The Big Picture: Is the LCD Becoming the New Motherboard?

The Apple Inc. (Nasdaq: AAPL) iPad is breaking new ground in so many ways. But in one particular area, Apple could shake up the entire electronics supply chain.

Last spring, market research firm iSuppli Corp. reported some very interesting findings from its tear-down of the iPad. Some 44 percent of the product's bill-of-materials (BOM) cost was in the user interface. Specifically: the LCD, touchscreen, and associated electronics.

That BOM equation reflects a shift in product design -- and the value chain of components for that design -- that is a mere ripple now but could eventually become a big wave. In computers, product design starts with the motherboard. Component suppliers vie to win a spot on that board. But the iPad is designed around the user interface. This emphasis, in which the focus starts with the screen rather than the data processing, is what has made the iPad so attractive and useful, and thus so popular.

"This unleashes an extremely interesting dynamic," iSuppli CEO Derek Lidow said in a press release. "The question of which companies in the supply chain will capture the profits from this user-interface-based approach will be of major importance in the coming years."

Translation: The chip giants of the PC industry, such as Intel Corp. (Nasdaq: INTC) and Advanced Micro Devices Inc. (AMD) (NYSE: AMD), could lose their dominance in the electronics industry. Yet they seem oblivious to this shift. In "Intel, Microsoft, and the curious case of the iPad" CNET's Brooke Crothers notes that Intel's Paul Otellini thinks tablets will have only a marginal impact on PC sales and that AMD’s Dirk Meyer doesn’t think tablets merit R&D spending yet.

They may not see the threat because they aren’t looking in the right direction. They think the display is just another component. But if the LCD becomes the new motherboard, then the companies associated with the display, touch screen, and associated electronics -- and in the iPad that's, respectively, LG Display, Wintek Corp. and Broadcom, and Texas Instruments -- will grow in influence. The LCD might eventually subsume some of the functions now performed by individual chips, just as Intel microprocessors kept integrating the functions of other chipsets on the motherboard.

Whether, and how quickly, the balance of power shifts to the display will depend on both the growth of the tablet market and whether the dominant tablet manufacturers focus on the display as the center of the design universe. Gartner Inc. , for one, has an incredibly rosy forecast for tablets, predicting growth of from 19.5 million units this year to more than 208 million in 2014. To put that in perspective, PC shipments were 306 million last year and will probably be around 350 million this year.

Whether other tablet manufacturers follow the design lead of Apple is a tougher question. Many of them view the tablet as a mini-PC rather than a smart display. However, it's not just the iPad that should prompt computer companies to rethink their designs. Just look at where the consumer electronics industry is headed. It’s video everything: Internet-enabled TVs; video on your smartphone. Earlier this month, Cisco Systems Inc. (Nasdaq: CSCO) announced a video conferencing service for consumers.

If the display becomes the center of the universe, big changes will occur in the channel. For one thing, supplies and pricing could become more chaotic. LCD supplies have historically whipsawed back and forth dramatically -- like DRAMs. In both LCDs and DRAMs, each new generation of technology requires a new, more expensive fab. If manufacturers fail to time the switch just right (and they never do), the transition to a new generation causes severe shortages and then huge gluts in supply.

That's just one of the many potential implications. If I were a channel executive, I would keep my eyes glued to the screen.