Tablet Demand and Disruption: Mobile Users Come Of
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February 14, 2011 MORGAN STANLEY BLUE PAPER MORGAN STANLEY RESEARCH Global Kathryn Huberty, CFA Mark Lipacis Adam Holt Ehud Gelblum, PhD Scott Devitt Benjamin Swinburne, CFA Francois Meunier Keon Han Frank A.Y. Wang Jasmine Lu Grace Chen Bill Lu Masahiro Ono Tablet Demand and Disruption Mia Nagasaka Kazuo Yoshikawa, CFA Mobile Users Come of Age Mathew Schneider, CFA Tablet demand is still underappreciated: shipments could reach 100 million by 2012, in our bull case scenario. A series of proprietary surveys covering more than 8,000 consumers and 50 chief information officers suggest that tablets are accelerating the Global Technology, Media and adoption of the mobile internet. Our data yielded several surprises: 1) two-thirds of Telecommunications Equipment Team companies expect to allow tablets on their networks within a year; 2) consumer interest in See page 2 for all contributors to this report tablets is even greater outside of the US, and 3) users are moving beyond web surfing, email, games, video, and applications to content creation. Tablets are additive to the broader computing market, and we see more beneficiaries than challenged companies. Tablet disruption is not yet discounted by the market in many industries.Tablets should reduce PC market growth by 3 percentage points in 2011—maybe more over the long term. Like smartphones, tablet growth is likely to benefit the established leaders while challenging legacy technology. The impact on printing companies may be the most underappreciated cannibalization story, and we highlight AMD, Dell, Lexmark, and Ricoh as potentially challenged from tablets. Market share leaders and “arms dealers” are the best way to play the bull case. Apple and Samsung Electronics are the most probable tablet beneficiaries, with tablets core to the investment thesis. ARM Holdings, Broadcom, and SanDisk help provide users with fast, touch-enabled, and power-efficient mobile devices and should enjoy greater scale if tablet growth surprises to the upside. Medium term, there are opportunities for Morgan Stanley Blue Papers focus on critical software companies in applications, management, and security. Tablets’ impact on Wintel investment themes that require coordinated perspectives across industry sectors, regions, players Hewlett-Packard, Intel, and Microsoft has largely been discounted, and earnings or asset classes. risk appears limited, partially due to diversification. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. MORGAN STANLEY RESEARCH February 14, 2011 Tablet Demand and Disruption MGlobalORGAN STANLEYTechnology, BLUE Media PAPER and Telecommunications Equipment Team Contributors to this Report US Hardware Kathryn Huberty, CFA1 +1 (212) 761-6249 [email protected] Scott Schmitz1 +1 (212) 761-0227 [email protected] Mathew Schneider, CFA1 +1 (212) 761-3483 [email protected] Jerry Liu1 +1 (212) 761-3735 [email protected] US Semiconductors Mark Lipacis1 +1 (415) 576-2190 [email protected] Sanjay Devgan1 +1 (415) 576 2382 [email protected] Sundeep Bajikar1 +1 (415) 576-2388 [email protected] Atif Malik1 +1 (415) 576-2607 [email protected] US Software Adam Holt1 +1 (415) 576-2320 [email protected] Jennifer Swanson, CFA1 +1 (212) 761-3665 [email protected] Keith Weiss, CFA1 +1 (212) 761-4149 [email protected] Melissa Gorham1 +1 (212) 761-3607 [email protected] US Communications Equipment Ehud Gelblum, PhD1 +1 (212) 761-8564 [email protected] Kimberly Watkins, CFA1 +1 (415) 576 2060 [email protected] Michael Kim1 +1 (212) 761 3247 [email protected] US Internet Scott Devitt1 +1 (212) 761 3365 [email protected] Collis H.G. Boyce1 +1 (212) 761 6578 [email protected] Joseph N. Okleberry1 +1 (212) 761 8094 [email protected] US Cable/Media Benjamin Swinburne, CFA1 +1 (212) 761-7527 [email protected] David Gober1 +1 (212) 761-6616 [email protected] Europe Semiconductors Francois Meunier2 +44 20 7425-6603 [email protected] Sunil George2 +44 20 7425-3436 [email protected] Asia Technology Jasmine Lu5 +852 2239-1348 [email protected] Grace Chen4 +886 2 2730-2890 [email protected] Keon Han4 +82 2 399-4933 [email protected] Young Suk Shin4 +82 2 399-9907 [email protected] Bill Lu5 +852 2848-5214 [email protected] Frank A.Y. Wang4 +886 2 2730-2869 [email protected] Jerry Su4 +886 2 2730-2860 [email protected] Richard W. Ji5 +852 2848-6926 [email protected] Timothy Chan5 +852 2239-7107 [email protected] Masahiro Ono6 +81 3 5424-5362 [email protected] Kazuo Yoshikawa, CFA6 +81 3 5424-5389 [email protected] Mia Nagasaka6 +81 3 5424-5309 [email protected] Shoji Sato6 +81 3 5424-5303 [email protected] Yusuke Yoshida6 +81 3 6422-8652 [email protected] 1Morgan Stanley & Co. Incorporated 3Morgan Stanley & C. International plc, Seoul Branch 5Morgan Stanley Asia Limited 2Morgan Stanley & Co. International plc 4Morgan Stanley Taiwan Limited 6Morgan Stanley MUFG Securities Co., Ltd. See page 88 for recent Blue Paper reports. 2 MORGAN STANLEY RESEARCH February 14, 2011 Tablet Demand and Disruption MTableORGAN ofSTANLEY Contents BLUE PAPER Executive Summary ................................................................................................................................................................. 4 Key Investment Conclusions .................................................................................................................................................. 5 Summary of Key Takeaways by Industry............................................................................................................................... 6 The New Computing Landscape............................................................................................................................................. 7 Why We’re Bullish................................. ................................................................................................................................. 7 Key Tablet Assumptions: Shipments and Cannibalization...................................................................................................... 12 State of the Tablet Market .................... ................................................................................................................................. 14 Hardware: Cannibalization Challenges PC Vendors ................................................................................................................. 19 Semiconductors: ARM Wins Round One in Tablet CPUs ........................................................................................................ 28 Hard Disk Drives: Tablets Not Too Disruptive, Other Threats Linger ....................................................................................... 38 Memory Semiconductors: NAND Is Best Bull Case Play ........................................................................................................ 42 TFT-LCD and Touch Panels: Some Positives for Display Technology .................................................................................... 46 Imaging and Printing: Tablets to Reduce Printing Demand..................................................................................................... 50 Software: Opportunities in Management, Applications and Security......................................................................................... 55 Interactive Entertainment: Tablets Poised to Cannibalize Hardware ..................................................................................... 6 5 Cable/Satellite: Tablets Unlikely to Drive Incremental Cord-Cutting ......................................................................................... 73 Media: A Game Changer for Content Owners ........................................................................................................................... 77 Appendix I: Key Survey Takeaways ......................................................................................................................................... 81 Appendix II: US Tablet Survey Demographics.......................................................................................................................... 84 Appendix III: Models ................................................................................................................................................................. 85