Convergence Across Screens

Alex Barbi, portfolio manager of the Platinum International Technology Fund, delves into the shifting market trends in PCs, smartphones and tablets, and discusses the key players in both software and hardware.

While blaming the European crisis and a general economic slowdown, most PC makers are in fact facing a significant shift in consumer preferences towards mobile devices like smartphones and tablets with a multitude of ‘apps’ (applications such as games, utility programs, media etc) all available on user friendly touch screens.

The computer industry is going through a deep transformation.  During the June 2012 quarter we heard Hewlett Packard, the world’s largest PC maker, announcing another restructuring plan and taking a $1.2 billion write-off on Compaq Computer; on the same day Dell stock price plummeted by almost 20% as the company announced that consumer revenues had declined by 12% and sales to large enterprises were down by 3%. While blaming the European crisis and a general economic slowdown, most PC makers are in fact facing a significant shift in consumer preferences towards mobile devices like smartphones and tablets with a multitude of ‘apps’ (applications such as games, utility programs, media etc) all available on user friendly touch screens.

According to the most recent industry data, total smartphone sales in 2012 reached more than 700 million units, an increase of nearly 50% over the previous year.  This, despite a stagnant global mobile phone market, at 1.75 billion units.

Similarly, worldwide media tablet sales reached 128 million devices in 2012, a 78% increase on 2011.  In contrast, worldwide PC shipments totalled 350 million, a 3.8% decline from 2011.

The old desktops that 15 years ago introduced us to the Internet through a cable plugged in the wall, are now being replaced by thin/lightweight tablets or other mobile devices connected wirelessly to mobile Internet or Wi-Fi networks. The transition to cloud (web-based) services like music and video streaming, remote data storage of documents, photos etc is making the network and the applications (as opposed to the device per se) the centre of the user’s experience.

Content previously viewed on a TV or a PC (say a movie, games or photos) can now be viewed on a tablet or a smartphone and increasingly through wireless connections. The new devices are no longer standalone entities but increasingly multi-functional. You can take a photo on your smartphone but you may want to watch it on your tablet later on. You may receive an email message on your PC but you want to review it on your TV from the comfort of your couch while you are watching the photos you had taken earlier on your smartphone and so on. Different devices have to be able to “talk to each other” and synchronise content, messages, photos, music etc. Applications running on one device have to be available across all other devices.

These trends risk making traditional software applications such as those running old PCs less relevant and are threatening to relegate the desktop to a sideshow. Apple with its iPods, iPhones and iPads was very early to understand this revolution which is changing the way we access and manage information on and off the Internet. The race is on and while Apple’s competitors have been late to the game, they are now trying to catch up.

Google has advocated an open software environment with its Android Operating System freely available to phone/tablet manufacturers and software developers, aiming to develop an alternative to Apple’s successful iOS. Google’s main interest is to expand its advertising based Google Search franchise in the mobile world. In 2012, Android phones have in fact achieved a dominant 70% market share of the smartphone market, overtaking Apple now second with 21% share. The Android universe remains, however, fragmented across several phone manufacturers (with the exception of Samsung’s large share) with many developers and phone operators lamenting a lack of consistency across the various software releases and excessive costs in managing this fragmentation (as opposed to Apple’s monolithic/closed environment). Yet, despite its weaknesses, Android has become the leading operating system in tablets with a 62% market share in 2012, overtaking Apple with 45%. What about Microsoft? Five years ago, well before Apple had launched its iPad, Bill Gates was enthusiastically showing off an innovative table-top touch screen device called Surface, effectively anticipating most of the functions embedded in today’s smartphones and tablets. Microsoft, however, never released the product or its innovative interface and that gadget remained in the labs. Perhaps too worried about protecting its dominant Windows software franchise, Microsoft has been unable so far to meaningfully participate in the high growth smartphone and tablet markets.

The recent presentation of Microsoft’s innovative tablet named (again) Surface and the launch of the new Windows 8, designed specifically with touch interaction in mind, seems to address most of the issues that have so far prevented Microsoft from being a contender in these emerging areas. Unusually, Microsoft has decided to directly sell this ‘converged’ or ‘hybrid’ device (a tablet with a detachable and foldable keyboard) under its own brand, without relying on its traditional PC makers. We believe this is a sign that Microsoft has finally realised the urgency of addressing its weaknesses in this newly created market. It is also a message to its traditional PC partners to show a template on which to build tablets attractive and competitive enough against existing Apple and Android devices. We consider the launch of Windows 8 as the greatest chance that Microsoft has to re-gain the ground lost to Apple and Android in the consumer segment.

Tim Cook, Apple’s CEO has derided hybrid/converged devices comparing them to “an attempt to converge a toaster and a refrigerator” and he claimed that Apple will not make one. As a hardware manufacturer it would of course rather sell two devices than one... but perhaps Tim Cook is forgetting that the iPhone itself was created as a ‘hybrid’ between a phone and a music player effectively, partly cannibalising its own iPod.

Consumers value integration, so we think the game is still open and the market’s preferences can change very quickly when new products are introduced. Moreover, even Apple understands very well the need for inter-operability and common/consistent user interfaces. That is why it is working to improve inter-operability between its iOS devices (iPhones/iPad) and its OSX devices (Mac notebooks and desktops) with its new Mountain Lion software for Macs.

Samsung Electronics is also well-placed to benefit from the proliferation of devices based on Android and Windows 8 platforms (the Koreans have been partners of both Google and Microsoft) thanks to its scale, vertical integration and access to in-house leading components (semiconductors, memories, screens and batteries). Admittedly though, Samsung will play a role more akin to an arms’ merchant to Google and Microsoft given its strengths are more in hardware than software.

DISCLAIMER: The above information is commentary only (i.e. our general thoughts). It is not intended to be, nor should it be construed as, investment advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances. The above material may not be reproduced, in whole or in part, without the prior written consent of Platinum Investment Management Limited.