Tablets: When, not if

Today I listened live to the Apple Q4 earnings call, which featured a surprise guest appearance by his Steve Jobs. In his prepared remarks, his Steveness focused on the two-horse race with Android for smartphone leadership and its efforts to preserve its lead in tablets.

Apple shipped 4.19 million iPads (accounting for $2.79b in revenue) in the 13 weeks ending Sept 25, versus 3.27m (and $2.17b) in Q3, its first quarter on sale. (Apparently analysts had expected 5 million iPads to be sold.)

Deutsche Bank and Fortune got a flurry of publicity this morning when they added Apple’s iPad sales to its Mac sales, making it the US market leader with 25% share. (Tim Carmody of Wired adds more details, and discusses the limitations of this analysis).

Even without the iPad, Apple’s Mac products had the highest unit sales increase of any major PC maker, up 24% according to IDC. Meanwhile, the rapid rise of the iPad is clearly cannibalizing netbook sales and hurting traditional PC component suppliers like Intel and AMD, as AMD’s CEO admitted last week during his company’s earnings call:

Q: Any perspective you may have on tablets' impact on netbooks, or the growth or potential in that market next year?

Dirk Meyer: Clearly, in the last quarter or two, the tablet has represented a disruption in the notebook market. If you ask five people in the industry, you'll get five different answers as to what degree there's been cannibalization by tablets of either netbooks or notebooks.

I personally think the answer is both, and given the pretty high price points of the iPad, there's probably some cannibalization even of mainstream notebooks.

In his own call (according to my notes) Jobs said:

The iPad is clearly going to affect notebook computers. The iPad proves it's not a question of it but a question of when.

One of the analyst questions in the call was (paraphrasing): Apple is not number one with either the Mac or iPhone, but retains more than 50% global share for the iPod — so which one is more representative for the iPad?

Jobs clearly expects Apple to dominate the tablet market for another 12 months. He predicted failure for the current rush of tablets based on Android 2.2, given that Google has recommended waiting for the next version of the OS. (Apparently LG and Archos reached the same conclusion.)

But Jobs also predicted overall failure for the 7" tablet form factor — which he called a “tweener” because “it’s too big to compete with a smartphone, too small to compete with an iPad.” He also notes that while screens can get higher resolutions, touchscreens will not get higher resolvability unless people “sandpaper” their fingers.

I think it’s realistic to expect that Apple will retain its dominance in tablet computers for the next 6-12 months, and quite probably beyond that.

One factor is how long that Apple retains the ease of use advantage that (as Jobs argued passionately) it obtains from end-to-end control of the integration of the software, hardware and services. But the other major issue is whether Apple has the correct conception of what people want in a tablet.

Is Jobs right about the 10" size and the 1.5 lb weight, priced at $400? Or is the Kindle at a third of the price and weight more the wave of the future? If the latter wins, this would be somewhat reminiscent of the Palm Pilot defeating the Newton 15 years ago.

However, I think the form factor issue is part of a much more basic question. People aren’t going to carry around 3 screens: phone, tablet and laptop, so which one loses? I see the tablet as a browsing device that competes with a phone, while Jobs argues it’s a work device that competes with a laptop. Perhaps when the iPad bundles a virtual projection keyboard I’ll buy the laptop argument, but not yet.