The shifting Mobile Tectonic plates are bound to create new partnerships and alliances as the old Wintel empire retreats to its legacy comfort zone. What remains today are four players looking to dominate the mobile platform (i.e. Apple, Google, Samsung and Amazon) and each need to expand their presence in the coming new year or fall behind. Recent rumors abound that Amazon is going to build a smartphone; Google will create its X-Phone to outflank Samsung who in response is hedging its O/S options with Tizen, another mobile Linux O/S that is also backed by Intel. Get the picture: trust no one, especially not your “partners.”
Apple’s introduction of the iPAD Mini is one more step in the race to solidify the standardization of form factors based on whether it is a one-handed or two-handed mobile device. It is now clear that true personal mobility will be encased in a device that holds a screen that is between 4 and 8” and costs from $0 subsidized to $699 unsubsidized with the latest baseband technologies at the high end. In this expanded market place one can include iPods, smartphones, tablets and e-readers. This eventually becomes a market of multiple billions of units a year and served only by those who can assemble a very efficient integrated supply chain like Apple and Samsung do today. Over the past year, Google has come to understand that these former partners will be strict gatekeepers who intend to exclude their maps icon from the devices that fall into a new customers hand. Savvy buyers will know hoe to upgrade but many will stay with the default settings and thus deny Google revenue. Amazon also knows that their marketplace will depend on mobile shoppers who don't have a one button access to their web site. The current Kindle platform is not feature rich enough to attract premium buyers.
Legacy is still profitable for Wintel but is likely to shrink in terms of dollars in a manner similar to how IBM's mainframe business declined. The original 10” iPAD, we can now say was Apple’s way to test the market on the concept of internet consumption being more important than the Microsoft Office Suite. Consumers were expected to dabble but would corporate? The answer in the end was yes and it caught Intel and Microsoft by surprise because it was underpowered and didn’t support traditional apps. Intel received their heads up from Transmeta in 2000 on the importance of battery life in a wireless world but spent the next ten years pushing performance in large notebooks.
While Apple shipped iPADs with $30 processors, Intel launched Sandy Bridge and Ivy Bridge “ultra low voltage” parts at premium prices (>$200) and thus not only stunted the launch of ultrabooks but also tablets. Apple’s model can be summarized as giving away the processor, graphics and iOS while getting paid a premium on Batter Life, NAND storage and 4G LTE. In the end, the high valued piece of computing that Moore's Law addresses is that which is most mobile and connected. Intel could have vectored off the performance roadmap years ago to build an ultra low power x86 that was economical, but perhaps they were too distracted by AMD and NVidia. I have a strong suspicion that Apple understood that Wintel would breakup based on each vendors desire to maintain their high margin component and compromise was out of the question. Microsoft's decision to build their own tablet with an ARM processor shows that it is late in the game. And so Apple's model to give away the processor and O/S is in many ways similar to Microsoft giving away Internet Explorer for Free in order to dispatch the once thriving upstart known as Netscape. One can hear the oxygen being sucked out of the room.
In the coming year Apple and Samsung will look to extend their leads as they ping pong faster product iterations to close the gaps that once existed between a 3.5” iphone and a 10” tablet. Look for an iPAD mini refresh with a Retina Display in the months ahead that will be priced at $359 and allow the current device to drop to $299. Also look for an iPod with a 5” display as well as a new iPhone with a larger display, better camera and NFC. Samsung will splatter the wall with even more versions at ever smaller price point increments as they leave no product hole. Google sees this coming and has to move quickly or lose its leverage.
The issue for Google is not just the creation of the X-Phone, it also entails the creation of a whole supply chain and retail stores or stores within stores. Android started as an O/S that was meant to be proliferated to multiple OEMs who each took a small slice of the pie and thereby enable the creation of the equivalent Microsoft's PC strategy for the current decade. Samsung took the free O/S and leveraged its incredible vertical supply chain and fantastically expensive marketing budgets to buy off the channel while still making a profit. The other Android players withered at the assault. And so now Google has to conjure up advanced products to outflank Samsung. Google will need help on the hardware side. Will they turn to Intel as a Fab for cheap mobile chips and in return swear to stay x86 in their data centers. Is Amazon thinking the same thing?
Apple’s plan to ramp at TSMC this year with its A6X processor is a sign that they are looking to be completely independent of Samsung in the next 18 months. If they were unable to make a deal with Intel as a second Foundry then the latter has to aggressively move to partner with one of the other platform players. Paul Otellini sits on Google’s Board and I am sure has made the pitch. Is there a conflict of interest here that has caused him to resign from Intel early in order to facilitate a partnership? Time will tell. However mistakes at this stage will be magnified down the line. Where we sit today was unimaginable a year ago and where we sit January 2014 is likely to be significantly beyond what we can now dream.
Full Disclosure: I am Long AAPL, INTC, ALTR, QCOM
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