Analyst: Expect tablet market to commoditize

LONDON--The tablet market, pushed by the arrival of PC makers and lower-cost products, likely will quickly transform into one dominated by commodity products, an analyst predicted today.

"This could become the fastest-commoditized market in history," said Richard Windsor of Nomura Securities, speaking here at the Open Mobile Summit. "The tablet honeymoon will likely be over in 2012."

Today, Apple's iPad dominates the market, challenged by a new host of contenders such as Motorola's Xoom, Samsung's Galaxy Tab line, Research In Motion's PlayBook, and--starting July 1--Hewlett-Packard's TouchPad. For the most part, those challengers carry premium prices similar to the iPad, but that likely will change.

"We do see other tablet vendors start to make an impression. This is caveated on price. They have to come down," Windsor said.

That's a big caveat. Apple long has carried a reputation for high-priced products, but Chief Executive Steve Jobs was able to needle rivals that could only match the iPad's prices. Making tablets isn't cheap, in particular with the price of touch screens that are bright and responsive. The cost will change, though.

"Samsung is about to switch on fab 5," its fifth-generation fabrication facility for manufacturing LCD screens, Windsor said. "The screen's going to get an awful lot cheaper to make."

Another factor is the arrival of personal computer makers accustomed to narrower profitability margins. Tablets today run in the 30 percent range for gross margins, but the PC makers are used to 10 percent gross margins.

"That, plus the decline in pricing of screens, should allow them to bring pricing in about $300 or so," he said.

It's not all about buying a piece of hardware, of course. Apple has a powerful lead when it comes to software available on its App Store, and it's trying to expand its services options, too, with iCloud. Because first-generation Android tablets couldn't match the apps and couldn't beat the iPad on price, they were duds, Windsor said.

"The Android tablets aren't as good because of the ecosystem," Windsor said. "They've got to be cheap."

Apple faces challenges in its phone line, too, Windsor said. The company's current business can't be beat when it comes to profit generated per phone, but the smartphone industry is on the brink of major change.

"It's too profitable," Windsor said. Gross margins are too plump right now, but they'll be thinning. With cheaper screens coming, "we see the handset market becoming much more competitive...The number of people who'll pay $500 or $600 for a smartphone [the wholesale price before carrier subsidies] is rapidly running out."

A lot of the new growth will come with Asian Android phone makers such as LG Electronics and HTC, Windsor predicted. That could pose problems for second-tier phone makers.

"It's the smaller guys who don't have the resources to innovate enough to keep going," he said. "We're nervous about Motorola and Sony Ericsson. We view LG as cyclical, and at the moment they're coming into an upturn."

The lower-cost smartphone movement will give Apple a big choice about whether to follow that market.

"Apple, if it doesn't address the lower-priced tiers, is going to flatten out," Windsor said. And to do that, it'll have to do a separate phone. Apple drastically cut the iPhone 3G's price when the iPhone 3GS arrived, but nobody was interested.

And, Windsor said, there are no rumblings from component suppliers such as battery makers about a cheaper iPhone.

"The longer we don't hear a single rumor, the longer it's going to take for them to do it," he said. "The signs are it'll be at least a year."

Apple faces some uncertainty, but Nokia, struggling with a transition away from its own operating systems to Microsoft's Windows Phone 7, is in a very tough place.

A mid-tier Windows Phone model from Nokia won't emerge for a year, he said. "We're still extremely cautious on Nokia's outlook for the next year," Windsor said.

He wouldn't rule out the company, whose fate is intertwined with the success of Windows Phone 7. There's probably room for three mobile OS ecosystems in the market, but it's not clear how long a grace period Nokia and Microsoft have before programmers and customers just settle on two.

It's conceivable Nokia could be acquired, but Windsor views Samsung as a very unlikely purchaser. It's well on its way to leaving Nokia behind with its own organic market growth. Microsoft is possible, but Nokia shareholders Windsor said he's spoken to wouldn't expect anything unless Nokia's stock price drops in half again.

Nokia would be a challenging acquisition, though, given its hard times.

"It's deeply liquid. If someone was to come in and bid for it, it probably would go through. But what are you taking on?" Windsor asked. "It's like catching a falling knife": bad timing means you could cut your fingers.