supposed to be shown: RIM allowed everyone to -- pardon the pun -- play with it. I loaded up the PlayBook with numerous simultaneous windows, with applications running Quake, high-definition video, and Adobe Flash-intensive web sites. The performance was amazing, with all apps multitasking in separate, visible windows -- just like you're used to on your Windows or Mac PC/laptop. And at no point did any of the multiple devices I tested crash.

The stability of BlackBerry's new ONX operating system is legendary, as it operates nuclear power plants and unmanned military vehicles alike, and this unprecedented stability appears to have translated into the PlayBook.

The PlayBook hardware is also filled with interesting advantages. I immediately noticed that it was the only tablet I have seen to date that uses MicroUSB for charging. This means you need to only carry one charger to feed both your PlayBook and your smartphone of any brand (as long as it's not Apple). In addition, the front-facing camera has a very high resolution that could enable biometric user identification, increasing the security of the device, without requiring a separate fingerprint reader.

How does the PlayBook connect to the Internet and to other devices? Just as with the iPad's launch on April 3, 2010, the PlayBook launches with WiFi. As such, you use the device in a manner similar to most iPad owners. You can tether the device to a mobile WiFi hotspot such as the Novatel MiFi, a Motorola Droid or even the new iPhone 4 for Verizon Wireless.

Later in the year, sometime in the second or third quarter, expect versions of the PlayBook to become available on all major cellular networks such as HSPA, LTE and WiMax. Sprint already announced its WiMax version last week, available no later than the third quarter of 2011. Expect Verizon Wireless, T-Mobile USA, AT&T and other operators to announce upcoming availability of their versions in the second quarter.

In addition to WiFi and 3G/4G cellular versions, the PlayBook offers one additional method of connectivity that will set it apart from most other tablets: The PlayBook will connect over Bluetooth to an existing BlackBerry. This comes in handy for organizations with strict security needs that need to strictly protect information residing behind the corporate firewall. Employees may be prohibited from using WiFi as a result of the security concerns regarding WiFi.

The PlayBook uses a form of Bluetooth that RIM says has been approved by the NSA (National Security Agency). In addition, this allows you to share the data plan for which you are already paying on your existing BlackBerry, and it does so using very little power, saving battery life on both devices. These are all major selling points for the PlayBook compared with Android tablets.

RIM showed how the PlayBook runs Android programs that it claims were converted very easily and quickly. I was told that it could be as easy as one programmer spending only a few hours to do the conversion. If this is true, one would think almost every Android program will quickly become available for the PlayBook. The implications of this appear not to have been understood by the market, or else RIM stock would probably be trading well above $100 a share.

Who will buy the PlayBook? Clearly the enterprise/government market is almost a captive one for RIM given that it will have superior security on numerous fronts. Any CSO (chief security officer) of a company in possession of secrets must be scared stiff over what may come next in the WikiLeaks sagas of the future. Given the choice of deploying the same tablet platform that will be used by the CIA and the largest banks, compared with other platforms focusing on playing Angry Birds (that's a popular game, for those of us who have never played a computer game), what do you think most enterprises will choose? The PlayBook, of course.

In summary, the BlackBerry PlayBook was by far the major upside surprise at CES. It performs flawlessly with no crashes or freezes. It has a fantastic browser that will render many apps unnecessary: Who needs a Facebook app when you have a flawless browser, just like your laptop? And if you still need apps, Android apps are easily converted, so the PlayBook could launch in March with more than 200,000 apps available very quickly.

RIM showed that the PlayBook is the real deal. Expect handsets using the same powerful QNX operating system before the end of this year. In comparison, Motorola's Xoom demo of Android 3.0 Honeycomb doesn't really even qualify as a demo, given that all it showed was a video and people weren't allowed to touch it.

RIM stock is trading at a huge discount to peers. Once the PlayBook rolls out in different versions (3-inch, 4-inch, 7-inch, 10-inch, Sprint, Verizon, AT&T, T-Mobile and other versions), the earnings multiple should expand dramatically. Now that the most secure mobile platform is also the most powerful and most flexible, this stock deserves to trade at a premium to peers, not a discount.

Finally, I expect Apple continue to dominate the tablet market for consumers through the end of the year, thanks to the iPad 2, which should become available in the second quarter of 2011. Thanks to numerous hardware vendors, Android will likely take the #2 spot in the consumer market, and RIM should be the #3 consumer player with the PlayBook, while becoming the #1 player in the security-conscious government/enterprise markets.

The biggest question mark is HP, which is unveiling its new smartphone, tablet and TV products in San Francisco on Feb. 9. If HP's new products were to fail, HP may be faced with no other reasonable option other than to acquire RIM, if it wants to pursue its own platform rather than relying on Google, Microsoft or MeeGo (Nokia and Intel joint project).

If you comment on this article, please state whether you actually viewed the Motorola Xoom demo in person, as well as if you had your own fingers on the BlackBerry PlayBook for any meaningful period of time. Seeing and feeling the real, live, product makes a difference.

Thursday, January 6, 2011

RIM's PlayBook Checkmate

What will be the most powerful tablet advertisement this summer? It could very well be Sprint Nextel's promotions for the Research In Motion's BlackBerry PlayBook tablet running on Clearwire's 4G WiMax network. Why? Because Sprint is the only wireless broadband carrier offering unlimited 4G consumption for a fixed price.

Jim Cramer has correctly made the observation that TV/movie consumption is rapidly moving in the direction of watching Netflix on the Apple iPad. This is true, but unless you are on WiFi, watching Netflix on the iPad can also be a costly proposition. AT&T offers a 2 gig per month iPad 3G plan for $25, which is rapidly consumed if you use Netflix frequently. The real monthly cost could be a lot higher than $25, as you consume a lot more than 2 gig per month.

Here is where Research In Motion's pathbreaking deal with Sprint comes in: So far it looks to be the only iPad competitor offering unlimited 4G use for a reasonable fixed price. We don't have the pricing details yet, but all indications are that it will be very competitive with AT&T, Verizon and T-Mobile -- with one critical exception: unlimited use. This means you can watch as much Netflix as you want, without worrying about overages.

Obviously, it is eminently possible that Apple's and Google's hardware partners -- such as Samsung, LG, Motorola, HTC, Dell, Lenovo and others -- will copy this deal with Sprint, but until they do, it appears that RIM has taken this bull by the horns and launched the first strike. In fact, I wrote out on Nov. 4 that Apple should cut its next deal with Sprint/Clearwire.

Who are the other winners in this equation? Sprint owns approximately 50% of Clearwire, which has the WiMax network offering this unmatched 4G capacity and performance. No other operator has 120 MHz worth of 4G spectrum (Verizon has 30 MHz and AT&T perhaps even less). I wrote on Sept. 28, 2010, that it was most likely Texas Instruments that supplies RIM with the PlayBook's dual-core CPU.

Who makes the baseband radio chips for the RIM PlayBook? Clearly, the EVDO radio, to the extent that it contains one of those (most likely), is made by Qualcomm. The WiMax radio is most likely made by Broadcom. Why Broadcom? Broadcom has approximately 90% market share inside the end-user devices operating on the Sprint/Clearwire WiMax network, so that's a fair guess, although not totally without uncertainty.

Aside from the PlayBook's superior consumer proposition in terms of a fixed monthly price for unlimited consumption, what will be the PlayBook's major competitive advantage over devices such as the iPad and those based on Google Android? In a word, security. BlackBerry is the undisputed security leader with a dominant market share in sensitive government operations and many of the major banks and other high-profile institutions.

The recent WikiLeaks scandals have raised the awareness of government and corporate IT security to new highs. This plays right into BlackBerry's hands, with the launch of the PlayBook as the only security-focused tablet.

There are, however, three major questions RIM must answer with respect to its PlayBook transition. Fortunately, I believe I have the answers:

Will the PlayBook be available only on Sprint? What about Verizon, AT&T and T-Mobile? There is no reason it won't be available on those, too. The probability of announcing all of them on the same day is just tiny. It does not take a rocket scientist to figure out that RIM has LTE and HSPA+ versions available for the other non-WiMax carriers.

Will the QNX operating system powering the PlayBook be available also on future BlackBerry smartphones? Yes, of course. A reasonable development time-line would suggest that QNX BlackBerry devices could emerge around the end of September 2011. The smaller size means battery and heat issues would need to be worked out, but this development has likely been underway for more than six months already.

Does the PlayBook work only in conjunction with a BlackBerry? This is, for most relevant purposes, misinformation and propaganda spread by somebody in order to make BlackBerry look like a fool. It could also be RIM's fault for not explaining it very well. The PlayBook must tether to a BlackBerry via Bluetooth only if it is to operate behind RIM's corporate server firewall, the so-called BES (Blackberry Enterprise Server). This security requirement is simply not applicable to the regular consumer, who can disregard it. For the regular consumer, the initial PlayBook device in March will work just like an Apple iPad in the connectivity department: WiFi. Moreover, even for those particular corporate applications, it is only a requirement for the first six or so months of the initial noncellular (WiFi-only) version of the PlayBook. Once the 4G PlayBooks hit the market this summer, they will also be able to talk to the secure servers behind the corporate firewall directly, without the need to tether to another BlackBerry using Bluetooth. RIM needs to explain this a lot better, but in the meantime people need to understand that there is nothing to worry about here.

In summary, RIM is forging a partnership with Sprint/Clearwire that is a match made in heaven for the mobile Netflix consumer. With Texas Instruments, Qualcomm and Broadcom under the hood, the BlackBerry PlayBook could propel RIM and other stocks to new highs this spring in anticipation of this superior product hitting the market.