2013 global tablet forecast

Transcription

1 2013 global tablet forecast DIGITIMES Research Special Report James Wang, DIGITIMES Research, December 2012

2 Introduction Based on analysis of the major platform companies and white box tablets, Digitimes Research forecasts that global tablet shipments will overtake notebook shipments in 2013, growing by 38.3% on 2012 levels to hit 210 million units; shipments of branded tablets alone are forecast to 140 million units. The aggressive pricing of the Nexus 7 and Nexus 10 is likely to give Google strong momentum in Digitimes Research projects that Google will become the number two large tablet vendor in one fell swoop, with shipments topping 19 million units. While Apple will retain the number one spot, its share of branded tablet shipments will decline to just 55.6%; factoring in white box tablets, Apple s share of tablet shipments will drop to just 37.4%. The explosion in white box tablet shipments in 2012 means that Android will overtake ios to become the largest platform in Combined shipments of all Android tablets including branded, white box, Amazon and Barnes & Noble (B&N) devices are projected to hit 121 million units in 2013, representing 40.2% growth on 2012 figures. Digitimes Research also projects that global shipments of branded and white box tablets will hit 320 million by 2015, with branded devices accounting for some 220 million units and white box tablets for the remaining 100 million. Note: Unless otherwise noted, the source of all charts and tables in this report is Digitimes Research

3 Definitions

4 Device definitions Product type Exterior design Definition NB Tablet PC Smartphone Portable media players Clamshell Convertible One piece Detachable Can be pivoted to an angle 180 Dual screen type Sliding cover type Tilting type, can be pivoted to an angle >180 One-piece type, keyboard can be added but is limited to text input 5 plus with no cellular voice call functionality 6 plus with cellular voice call functionality One-piece type with a detachable keyboard dock that adds additional features such as external ports, storage, batteries and even separate processors Includes touch panel and app store(s) Large size is defined as less than 6 with cellular voice call functionality Modular type, for example where a dock or second screen can be added Includes touch and non-touch screens Screen size les than 5 for touchscreens Note: Will include different processor architectures and operating systems in a single device. 0

5 Device definitions (1) The line between tablets and notebooks is likely to become increasingly blurred, while the share of shipments accounted for by products positioned somewhere between the two categories is likely to rise. For statistical purposes and in order to avoid double counting products/shipments in both the tablet and notebook categories, Digitimes Research uses the following definitions to differentiate tablet PCs, notebooks, smartphones and media players. Tablet PCs are defined as standalone mobile devices that may or may not have a physical keyboard; where there is a keyboard, it can be detached from the main device without impeding its operation. Tablets can be subdivided into one-piece and detachable products. Keyboards may be used with one-piece products, such as Bluetooth wireless keyboards, or the wired keyboard peripherals available for the ipad, which connect via Apple's proprietary connector; the functionality of such keyboards is essentially limited to text input. Detachable tablets consist of a main unit with a multifunctional keyboard dock that may include external ports, storage, and even separate processors, as well as text input functionality For example, some dual-os models feature an ARM-based architecture in the main unit to run Android and an x86 processor in the dock to run Windows. According to this definition, the Windows 8 Pro and Windows RT versions of the Microsoft Surface, and detachable mobile computing devices running windows with an added x86 processor, are all classified as tablets and are therefore included in tablet shipment calculations.

6 Device definitions (2) Notebooks may have processors situated in either the screen or the keyboard portion of the device, but the keyboard and screen cannot be detached or otherwise separated. Notebooks can be subdivided into clamshell and convertible types. "Clamshell" means that the notebook's screen can be pivoted away from the keyboard at an angle no greater than 180 degrees; this category also includes dual-screen designs such as the Asus Taichi. The "convertible" category includes sliding and tilting designs where the screen can be pivoted at an angle greater than 180 degrees, such as the IdeaPad Yoga. Tablets and smartphones are primarily differentiated by screen size, with the dividing line set at seven inches. Thus, the Samsung Galaxy Note's 5.3-inch screen puts it in the smartphone category, while the Galaxy Tab 7 3G version's 7-inch screen qualifies it as a tablet, despite its voice call functionality. Seeing the success of Samsung s Galaxy Note, some Chinese smartphone vendors are designing 6.x-inch smartphones. Digitimes Research grouped these devices into smartphone category so their shipments will not be counted in this report. Digitimes Research believes that these product definitions will enable different types of product to be more clearly distinguished, thereby helping to avoid conflicts with the definitions Digitimes Research defines tablet shipments as the number of units built for brand vendors by ODM/OEM manufacturers (unit build), rather than using alternative definitions such as brand vendors' shipments to channels (sell in) or actual sales to consumers (sell through).

7 White box tablet definition: Shipments mainly in China White box tablets Definition and differentiation by industry White box tablets are mainly produced by companies with a background in white box handsets, netbooks, media players and digital photo frames, based in the South China region Grey area between white box and branded tablets Branded Tablets Apple, Google, Microsoft, Amazon, B&N, Samsung, Asus, Acer, HP, Dell, Sony, HTC, RIM, etc. Definition and differentiation in terms of brand recognition

8 White box tablet definition: Shipments mainly in China Digitimes Research figures for tablets previously counted only branded devices, but now also include white box tablets. Digitimes Research figures show branded tablet shipments based on tier-one brand, and white box tablet shipments based on what was the clone device industry. There is no overlap between these two sectors of the tablet industry, in order to avoid problems of duplicate figures. Tier-one firms include Apple, Google, Microsoft, Amazon, Barnes & Noble (B&N), Samsung, Asus, Acer, HP, Dell, Sony, HTC, RIM and others. White box tablets overwhelmingly use different AP solutions to branded devices in order to keep costs down. Many such solutions are sourced from China-affiliated suppliers, including Amlogic, Wonder Media and Telechip; the supply chain is therefore distinctly different from the branded tablet sector. Digitimes uses the term white box to denote companies that were previously largely clone device makers, which are mostly located in Shenzhen, as well as parts of the East China region. However, there is still a grey area between white box and branded tablets that is difficult to make completely clear. There is considerable variation in the level of recognition that different brands enjoy, from former white box firms like Lanmo, Gaofei and Ainuo, to channel company brands like Bestbuy s Insignia brand, and tier 2 or tier 3 brands like HiSense, Haier, Philips, NEC and Toshiba. It is therefore difficult to draw a clear line between white box and branded products. White box and clone devices are different concepts to begin with, and there is a grey area between both concepts and the existence of a specific brand. However, shipments of models that fall into this difficult to calculate grey area remain small and within the extent of a reasonable margin of error.

9 Chap. 1 Overview of branded tablets in 2012

10 Overview Digitimes Research projects that global branded tablet shipments will reach 104 million in 2012, representing 64% growth on 2011 figures. The ipad will account for roughly 63% of this figure, a drop of two percentage points on 2011, while shipment share for Android and Windows tablets will increase slightly.

11 Chap. 1.1

12 Global branded tablet shipments, Unit: m units ipad - Non-iPad % % (e) 10

13 Global shipments of branded tablets are forecast to hit 104m units in 2012 In 2012, Apple built on strong ipad 2 sales to effectively squeeze out other players during the first half of the year; and although other brands returned to growth in the third quarter and saw explosive growth in the fourth quarter, whole year growth rates for Apple tablets remain some 21 points higher than for other brands.

14 Global tablet shipments by brand, Unit: m units ranking 0 Apple Amazon Samsung Google Asus Microsoft B&N Lenovo Acer (e) Other tier 1

15 Google shoots into the top 4, Microsoft s ambitions has potential for Surface While Apple remain secure in first place, the rankings for other brands will change significantly in Amazon is expected to overtake Samsung to take second place, while Samsung will fall back to third. If the Nexus 7 and Nexus 10 were included in Google s shipment figures, Google would be the fourth ranked brand, overtaking all hardware brands except Samsung and Apple. Without the Nexus 7, Asus would be ranked fifth with 2.7 million units; including Nexus 7 shipments, Asus would be ranked fourth with 7.0 million. Microsoft s target is to ship 3.0 million to 5.0 million units in the fourth quarter, depending on the level of shipments that the supply chain can support. B&N is forecast to ship just 2.5 million units, and no more than 3.0 million in the most optimistic scenario; its shipments will largely be determined by its ability to meet targets in the fourth quarter. Whole-year shipments for Asus, Microsoft and B&N will see little change under stable conditions; however, the latter two firms may overtake Asus if they meet their shipment targets. Lenovo will ship some 2.1 million units, almost double the level seen in 2011, although Google and Microsoft s move into the market means that Lenovo s ranking will remain unchanged. Acer s whole-year shipments of just 1.45 million will see it fall to ninth place. In 2011, RIM was sixth, Motorola and HP tied in ninth place, and HTC was 11 th ; all have now dropped out of the top 10.

16 Taiwan-based ODM/EMS tablet shipments, Unit: m units Foxconn Quanta Pegatron Compal Wistron Inventec (e)

17 Major client orders are concentrated on the top 3 firms, which collectively account for 96% of Taiwan shipments The branded tablet market is becoming more concentrated in the hands of a small number of platform companies. Taiwan-based ODM/EMS firms will therefore only be able to maintain whole-year shipments in the one to two million unit range, unless they are able to win orders from these platform firms. The 9.7-inch ipad remains the mainstay of Foxconn s tablet shipments, although it has also won a portion of ipad mini orders and is also making the Kindle Fire HD 8.9-inch for Amazon; this gives Foxconn shipments of 64.6 million, representing 56% growth on Quanta continues to hold on to orders for 7-inch Amazon devices and is also assembling the Nexus 7. Its success in maintaining concurrent relationships with two competing brands will allow in to achieve shipments of 14.6 million, representing 176% growth on Pegatron has also won some ipad Mini orders and is assembling the Surface for Microsoft, giving it whole-year shipments of 8.3 million and a formidable year-onyear growth rate of 407%. Compal and Inventec will both see shipments drop markedly on 2011 levels as a result of clients moving out of the market or switching to in-house production. Wistron s shipments will see growth in 2012 as a result of it winning orders for the Asus Transformer TF300.

18 Chap. 1.2

19 Global shipments and shipment share for branded and white box tablets by size, Unit: m units 7.x 8.x 9.x 10.x > % Unit: % x" 8.x" 9.x" 10.x" >11" 80% 60% 40% 20% 0% (e) Note: Figures on the left of each category in the bar chart are for 2011; figures on the right are for 2012 shipments.

20 Large tablets remain dominant in 2012 While Apple, Google and Amazon have all launched 7.x models, shipments of these smaller sizes are concentrated in the second half of the year, particularly the fourth quarter. 9.x models will therefore still account for the largest share of whole-year shipments at 58%. Nevertheless, shipments of 7.x and 10.x models are both growing much more rapidly that those of 9.x models, with shipments of both categories set to more than double in 2012.

21 Global branded tablet shipments and shipment share by OS, Unit: m units Unit: % ios Android Windows Other % % 60% ios Android Windows Other 40% 20% 0% Note: Figures on the left of each category in the bar chart are for 2011; figures on the right are for 2012 shipments (e)

22 ios still accounts for 63% of branded tablet shipments in 2012; but Windows grows Android and Windows share of shipments will grow in 2012, while ios and other platforms will see their shares drop. ios share of branded tablet shipments is expected to drop back to 54% in the fourth quarter of 2012 from a second-quarter high of 75%, as rival products were launched in the second half of ios will nevertheless still account for 63% of whole-year shipments. Shipments of branded Android tablets are projected to hit 35.2 million, with Amazon and B&N s modified Android platforms accounting for 13.3 million collectively, giving shipments of 21.9 million for official Android tablets, of which the Nexus 7 and Nexus 10 will collectively account for 4.9 million. Shipments of Windows models will reach 3.7 million, of which the Surface will account for 2.5 million, with other hardware brands accounting for the remaining 1.2 million. RIM and HP sold tablets using their own BlackBerry Tablet OS (QNX) and WebOS platforms in 2011, but have already withdrawn from the market in RIM s 2012 financial reports show that more than 1.0 million BlackBerry Playbook tablets were still shipped, but most of these were leftover stock from 2011.

23 Unit: m units 70 Global shipments of branded tablets by AP vendor, Apple TI NVIDIA Samsung Qualcomm MediaTek Intel Other (e)

24 TI and Nvidia s shipments hit 10m chips, MediaTek and Intel also move up the rankings Apple, TI and Nvidia were the top three application processor (AP) suppliers for branded tablets in 2012, with shipments for TI and Nvidia both surpassing the 10 million mark. Samsung s AP chips are mainly shipped for use in its own device. The company will ship less than 4.0 million chips in 2012, making it the fourth largest tablet AP supplier. Qualcomm has suffered from capacity bottlenecks in the smartphone market, as well as the loss of two major clients as HP and HTC dropped out of the tablet market; its tablet AP shipments have therefore dropped to less than 1.00 million chips. MediaTek is the AP supplier for the Lenovo IdeaPad S2107, and its 2012 shipments will therefore stand at around 800,000 chips. Intel is supplying APs for Windows models made my PC manufacturers, giving it tablet AP shipments of around 700,000 chips.

25 Convertible tablet shipments, k units 3,500 3,000 Android Windows 2, ,000 1,500 1, ,300 2, (e)

26 Windows 8 drives the switch from notebooks to convertible tablets Digitimes Research classifies convertible models as tablets rather than notebooks; shipments of such models will reach 2.86 million in 2012, representing 120.2% growth on Shipments of Android models will reach 2.24 million, equivalent to 72.3% growth on 2011 levels. Shipments of Windows models will total 620,000, 21.7% will be convertible models. However, Windows share of shipments will eventually overtake Android as PC manufacturers launch new products.

27 Chap. 2 The rise and impact of white box tablets

28 Rise and impact of white box tablets The white box tablet sector has seen stunning growth in 2012, with whole-year shipments likely to exceed 50 million units, making the white box sector too big to ignore. Like the vast majority of research organizations, Digitimes Research previously only kept figures for branded tablet shipments, but has now become one of the first research firms in include figures on white box tablets in its calculations. White box tablets have seen such massive growth for three main reasons. First, the growth of Android handsets has brought with it a huge potential customer base for tablets; second, China-based AP solutions have reached maturity; and third, whole-unit manufacturing costs for white box tablets continue to drop. Digitimes Research also discovered that the overall picture of the global tablet industry is markedly different when the white box sector is factored in, with Android already overtaking ios as the number one platform in 2012 and seveninch models becoming the mainstream specification.

29 Chap. 2.1 Overview of white box tablets in 2012

30 Unit: m units Quarterly shipments of white box tablets by processor, Q12 2Q12 3Q12(e) 4Q12(f) Total Other InfoTM Via Amlogic Rockchip Allwinner

31 White box tablets shipments are forecast to hit 50.9m units in 2012 Digitimes Research estimates whole-year white box tablet shipments for 2012 at 50.9 million units, representing fivefold growth on the previous year s 10 million units. White box tablet shipment growth has been rapid throughout 2012, with shipments growing by four to five million units per quarter during the first three quarters. Some export orders were delivered ahead of schedule in September, with the result that fourth quarter shipments show a slowdown in growth. Shipments are split roughly 35:65 between the first and second halves of the year, giving white box tablets a broadly similar seasonal distribution to other rapidly growing consumer electronics (CE) products such as branded tablets, or e-readers in 2011 and earlier.

32 Global shipments of branded and white box tablets, Unit: m units % +74% +409% (e) Apple Other mainstream brands White box Total %

33 Global tablet shipments will top 155m in 2012, with white box tablet shipments second only to the ipad When white box tablets are factored in, whole-year global tablet shipments reached 73.3 million in 2011, and are projected to grow 111% to 155 million units in Shipments of white box tablets are likely to overtake shipments of nonmainstream brands, with grow rates far exceeding those of Apple and other mainstream brands.

34 Chap. 2.2 Growth drivers for white box tablets

35 Comparison of shipments of white box tablets and other convertible/mobile devices Unit: m units Industry structure and players are similar to the white box tablet sector 30 Low-end mobile computing devices that enjoyed a sudden burst of popularity 32.5 Mobile reader devices with similar sizes and pricing Explosive growth surpasses that of comparable devices 0 White box MP3/MP4 Netbook (2009) e-readers (2011) White box tablets (2012)

36 Growth for white box tablets shooting up past the 30m barrier The explosive growth of the white box sector in 2012 begs the question: is this growth sustainable, or will the market rapidly become mature? Historical examples, such as white box MP3/MP4 players, netbooks and e-readers, suggest that shipments tend to grow up to around 30 million units per year, before dropping back. According to processor suppliers for clone device makers, shipments of portable media players (PMP), commonly known as MP3 or MP4 players, from clone device makers peaked at around 30 million units per year. If only players from the white box PMP sector were involved, the market should theoretically have potential shipments of around 30 million. Just as netbooks took a slice of the notebook market with low prices and stripped down functionality, white box tablets could take a chunk of the tablet market. However, the netbook market failed to grow significantly after peaking at around 32.5 million units in E-readers are the most recent and most similar products to white box tablets in terms of size. They also saw rapid growth during the period, but never managed to pass the 30 million milestone, and shipments are declining steeply to an estimated 10 million units in White box tablet shipments are expected to soar from just 10 million units in 2011 to some 50.9 million units in Other factors must therefore be at play for such massive growth to occur.

37 Unit: m units Handset and tablet shipment ratio for ios and Android, (e) (e) Smartphone ipad iphone ipad iphone Tablet Smartphone Tablet Smartphone 30:70 33:67 Official Android tablets 8:92 If more Android handset users can be tempted to buy Android tablets, there will be a huge potential market as yet untapped by other brands, as there was for ios 8: Note: Numbers in red indicate the ratio of smartphone and tablet shipments on the same platform for each year

38 Growth driver 1: Untapped demand in the market, particularly the huge tablet demand from Android users The biggest driver in white box tablet growth comes from Android handset users, who create a huge demand for tablets as yet unmet by brand vendors. Digitimes Research estimates that global shipments of Android smartphones will hit 430 million units in 2012, representing an increase of 200 million on the figure for 2011, and providing an enormous potential customer base for Android tablets. Android users cover every sector from the high end to the low end, and are distributed across both developed and emerging markets; moreover, brand tablet vendors have yet to meet demand from these potential Android tablet markets. The ratio of branded tablet shipments to smartphone shipments will be 3:7 for ios in 2012, roughly on a par with 2011, and 8:92 for Android. If more Android handset users could be tempted to buy Android tablets, i.e. the tablet:handset shipment ratio could be increased, the potential market for Android tablets would be far larger than current shipments of branded Android tablets. Digitimes Research believes that branded tablets currently account for such a low proportion of overall Android device shipments for two reasons: First, Android has always been more fragmented than ios, making Android handset users less inclined to buy tablets than iphone users. Second, Android handsets are already available for less than US$100, while the cheapest Android branded tablets still cost US$159 and US$199; some potential low-end tablet buyers are therefore not yet catered for by brand vendors. Google has launched Android 4.0, known as Ice Cream Sandwich or ICS for short, to reduce fragmentation. Virtually all white box tablet AP vendors supported ICS in Falling hardware costs mean that white box tablets can now be bought for as little as US$79, so white box vendors can more directly target the low-end sector that accounts for such a large proportion of the Android user base.

39 Comparison of CPUs for mainstream white box and branded tablets RK2918 RK3066 A13 A10 Tegra 2 Tegra 3 Process 55nm 40nm 55nm 55nm 40nm 40nm Core(s) Cortex-A8 single core Cortex-A9 dual core Cortex-A8 single core Cortex-A8 single core Cortex-A9 dual core Cortex-A9 quad core Clock speed 1.2GHz 1.6GHz 1GHz 1.5GHz 1GHz 1.5GHz Video recorder encoding Video playback decoding GPU Resolution support 2H12 list price 1080p 1080p 1080p 1080p GC300 Mali400 Mali400 Mali400 GeForce 400MHz GeForce 520MHz 1024x x x x x x1080 US$8 US$12 US$5 US$8 US$15 US$20

40 Growth driver 2: Improved CPU performance helps China-based firms catch up with tier 1 vendors The second contributing factor to the rise of white box tablets is the improvement in the performance of APs from China-based suppliers, which allows even low-end products to deliver acceptable levels of performance. Among the more popular AP solutions for white box tablets in 2012 are the entry level Allwinner A13 and Rockchip RK2918, and the higher end Allwinner A10 and Rockchip RK3066. White box tablet APs often compromise on some aspects of performance in order to keep costs down, but are capable of matching solutions used in branded tablet, such as the Tegra 2 or Tegra 3, in some areas. Branded tablet AP solutions generally have better CPU performance. A list of commonly used solutions in order of CPU performance would read: Tegra 3, TK3066, Tegra 2, A10, A13 and RK2918. However, The A10 actually has exceptional multimedia performance, although the Tegra 3, RK3066 and Tegra 2 are not far behind.

41 Factory gate price of entry level 7-inch white box tablet Unit: US$ <40 1Q12 2Q12 3Q12 4Q12(e)

42 Growth driver 3: Cost - Factory gate prices for cheapest models falls to US$40 The third reason for the rapid growth of white box tablets is the rapid drop in costs. When Amazon launched the Kindle Fire at US$199 in late 2011, many in the industry voiced concerns that the white box tablet market would suffer as a result of price pressures from branded products. However, the reality has been that white box tablets have been virtually unaffected by the Kindle Fire. According to white box vendors, the factory gate price of an entry level white box tablet has fallen from US$50 in the first quarter of 2012 to just US$40 by the fall, with retail prices dropping as low as US$79. By fall 2012, the cheapest branded tablets, such as the revised firstgeneration Kindle Fire, were on sale for US$159, while the cheapest Nexus 7 model was available for US$199, in both cases more than double the price of entry-level white box tablets. This marked price difference enabled white box tablets to maintain very high growth despite the threat from branded devices, with the situation in some ways resembling the e-reader market in 2010 and 2011.

43 US$40 white box tablet design solutions: Low-end CPU, TN panel, G+P touch sensor Touch panel total: US$ TV panel (800x480): US$ Supplier: BOE, Tianma, HannStar Touch sensors (G+P or GG): US$6-8 Suppliers: BYD, Truly PCB total: US$ Processor:US$5-12 Suppliers: Allwinner, Amlogic, Via, InfoTM Memory: (4GB-8GB) US$1.8-3 Suppliers: Micron, SK Hynix Power management IC: US$0.8-1 Suppliers: TI, Wolfson, Realtek Other components on the PCB: US$7-9 Total other costs: US$4-6 Casing: US$ Battery (2600mAh): US$3-4

44 US$40 white box tablet design solutions: Low-end CPU, TN panel, G+P touch sensor Sources at Taiwan-based ODM/EMS firms indicate that factory gate prices for seven-inch branded tablets remained at US , well above the US$80-90 for white box tablets. White box makers must choose different solutions from brand vendors to keep costs down. Brand vendors mostly use wide viewing angle display technologies such as IPS, FFS or MVA; while white box makers generally opt for TN panels, as well as imposing less stringent quality requirements, for example by accepting B-stock components that would not be acceptable to brand vendors. By fall 2012, seven-inch panels with a resolution of 800x480 cost just CNY60-62 (US$ ). G+P touch sensor solutions are used on low-end models to reduce costs. Such solutions involve bonding a single sheet of plastic on a single sheet of glass, and generally cost US$6-8 per unit. The PCB is another major contributor to costs, at CNY (US$ ) depending on the supplier. The application processor (AP) is the most expensive component on the PCB. Mainstream solutions such as the Allwinner A10 and A13, or the Rockchip RK2918 and RK3066, are listed at US$5-12. Nvidia and TI APs generally have a list price of US$ Stiff competition and transparent pricing in the memory sector means that the difference in prices between suppliers is minimal, with 4GB costing around US$1.80 and 8GB around US$3. White box vendors can also economize on sensors, for example by using only linear accelerometers (G sensors) and no gyroscopes; further savings can be achieved by including only a front-facing camera, i.e. omitting the rear camera. Adding the costs outlined above to the battery and the device casing gives a whole-unit shipment cost of around US$40 for a white box tablet, and as low as US$35-40 for some manufacturers.

45 Chap. 2.3 White box firms drive a transformation of the entire tablet industry

46 Global branded and brand + white box tablet shipments and shipment share by OS, 2012 Unit: m units ios Android Windows Unit: % % % 60% % 20% ios Android Windows 0% Brand Brand + white box Note: In the bar chart, figures on the left denote brand shipments, figures on the right denote brand + white box shipments

47 Factoring in white box tablets, Android already surpassed ios as the largest tablet platform in 2012 The majority of research bodies do not officially include white box tablets in their industry data, but Digitimes Research believes that white box tablets are already too important to ignore in 2012, and are in fact leading a transformation in the way both industry players and observers view the tablet market as a whole. Digitimes Research estimates that Android will account for 33.9% of branded tablet shipments in 2012, equivalent to 35.2 million units. ios will still have a shipment share of 62.6%, representing a drop of just two percentage points on 2011, although other mainstream brands saw collective growth of 118% in the fourth quarter of 2012, turning the tide on Apple s dominance. Factoring in the white box sector, Android overtook ios as the largest tablet platform in 2012 with a total of 55.6% of tablets shipments. When white box and branded tablet shipments are factored in, ios shipment share falls to 42%, 21 percentage points lower than its share of branded tablet shipments. Digitimes Research estimates that if Android can close the gap with ios in terms of the ratio of tablet to handset shipments, to a ratio of 2:8 (the figure for ios is 2:7), the 2012 Android tablet market would already exceed 100 million units. Android tablet shipments including white box and branded models will soar to a total of 86.1 million for 2012, giving a tablet to handset shipment ratio of 17:83. Digitimes Research believes that white box tablets are currently replacing branded Android tablets at the low end and in markets where brand vendors are relatively weak such as emerging countries, cannibalizing some of the potential market for Android tablets.

48 Shipment share of Android tablets, by category Official Android Amazon and B&N White box 25% 34% 2011 Android tablet shipments reached 29.2m units 44% 59% 2012 Android tablet shipments will reach 86.1m units 16% 22%

49 White box products account for 59% of Android tablet shipments Including the white box sector changes not only the picture for Android tablet shipments and shipment share, but indeed the distribution of power in the Android tablet sector as a whole. Explosive growth in white box tablets means that official Android tablet vendors like Samsung, Asus and Lenovo will only account for some 25% Android tablets in 2012, a 19 percentage point drop on E-book vendors like Amazon and B&N are also suffering as a result of the rise of white box tablets, with their share of Android tablet shipments falling from 22% in 2011 to 16% in It is this situation that will spur Google to launch a US$99 tablet in 2013 to fight back against white box tablets, after staging a comeback against Amazon with the Nexus 7 in 2012.

50 White box tablet shipments by size, x" 9.x" 8.x" 7.x" 3% 5% 10% 82%

51 White box tablet shipments are concentrated on 7-inch devices, with 8-inch devices also accounting for 10% White box tablets are focused on the low end sector, which is reflected in the fact that 7.x models account for 82% of white box tablets. 8.0 tablets with a 4:3 aspect ratio are unique to the white box sector and account for some 10% of white box tablets. 9 or larger displays involve higher panel and touch module costs, but white box solution design firms also always raise the specification and cost of other components in parallel to screen size, driving up overall unit costs and prices; as a result this size category accounts for less than 10% of white box tablets.

52 Global shipments and shipment share for branded and brand + white box tablets by size, 2012 Unit: m units x 8.x 9.x 10.x >11 Unit: % % % % % x" 8.x" 9.x" 10.x" >11" 20% 0% Brand Note: In the bar chart, figures on the left denote brand shipments, figures on the right denote brand + white box shipments 44.8 Brand and White box

53 Tablet shipments show that 7-inch models are likely to overtake 9.x-inch as the mainstream size in 2012 The mainstream size for branded tablets has tipped from 9.x in favor of 7.x models in 2012 with the launch of the Kindle Fire, Nexus 7 and ipad mini. If the white box sector is included, 7.x is already the category with the greatest shipments in Price and portability are increasingly the dominant factors in both the branded and white box sectors of the tablet market, with the result that tablets will be in ever closer competition with smartphones in the future.

54 Share of global tablet shipments, 2012 Apple Amazon Microsoft + Google Samsung Other tier 1 White box B&N brands 10% 8% 4% 5% 10% Total of 104m units excluding white box 63% 32% Total of 155m units including white box 43% 7% 5% 3% 3% 7%

55 White box account for nearly one third of shipments, tier-one brands excluding Apple account for 25% The four major platform firms Apple, Google, Amazon and Microsoft (chiefly because its investment in Nook Media adds B&N shipments to its own totals) - will collectively account for 82% of the branded tablet market in When white box tablets are factored in, hardware brand vendors addressable market accounts for an even smaller share of the overall tablet market at just 12%. Even major brands like Apple, Microsoft and Amazon are struggling to check the rise of white box tablets, with shipments already second only to those of Apple. Apple is focused on models with high margins and is unlikely to go head on against white box vendors. The primary appeal of Microsoft s Surface is its PC-like document creation features, and it is unlikely to move into the low-price or small-size sectors, not least because it must also maintain the profitability of Windows and Office. Even if Microsoft actually launches the rumoured Xbox Surface games tablet, its performance, positioning and price would all be a far cry from those of white box tablets. Amazon is focused on low-priced products, but is limited to the European and North American markets due to the limitations of its channel, content and app ecosystems; it will therefore have only a minimal direct impact on white box tablets. Of the four major platform firms, Google poses the biggest potential threat to the future of the white box sector.

56 Chap. 2.4 New forces in the industry created by the rise of white box tablets

57 Global shipments of tablet APs, Unit: m units Branded tablet AP vendors White box tablet AP vendors Apple Allwinne r TI NV Rockchip Amlogic Via InfoTM Samsun g Qualcom m MediaTe k 2012(e) Intel Other

58 White box solution vendors account for 2 of the top 5 global tablet processor firms The rise of white box tablets has turned the relevant China-based companies into new forces in the market, the most important of which are processor (AP) and solution design vendors (design houses). Digitimes Research s calculations of branded and white box tablets by AP vendor reveal that Allwinner and Rockchip will both move into the top five, with Allwinner in particular already close to one third of Apple s shipments. These calculations are for the shipments of tablets made using different brands of AP, rather than actual AP shipments. For tier-one AP vendors like TI, Nvidia, Samsung and Qualcomm, white box tablet AP vendors are a very damaging force at the low end of the market. In the past, netbooks failed to make further inroads in terms of replacing conventional notebooks once netbook shipments reached 32.5 million, partly because Intel was unwilling to allow its own lowend products to erode the market for its midrange and high-end products. However, as white box AP vendors continue to improve the performance of their tablet chips, they will catch up with and threaten the position of tier-one AP vendors. Google and Amazon will continue to fight on price, while hardware brand vendors will become more willing to consider using cheaper AP solutions. Lenovo s key S2107 tablet launched in the second half of 2012 already uses a MediaTek solution, while Asus has previously researched the use of Via solutions; tier-one brands are therefore likely to make increasing use of the types of AP solution that are currently favoured by white box tablet vendors, at least in low-end models.

59 Tablet shipments for global brands and China-based solution vendors, 2012 Unit: m units Brands Solution vendors mainly using Allwinner chips Solutions vendor mainly using Rockchip chips Apple Amazo n Samsu ng Google Pingwa ng Asus Tianqi Microso ft B&N Topwis e Sochip Lenovo Hetianc huang UVChip Acer Chih Tien e-shine Other 2012(e) Source: Digitimes Research, November

60 Numerous white box tablet makers collectively constitute a major force, while shipments for major solution vendors may surpass tier 1 brands Some solution design firms (design houses) closely resemble ODMs, but are more flexible and able to directly ship PCBs to downstream assembly firms, as well as shipping whole units to brand vendors or channel companies that wish to affix their own brand; some also have experience of running their own brands. While solution vendors and brand companies have significantly different implications for downstream sectors of the industrial chain, given that their shipments reflect their individual impact on upstream procurement for items such as memory or Wi-Fi modules, it is still possible to compare the differences in the size of shipments. Digitimes Research calculates that the major white box tablet solution vendors such as Pingwang, Tianqi, Hetianchuang, UVChip, Sochip and e- Shine will soon be on a broadly similar level to those of tier-one brand vendors. Pingwang s shipments may even exceed those of all tier-one hardware brand vendors except Samsung.

61 Tablet shipments for Taiwan-based ODM/EMS firms and China-based solution vendors, 2012 Unit: m units Taiwan ODM/EMS Solution vendors mainly using Allwinner chips Solution vendors mainly using Rockchip chips Foxcon n Quanta Pegatro n Pingwa ng Tianqi Topwise Sochip Hetianc huang Uvchip Compal Wistron Chih Tien e-shine Invente c 2012(e)

62 Factoring in whole-unit and design solutions, only the top 3 Taiwan-based ODM/EMS firms have greater shipments than solution vendors If China-based solution vendors are compared with Taiwan-based ODM/EMS firms in the same way, we find that only Foxconn, Quanta and Pegatron have greater shipments than the major China-based white box tablet solution vendors. As cost pressures on brand companies increase, brands may be more willing to use white box AP solutions, with the result that China-based solution vendors are likely to take a significant number of brand clients away from Taiwan-based ODM/EMS firms.

63 Chap. 3 Trends for the major global tablet vendors

64 Overview The big four platform companies will continue to dominate the global tablet industry in 2013, as the war between the various platforms heats up further. The differences in business model between Apple, Google, Amazon and Microsoft will be of decisive importance in determining their relative strengths and weaknesses in this battle. The latest products announced by the big four during September and October 2012 show that Apple is unwilling to reduce its margins by giving the ipad mini a lower price, giving competitors an opportunity to exploit. Google is pricing its products aggressively and has the least vulnerable business model. Microsoft s business model and the positioning of the Surface product itself will constrain it primarily to the midrange/high-end and large-size sectors; moreover, the existence of Google will force it to follow a similar route of close hardware/software integration to that of Apple. Amazon s margins are likely to be squeezed even further as the price war with Google intensifies.

65 Chap. 3.1 Platform war in the tablet industry

66 Four key aspects of the platform war: Platform size, ecosystem, cohesion, profitability Product services (revenue sources): 1. End hardware 2. OS 3. Software & apps 4. Digital content 5. Cloud services 6. Advertising 7. Online and mobile payments Expanding platform size Making profit Attracting ecosystem members Creating cohesion 3 Ecosystem members: 1. OEM partners 2. Software & app developers 3. Digital content firms 4. Advertising agencies 5. Sellers Form of cohesion 1. User interface 2. Popular software/apps 3. Digital content 4. Cloud storage, synchronization 5. Other

67 Four key aspects of the platform war: Platform size, ecosystem, cohesion, profitability The tablet industry will see an intensifying platform war between Apple, Google, Amazon and Microsoft in The real battleground will be over the ability to use various kinds of free, or at least cheap, products and services to tempt users to buy in, and thereby to build ecosystems, increase cohesion and find ways to deliver channel profits. To put it simply, the differences in strategy between Apple, Google and Amazon stem from their choices in terms of retaining or abandoning various sources of revenue, including hardware, OS, software and apps, digital content, cloud services, and advertising.

68 Four major mobile device platform firms presence Imp portance of pr rofitability Apple Google Amazon Microsoft Business territory (revenue source)

69 The four main tablet platform firms are disrupting each others efforts The battle between the platform companies essentially involves doing everything possible to expand market share, keep up margins in each company s original area of business, and damage competitors profitability in their main area of business. Apple and Microsoft rely on both hardware and software for profits, making them easier targets. Despite Amazon s status as the undisputed king of the online retail sector, its activities in the mobile market are still at an early stage of development and it relies on the Kindle Fire as its hardware platform; the profitability of its mobile business as a whole is therefore vulnerable to changes in mobile device margin rates. Apple, Microsoft and Amazon have consistently failed to make major breakthroughs in the mobile advertising sector, giving Google a unchallenged position in this area, and as a result, the most robust business model.

70 The 4 main platform firms each face different growth obstacles and bottom lines Growth obstacles: High prices Brand vendors competitiveness Ecosystem still weak Brand vendors support Ecosystem still weak Limited to the North American and European markets Bottom lines: 30% margins No foundation in the tablet market Margins for the surface are lower than Windows licensing costs Overall profits for the Kindle

71 The 4 main platform firms each face different growth obstacles and bottom lines The starting point of each platform company s business model makes it easy to see where the major obstacles to growth and the bottom line for each firm are. One key aspect of competition for each of the big four is to eliminate its own growth obstacles; by increasing market share, each can hope to force the competition closer to their bottom line, reducing their willingness to remain in the market. Current trends show that Google has the greatest chance of pushing Apple, Microsoft and Amazon down to their bottom line. While Google has launched its own Nexus range of tablets, its share of Android devices as a whole is very low; even if it were to step up the price war by selling hardware at a loss, the impact on the profitability of its Android business as a whole would still be minimal, putting in the most unassailable position of the four platform companies.

72 Chap. 3.2 Apple

73 Apple product roadmap acceleration, Device launch 5th ipad, 6th ipad? AP launch A7, A7X A8? OS launch

74 With 2 new ipad models and 3 new processors launched in one year, does Apple intend to increase the pace of product updates Apple launched two new ipad models in 2012, with the fourth generation ipad and the ipad mini both launched in the second half of the year. As a result, many media observers now expect Apple to launch more than one new ipad in 2013, or even to move towards offering a new strategy with a wider range of models on sale at any one time.

75 Apple processor development Name A4 A4 A5 A5 A5 A5X A6 A6X Model no. APL0398 APL0398 APL0498 APL0498 APL2498 APL5498 APL0598 NA Product ipad iphone 4 ipad 2 iphone 4S ipad 2 (US$399) Device resolution New ipad iphone 5 4th ipad 1024x x x x x x x x1536 Launch date Mar 10 Jun 10 Mar 11 Oct 11 Mar 12 Mar 12 Sep 12 Oct 12 Core(s) Cortex-A8 Cortex-A8 Cortex-A9 Cortex-A9 Cortex-A9 Cortex-A9 Cortex-A15 Cortex-A15 Clock speed 1GHz 800MHz 1GHz 800MHz 1GHz 1GHz 1.3GHz 1.5GHz 1 2 Process 45nm 45nm 45nm 45nm 32nm 45nm 32nm 32nm Area (mm 2 ) GPU PVR SGX MHz PVR SGX MHz PVR SGX543M P2 200MHz PVR SGX543MP 2 200MHz PVR SGX543MP 2 200MHz PVR SGX543 MP4 200MHz PVR SGX543 MP3 266MHz PVR SGX543 MP4 500MHz Memory Dualchannel 200MHz LPDDR 3.2GB/s Dualchannel 200MHz LPDDR 3.2GB/s Dualchannel 400MHx LPDDR2 6.4GB/s Dualchannel 400MHx LPDDR2 6.4GB/s Dualchannel 400MHx LPDDR2 6.4GB/s 4 channel 400MHz LPDDR2 12.8GB/s Dualchannel 533MHz LPDDR2 >12.8GB/s 4 channel 533MHz LPDDR2-17GB/s

76 Apple has yet to increase the pace of processor updates, and is expected to launch the A7 rather than the A8 in 2013 Apple has in the past launched updated processors at the same time as new products. This means that the pace at which the company updates its processors can be used to infer its roadmap for new product launches. Digitimes Research believes that even though Apple has launched three new processors in 2012 the A5X, A6 and A6 the A5X and A6X only consist of minor revisions to the A5 and A6 respectively. Processor updates depend on changes to the core architecture, and rather than speeding up the pace of core architecture changes from the A5 to the A6, Apple has in fact slowed down. The company is therefore projected to launch only A7 and A7X models in 2013, with the A8 unlikely to appear before the end of For the same reason, Apple is unlikely to launch new ipad models at different price points in the same year; in other words, it will not launch both fifth and sixth generation ipads, or both second and third generation ipad mini models, in 2013.

77 Apple may launch a 4 th ipad line in AP launch A7 A7X US$229 ipad mini ipad launch US$329 ipad mini 2 Retina mini US$399 ipad 2 1 4th ipad US$499 ipad 2 New ipad 4th ipad 5th ipad

78 Apple may launch a 4 th ipad line in 2013 However, Apple may continue the strategy first seen with the ipad 2 by continuing to sell the fourth generation ipad line at a price of US$399 while launching a fifth generation ipad. Apple may also keep the first generation ipad mini on sale at a reduced price when it launches the second generation ipad mini. Digitimes Research believes that Apple is highly likely to use Retina displays in the second generation ipad mini, in which case the price of the first generation ipad mini would likely be reduced to US$229.

79 iphone sales and growth estimates, 4Q10-4Q12 Unit: m units Q10 2Q11 4Q11 2Q12 4Q12(f) Sales Q/Q 15% 15% 9% 16% 117% -5% 26% -8% 69% Y/Y 86% 113% 142% 21% 128% 88% 28% 41% 9%

80 Seasonal variations in ipad sales during 2013 are likely to resemble patterns in iphone sales during 2012 Apple s decision to launch a new ipad model in October 2012 changes the seasonal pattern originally expected for ipad launches in When Apple moved the iphone launch date from June to October in 2011, it effectively adjusted the seasonal distribution of iphone sales such that fourthquarter sales were the highest, with sales subsequently dropping off with each successive quarter of the new year. If the next ipad is indeed launched in October 2013, the seasonal distribution of ipad sales is likely to resemble the pattern for iphone sales in If Apple launches the next generation ipad in June or July of 2013, the seasonal contraction in the first quarter will increase, while sales in the third and fourth quarter will remain flat, giving whole-year sales a seasonal distribution that more closely resembles that of the ipod.

81 ipad sales and growth rate estimates, 4Q10-4Q12 30 Unit: m units Sales 0 4Q11 2Q12 4Q12(f) 2Q13(f) 4Q13(f) Q/Q 39% -24% 44% -18% 43% -10% -17% -7% 79% Y/Y 111% 152% 84% 26% 30% 53% -12% -2% 25%

82 Sales of the whole ipad range are forecast to hit 75m units in 2013, with shipments reaching 80m Digitimes Research projects that total sales of all ipad models will hit 75 million in 2013 if the new model is launched in October, equivalent to 19% growth on the 2012 forecast of 63 million, while shipments will hit 80 million. If demand is stronger than expected and continues until the first quarter of 2013, whole-year sales of the entire ipad range may bit million units in 2013, with shipments going as high as 90 million.

83 Unit: m units ipad quarterly shipments, ipad 2 New ipad Q12 2Q12 3Q12(e) 4Q12(f) 1Q13(f) ipad mini s share of shipments increases

84 ipad mini shipments could reach 40m in 2013 Information obtained by Digitimes Research suggests that the ipad mini will account for an increasing share of all ipad shipments with each passing quarter, and will already account for nearly half of all ipad shipments in the first quarter of If ipad shipments reach 80 million units in 2013, ipad mini shipments will be around 40 million units.

85 Chap. 3.3 Google

86 Monthly shipment estimates for the Nexus 7, 2H12 k units 1, July estimates Shipment figures revised upwards Jul'12 Aug'12 Sep'12 Oct'12(e) Nov'12(e) Dec'12(f)

87 Market response to the Nexus 7 is better than expected, 2012 shipments expected to top 4.3m Following the lacklustre market performance of Android tablets in 2011, Google decided to launch the Nexus 7 in conjunction with Asus. Unlike earlier Nexus-branded handsets, Google positioned the new tablet with a breakthrough price and was more aggressive about increasing shipments. Digitimes Research originally projected that Nexus 7 shipments would begin to tail off in the fourth quarter of 2012, but, aided by delays to the commencement of ipad mini shipments, Nexus 7 shipments actually grew in the fourth quarter, while whole-year shipments are likely to hit 4.3 million units.

88 Success of the Nexus 7 drives Google to launch the Nexus 10 Galaxy Tab x800 US$399 US$349 4th ipad x1536 From US$499 New display panels and processors As Apple reduces its use of Samsung components, the Nexus 10 becomes an important new shipment outlet for Samsung s highresolution panels Nexus x1600 From US$399 Threatens the ipad ipad x768 US$399

89 Success of the Nexus 7 drives Google to launch the Nexus 10 Spurred on by the success of its strategy for the Nexus 7, Google has set its sights on Apple and launched the high-value, high-performance Nexus 10 tablet to challenge the ipad, hitting not just the position of the fourth generation ipad, but also the US$399 ipad 2. Apple s ability to maintain its US$ inch product line is now threatened by the launch of the Nexus 10, as well as by cannibalization of sales by the ipad mini. isuppli estimates that the increased display resolution on the new ipad results in an increase of around US$30 in display panel costs compared to the ipad 2. Digitimes Research believes that the different in display panels costs between the Nexus 10 and the Samsung Galaxy Tab is also in the same range. However, as Samsung uses its own in-house display panels, the knock-on effect on final device prices can be kept to a minimum, with the result that the price difference between the Google Nexus 10 and the Samsung Galaxy Tab is just US$50. Just as Apple is striving to eliminate Samsung from its supply chain, Samsung is collaborating with Google on the Nexus 10, making Samsung more competitive with Apple in terms of final devices, as well as providing it with a new outlet for its high-resolution display panels. The aggressive pricing of the Nexus 10 makes it even more likely that Google will launch a low-price seven-inch tablet in summer 2013, while supply chain rumours make it likely that the device will be priced at just US$99.

90 Global tablet share and Google s strategic targets, 2012 Google Other tier 1 brands Amazon+B&N Apple White box Microsoft 1 2 Primary targets: Amazon+B&N 1. Limited resources 2. Closest to withdrawing from the market Secondary target: Apple 1. Major enemy brand 2. Can more easily use low-priced products to attack 43% 9% 3% 1% 12% 3 32% Tertiary target: White box tablets 1. Affect sales of official Android tablets 2. Precise targets of attack less clear

91 Google will take on Apple, Amazon, B&N and white box tablet vendors in 2013 Looking at the performance of Android tablets as a whole during 2012, the Nexus 7 has seen considerable success, but competing products from Apple, Amazon, B&N and the white box vendors still account for a very large share of the market. Digitimes Research believes that Google will launch an all-out effort to take on all these competitors in Amazon and B&N have both experienced a major deterioration in their financial situation following their entry into the tablet market. Should the losses from their tablet businesses rise to the point that they can no longer be offset by their content businesses, they will be forced to exit the tablet market and abandon their modified Android platforms in favor of a cross-platform digital content strategy. Google s number one priority is to force Amazon and B&N out of the market, and as both are already not far from their bottom line, they are vulnerable to attack. Apple s high price positioning also makes it vulnerable to products like the Nexus 10. Apple is also the biggest competitor for Google s hardware partners, making it Google s second most important target. White box tablets affect sales of official Android products and must also be stopped from Google s point of view; however, the lack of a clear, single target means that this threat is a lower priority for Google that those mentioned above. Microsoft s lack of support from OEM partners means that it is the least significant competitor for Google.

92 Google will expand the Nexus tablet range Price Specs Partners Shipment forecast US$ x1600 Exynos chip Samsung 2-4m US$ Nexus 7 2 nd generation Nexus 7 Budget version US$ x1200 Thinner and lighter, or featuring higher resolutions x600 Likely to use tier 2 AP Components from firms based in China of Taiwan Unclear. Samsung Asus and Lenovo are all potential partners Unclear. Samsung Asus and Lenovo are all potential partners 5-8m 8-12m

93 Google will expand the Nexus tablet range, total shipments have the potential to reach 19m units in 2013 Given this strategy of attack on all fronts, Google is expected to further expand the Nexus tablet range in 2013, adding an even cheaper seven-inch model to the range, as well as producing second generation Nexus 10 and Nexus 7 models. Digitimes Research projects that Google s whole-year shipments of the entire Nexus range in 2013 will be in the million-unit range; given steady, health growth, shipments would be around 19 million units. Shipments of individual mainstream 10-inch Android tablet models priced from US$399 were of the order of 150,000 per month in Google shipped around 4.3 million Nexus 7 tablets in the second half of 2012, and could see growth of % for a second generation model in the same price bracket. Shipments of the rumoured ultra-budget model could reach two to three times the level of the Nexus 7, giving shipments of million.

94 Share of Android tablet shipments for Google and other official Android tablet vendors, 2012 Google Other official Android tablets 20% Official Android tablet shipments of 21.9m units in % Official Android tablet shipments of 37.7m units in % 80%

95 Ability to compete on level playing field with Google is key to success for hardware brands other than Apple Digitimes Research projects that the Nexus 7 will account for 20% of all official Android tablets in Bolstered by the Nexus 7, Asus will ship a total of 7.0 million tablets in 2012, putting it nearly 5.0 million units ahead of Lenovo. In effect, Google is directly determining which brand vendors will come out winners in the tablet market, although this control of course does not extend to Apple. If the Nexus range is not included in calculations, Digitimes Research projects that branded Android tablet shipments will total 17.6 million in 2012, rising just 6% in 2013 to 18.7 million. Total shipments of 19 million for the whole Nexus range in 2013 will double the size of the potential market for tablet brands other than Apple to 37.7 million units, with the result that whichever brands land the opportunity to collaborate on Google two forthcoming seven-inch models will be the winners in 2013.

96 Chap. 3.4 Microsoft

97 Quarterly revenues for Microsoft divisions corresponding to Windows and Office, Unit: US$m 8,000 Windows & Windows Live Division Microsoft Business Division 7,000 6,000 5,000 4,000 3,000 2,000 1, Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1

98 Effects of PC industry decline - Growth in Office slows, while Windows undergoes a Q/Q contraction Since the launch of the ipad, the PC market has gone from growth into decline. Digitimes Research projects that notebook shipments will contract 4.3% on 2011 levels. As a result, revenues from Microsoft s Business Division, which is focused on Office and accounts for around one third of the company s total revenues, have seen limited growth since The Windows & Windows Live Division, which accounts for 25-30% of company revenues, has seen revenues contract for five successive quarters, with its share of all company revenues slipping to 20% in the third quarter of 2012.

99 Microsoft s Surface shipment targets (as provided by the upstream supply chain), Unit: m units

100 Microsoft fights back in the tablet market with the Surface, sets 2013 shipment targets of around 10m Faced with PC vendors seeming inability to fight back against Apple in the tablet sector, Microsoft finally entered the mobile device market itself on October 24, 2012, when the Surface tablet was officially launched. Information obtained by Digitimes Research shows that Microsoft ordered the equivalent of shipments of three to five million Surface tablets from the supply chain in 2012, and has set a 2013 shipment target of 8.0 million units. However, the supply chain is concerned that the market will not necessarily accept the Surface, and shipment forecasts for the surface are therefore generally conservative. Digitimes Research projects that Surface shipments will reach 2.5 million in 2012, rising to 8.0 million in 2013.

101 Surface pricing strategy analysis 9.7 ipad Transformer TF300 US$499, 16GB US$399, 32GB US$599, 32GB US$499, 64GB 16GB storage space common at the US$499 price point Keyboards common at the US$599 price point Surface RT version US$499, 32GB US$599, 32GB+Touch Cover US$699, 64GB+Touch Cover A price difference of US$100 leaves OEM partners sufficient margins after hardware costs to pay Microsoft s licensing fees for Windows RT and Office 3

102 The RT version of the Surface is priced from US$499, making it competitive and profitable The main factor in the supply chain s pessimistic view of Surface sales is concerns over its high price. Microsoft announced prices of the RT version of the Surface some time ago, with the 32Gb version selling for US$499 or $599 with the Touch Cover keyboard cover. Digitimes Research believes that the pricing of the Surface RT is appropriate; it is comparable to the 32GB version of the 9.7-inch ipad, and with the Touch Cover it is well positioned to exploit the functionality of Office inch Android tablets from Microsoft s Windows tablet OEM partners are priced around US$100 cheaper, leaving OEMs ample room to pay licensing fees for Windows RT and Office, while still covering product costs and retaining profit margins. While the price of the Surface may be attractive, its operating system is untested and its app ecosystem is inadequate; companies in the supply chain are therefore still concerned about its acceptability to consumers.

103 Forecast of global shipments of mobile computing devices, Unit: m units Tablets (excluding Surface) Surface Notebooks Note: Tablet shipments do not include white box tablets. 4

104 Will Surface growth come from replacing notebooks or tablets? Microsoft has positioned the Surface as an innovative product that caters for demand from both the notebook and tablet sectors of the mobile computing device market. It is difficult to project growth for the Surface before the market has had time to determine its success. However, analysis shows that the main growth driver for the Surface will come from replacing notebook or tablets, which is still helpful to any effort to determine the Surface s market potential.

105 Competing ecosystems could make it difficult for the Surface RT to move into the tablet market Traditional PC software ecosystem Obstacles to entry come from the software/app ecosystem App ecosystems (Apple, Google) Mutually complementary Replacement, obstacle to entry Notebook market X86 version RT version Tablet market Strength of Microsoft s shipments (attack) 5

106 Competing ecosystems could make it difficult for the Surface RT to move into the tablet market There will be both Windows RT and x86 (Windows 8 Pro) versions of the Surface. User ratings of the hardware design are positive, with the performance of the Kick Stand, Touch Cover and Office coming in for particular praise. Despite some continuing shortcomings when used away from the desktop environment, the Surface has the potential to cater for notebook users at least to some extent, for example by using it resting on the lap. The x86 version of the Surface will be compatible with Windows PC software, making it more suitable as a replacement for a notebook. Nevertheless, Microsoft s hopes for the tablet market rest mainly on the RT version, but the weakness of its ecosystem compared to the enormous ecosystems already built by Apple and Google may hinder the Surface s move into this market. The Surface is therefore inherently well placed to replace notebooks, but less well positioned to replace tablets. Replacing notebooks with the Surface is nevertheless still beneficial to Microsoft, and so the company is focusing on the RT version in terms of shipments.

107 Surface tablets will not find it easy to move into the small tablet sector Quarterly tablet shipments by size, x" 8.x" 9.x" 10.x" 11.x" Unit: m units Move in Compete Q12 2Q12 3Q12(e) 4Q12(f) Surface devices will struggle to compete in the small tablet sector Smaller devices are already the main source of growth for tablets 9.7 ipad shipments will fall, but this is mainly due to the launch of the ipad mini Apple has already moved into the small tablet sector 6