Over the last few days, would be reports of Apple (Apple) bringing a smaller iPad to market have been gathering steam. Its no secret that Apple has an intensely loyal customer base across all its i-products, but given the number of industries that it impacts, Apple is an extremely watched if not scrutinized company. With good reason, through its hardware products, software and iTunes offering it has transformed the way people buy and consume a number of products - musics, TV, movies, podcasts, games, apps and software to name just a few -- on devices that did not exist - or were not mainstream - until Apple introduced them.
A key chapter in any consumer electronic company's handbook is shrinking its product to make the design smaller or at least slimmer. We can look at any number of past products from radios to cameras and video cameras to PCs and TVs. Those last two have witnessed extreme form factor compression over the years, while all of them have fallen victim to falling average selling prices (ASPs) as well. TVs in particular have gone from large and bulky to extremely thing given the rise of LCD, LED and more recently OLED technology. All of that has benefiting companies like Cree (CREE) and Universal Display (PANL).
Part of that device price compression reflects the competitive environment, but it is also driven by vendors seeking to expand the target market for their products. After all, companies like to attack large markets with their products and dropping prices and introducing lower priced and potentially smaller versions is a tried and true way of expanding that addressable market beyond the high-end.
Apple has done this in the past extremely well via the iPod and the follow up iPod mini, iPod Nano and iPod Shuffle. iPod aside, Apple has also introduced smaller, thinner products in its Mac line of products in the form of its Macbook Air and to some degree with its Mac mini. Over the last fast years since Apple first introduced its market share leading iPhone, there have been a number of rumors over a smaller form factor offering and as yet one has yet to emerge. But with competitors already bringing smaller tablet form factor products to market at more affordable prices, it seems likely that Apple will respond rather than sit on the sidelines as other companies look to beat it in a market that it helped create if not re-create. These competitors include Amazon (AMZN) with its Kindle Fire, Google (GOOG) and its Nexus 7, Barnes & Noble (BKS) with its Nook, and the Samsung Galaxy Tab 2.
I've shared my view that industries over time tend to consolidate around less than a handful of companies and over time those companies have the lion's share of the market. PCs and the basic/feature mobile phone market offer great proof points for this but so do TVs and other consumer electronics. It looks as if we are getting ready for the next round in the Tablet Wars and it should be no surprise as to what comes next even though more competitors keep throwing their hat into the ring. The most recent one to do this was Microsoft (MSFT) with its Surface tablet and one has to wonder how long until Microsoft announces a smaller form factor version.
So who wins or at least benefits in the tablet wars?
Using history as a guide, most of the device vendors will not benefit in a significant way over the long-term given price competition and the need to ratchet up marketing dollars in a bid to build their respective brand. Some will make a go of it and drop out over time, while others will fade from existence like the way Palm, Danger and Sendo did in the mobile phone/smartphone space. In my view, the most likely winners - read that as the top three by volume - long-term are likely to be Apple, Amazon and a Google- Android powered version by either Google-Motorola or Samsung. But odds are that will be a long and costly battle in what will be a larger Connected Devices War.
From a different investing vantage point, there are a number of key suppliers that are poised to benefit as the Tablet War heats up. From glass suppliers like Corning (GLW) to touch capacitive solutions from Synaptics (SYNA) and Silicon Labs (SLAB) and RF solution and baseband companies, like Skyworks Solutions (SWKS), RF Micro Devices (RFMD), TriQuint Semiconductor (TQNT), Qualcomm (QCOM) and Broadcom (BRCM) among others. Not surprisingly, most if not all of these companies are also benefiting from the Smartphone Explosion that is going on. Some like Synaptics may not benefit as much given the cannibalization in the notebook PC market. Together these mounting vendor wars will drive incremental demand for component suppliers, but longer term investors will need to identify those suppliers that are well positioned with those few companies that will be the ultimate hardware winners.
Two stocks investors should watch with an eye toward buying as we battle through the upcoming 2Q 2012 earnings season are Qualcomm and Skyworks, with Corning and RF Micro on the contender list.
