This leaves non-Apple OEMs such as Dell, HP and Acer to look to Android from Google or Linux for a legitimate, lightweight, open alternative that can have applications written from a vast, independent community.
So how should Dell and HP respond?
It is always easier to stay out than get out.
Needham believes the other OEMs should wait to see how the market reacts to the iPad, its real life use cases and the requests for additional features.
Western Digital is the master at letting the market develop before entering with exactly what is necessary.
The report goes on to state Needham believes the other OEMs can effectively create a new category form factor, making Needham somewhat less interested in the first Mini 5 from Dell (roughly 5 inches reportedly) for example. These will be expensive devices, and users will likely not chose to be adventurous.
Needham also expects Dell to expand this Mini line beyond the Mini 5, but at the moment, the Mini 5 seems to answer a question no one asked (too big for a phone, too small to create content, not that much bigger than an iPhone for movies).
At the end of the day, even Apple’s 10-inch iPad, is consistent with both book sizes and some of the most popular netbooks.
Alternatives taking more of a slimmed down netbook approach are also likely doomed for failure (i.e., Atom-powered running a watered-down traditional PC OS). Merely the fact that the user must boot the device could be a deal breaker (vs. always-on), but slower overall performance, an extremely small Windows taskbar that must be manipulated by hand may be less of a factor in a more full scale device become debilitating here.
Overall, Needham writes in its report it is apparent that this class of tablet device the iPhone has started that utilizes a smartphone OS, is powered by an ARM-based processor, and yet has the capability to run both entertainment and productivity apps has significant potential to disrupt the Wintel world.
Cost analysis: 3G enabled netbook vs. 3G iPad
As mentioned above in Table 1, the industry analyst community continues to have high expectations for the netbook to grow in the coming years.
However, Needham believes that most netbook buyers (once again using the firm’s three core requirements) were looking for lightweight Internet browsing and email, and might consider the switch to an iPad, especially if updates can be done without another computer.
Many netbooks have been returned following disappointing performance.
The data plans also present a stark contrast between netbooks and the iPad. (Read: ‘Fault lines in iPad teardown cost analysis)
Unlike netbooks that are tied to multiyear contracts with wireless vendors, the 3G iPad has no long-term contract, which significantly drives up the price comparison for the netbook (see Table 2). The lack of a 2-year contract is further enhanced by an unlimited data package for less money, vs. a 5GB max under Verizon.
Table 2: Netbook vs. iPad price comparison
Time will tell what the OEMs arrive at for future table / slate devices, but with Apple breaking the contract monopoly of AT&T, Needham expects a very competitive marketplace for data plans in the coming years.
Goodbye netbook. We hardly know you
With the casual Internet user and road warrior potentially seeing the cost advantages of the iPad, Needham believes the netbook is susceptible more than any other PC device.
While the segment was likely to be under pressure regardless in 2010 and 2011 from a corporate PC refresh that will skew towards desktops and mainstream notebooks, Needham expects the iPad and similar devices to further constrain growth potentially as soon as this year.
The report states it is difficult at this stage to assess just how much of a mix shift away from netbooks could occur, but over time, the bank mentions it would not be surprised to see half of the iPad / tablet market comprised of former or potential netbook buyers.
In terms of the corporate buyer that needs more content generating capabilities, this segment could migrate more to the ultra-thin market, where slim form factors with low-power processors have better performance than netbooks, and come with traditional screens and full-sized keyboards.
Either way, the netbook’s days of providing the bulk of growth within the PC market are likely past.
Now let’s take one step further…
One of the most interesting elements of the iPad as a content generating device is how Apple’s iWork applications (Pages, Numbers, and Keynote) can store files on iwork.com that can be accessed from any authorized user device.
This is the cloud in action, and may allow lower capacity versions to be sufficient.
The combination of the cloud storage dynamic and a form factor unlike traditional PCs and notebooks, further distances the market away from the legacy PC world.
Looking further down the road, Needham sees the arrival of the iPad (and similar devices) as a watershed event that is likely to be followed by more radical changes in breaking the Wintel logjam.
Specifically, one of the private companies Needham is particularly close to (read: Needham likely has money invested in the company) is nComputing (www.ncomputing.com), a provider of virtual desktop solutions at extremely low cost.
One of the nComputing’s more interesting products is its Numo chip that is now being embedded within LG televisions and other consumer and enterprise devices.
The ability to deliver PC functionality within an Android OS (for only the cost of a $20 chip) and away from the traditional form factor of a PC is compelling and infectious Needham believes.
The bank continues by assuming it is not difficult for consumers to imagine adding onto current cable or DSL service PC processing power delivered through our existing cable boxes.
Needless to say, if we can run PC applications, store files, and print, is it not a PC?
The answer to these questions could potentially bring about the second PC revolution and broaden adoption to many billions around the globe.
To achieve this, bandwidth must be enhanced, data centers scaled, and storage increased.
It will be an exciting time for innovative technology companies and investors.
To be clear, Needham does emphasize the firm does not believe that powerful local devices (desktop, notebook or otherwise) will be eliminated, but rather it expects new categories of devices, such as the iPad and virtual PCs delivered in non-traditional ways, to represent a growing percentage of PC users and push the boundaries of the industry definitions.
Ultimately, it will likely be the PC OEMs themselves that are forced to adapt and contribute to this change (whether organically or through acquisition).
Once this change is underway, Needham expects the productivity explosion that happened in the U.S. and other industrialized countries to spread to regions hampered by lower per capital income. (Read article, ‘China iPhone market demand projections‘)
Conclusion
The iPad, as the first successful entrant in this new product category or space, has the potential to be at the vanguard of this segment and become the benchmark for speed, easy of use, and elegant design that all subsequent offerings will be measured against.
The traditional PC market is poised to respond with dozens of tablet / slate designs, however, Needham still expects the netbook to be a casualty in this battle to expand the definition of a PC.
Bottomline, Needham expects that during the next 5 years the form factors offering PC functionality will change radically and set the stage for the next major expansion of the PC market.
Welcome to the dawn of the age of instant-on / always-on computing.
Source: Needham & Co., IDC, Verizon, Apple, VentureOutsource.com, April 2010
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