What Will Happen to PCs as Tablets Surge?

In 2009, OEMs shipped about 2 million tablet computers before Apple Inc. (Nasdaq: AAPL) jumped into the market. In 2010, the iPad sparked roaring demand for tablets, and shipment jumped to 19.7 million units. The giddy year-over-year growth offers a striking insight into the future of tablets and the potential havoc they will create in the PC market, which has been, until now, a mainstay of the high-tech sector.

Personal computers currently account for a major share of global semiconductor shipment, and the market has, for decades, boosted sales of other accessories and non-active components. The PC drove strong demand for consumer printers, and gave companies like Hewlett-Packard Co. (NYSE: HPQ) runaway profits from the sale of printer ink.

In addition, the PC market supports multibillion-dollar industries in many countries, including Taiwan, which got its start in the high-tech sector by supplying printed-circuit boards to foreign OEMs. Without the PC, we certainly would never have had the rapid growth of the contract manufacturing industry dominated by companies such as Flextronics Corp. (Nasdaq: FLEX) and market leader Foxconn Electronics Inc. (Hon Hai Precision Industry Co. Ltd.), which had 2010 sales of $78 billion.

The shifting fortune of the PC market is changing the dynamics of the industry, although component suppliers may not feel the pinch as much as their OEM customers. By 2015 -- just four years away -- total tablet shipment will jump to 243.2 million units, up from the 66.6 million units anticipated for 2011, representing an increase of 265 percent, according to researcher iSuppli Corp.

Apple, which lit a fire under the market last year with its first iPad, is expected to see its market share slip from 77 percent and 66 percent, in 2010 and 2011, respectively, to 36 percent by 2015, according to iSuppli. Windows-based tablets are forecast to grow steadily to about 16 percent of the entire market, from an estimated 5 percent for 2011.

According to Rhoda Alexander, director of monitor research at iSuppli: "The year 2013 will mark a critical juncture, as the tablet market turns into a battleground between media tablets using mobile operating systems, and PC-type tablets employing the Windows operating system.

"Microsoft and the PC makers will engage in a vicious battle to fight off the ongoing share grab from media tablets, even as many of these vendors offer media tablet solutions of their own. Expect to see a blend of slates, convertibles and dual- and potentially tri-screen solutions as alternatives to the media tablet onslaught."

Over the next years, many of today's biggest personal computer suppliers will experience a dramatic decline in demand for PCs. For semiconductor vendors, including companies like Intel Corp. (Nasdaq: INTC), which today dominates the microprocessor market, the increasing adoption of tablet devices by consumers and businesses presents a significant challenge.

Intel has responded to this shift, but because of its continued dependence on PCs for a bulk of its current revenue -- PC client group sales of $31.6 billion in 2010 represented 72 percent of total revenue -- it cannot afford to implement any drastic or sudden strategic changes that could hurt sales into the PC market.

Intel's management appears to understand the challenges and has been trying to alter the composition of its revenue mix. "We are transforming from a company with a primary focus on the design and manufacture of semiconductor chips for PCs and servers to a computing company that delivers complete solutions in the form of hardware and software platforms and supporting services," Intel said in its latest annual filing with the US Securities and Exchange Commission.

Intel's four strategies for succeeding in the "changing computing environment" are explained in the SEC document:

• Strive to ensure that Intel technology remains the best choice for the PC as well as cloud computing and the data center.
• Expand platforms into adjacent market segments to bring compelling new solutions to the smartphone, the tablet, the TV, the car and the rest of the embedded world.
• Enable devices that connect to the Internet and to each other to create a continuum of personal computing. This continuum would give consumers a set of secure, consistent and personalized computing experiences.
• Positively impact the world through our actions and the application of energy-efficient technology.

Despite these efforts, many industry observers still believe Intel's dominance of the semiconductor industry is on the line and that the company may not be able to stem the erosion of its market share as OEMs push competing products for their tablet computers. PC OEMs will also get hammered if consumers opt for tablets rather than notebooks or desktop products. This is a likely scenario for many users who cannot afford both a PC and a tablet computer.

DRAM or memory IC vendors will experience mixed fortunes in the unfolding market development. Industry observers believe DRAM content in tablets will increase as OEMs incorporate PC-like functionalities in the products, but it's not certain this will make up for any lost revenue from declining notebook and desktop sales.

At an investors' conference I attended in New York on Tuesday, many of the attendees were taking notes on tablets -- mostly iPads. Not a single notebook was in sight. The session on the rivalry between PCs and tablets concluded that we were entering a "post-PC era." I don't think the PC is "toast," as someone said in reference to Intel, but it's obvious the future of the personal computer is being written -- on a slate.