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The iPad Is Not a Cannibal. PCs Have a Bigger Problem

There been an industry frenzy over remarks by Best Buy (BBY) CEO Brian Dunn that laptop sales were down by as much as 50 percent at the chain because of the Apple (AAPL) iPad. There was a quick "Whoa, Nellie!" by Dunn as he tried to step back from the precipice of the implications. The intense interest in the perceived horse race between Apple and Microsoft (MSFT) misses a bigger point. The battle is over how consumers want to use computers. And when it comes to vendors versus consumers, the latter always win. Unless the hardware vendors in general start to understand that what is changing is habit, not external form factor, they will continue to fall behind and lose business.

Here's the Best Buy statement about the "grossly exaggerated" comment:

"The reports of the demise of these devices are grossly exaggerated," Dunn said. "While they were fueled in part by a comment in the Wall Street Journal that was attributed to me, they are not an accurate depiction of what we're currently seeing. In fact, we see some shifts in consumption patterns, with tablet sales being an incremental opportunity. And as we said during our recent earnings call, we believe computers will remain a very popular gift this holiday because of the very distinct and desirable benefits they offer consumers. That's why we intend to carry a broad selection of computing products and accessories to address the demand we anticipate this season."
We're left with two questions. The less important one is actually whether Dunn's remarks to the Wall Street Journal were exaggerated. He said "by as much as 50 percent." Given my experience of how retail management generally analyzes data, my guess is that the "up to" depended on the particular vendor and even model of PC. Netbooks were probably hardest hit because people buy them as a light computer to tote around. (In fact, a clarification â€" check Engadget reference.)

With analysts like Katy Huberty of Morgan Stanley sure that the iPad has cannibalized 25 percent of notebook sales, the up-to-50 percent number doesn't seem unreasonable. It's easy to assume we're seeing a case of Apple winning over Microsoft, and that would be disturbing to hardware vendors using Windows. However, there's a bigger question. The issue is not whether one vendor will win out over another or how walled garden computing competes with so-called open. It is whether computers can remain largely general purpose machines.

For decades, computers have been just expensive enough that they had to be multi-function machines. Even households with multiple PCs (in the generic, not Windows versus Mac sense) either needed a portable alternate to a desktop or the ability to allow more than one person at a time to use a computer.There were some exceptions, like an Xbox 360 or a Sony (SNE) PlayStation, which are essentially full-fledged computers dedicated to one use.

Still, the vast majority of the industry built and sold general machines. Product design, interfaces, distribution strategy, pricing, and every other facet of the business centered on this assumption. One machine to rule them all, with big hairy rings sitting on the hands of Microsoft, Intel (INTC), HP (HPQ), Dell (DELL), and the usual cast of characters.

But now everything is cheap, or can be. Hardware wants to be free. Form factors have collapsed. You can actually run powerful apps -- certainly more than equal to what was first available under MS-DOS -- on a smartphone. What companies can pack into a small space is amazing. For example, OCOSMOS has a new handheld gaming device sporting the following:

  • Intel 1.5GHz Oak Trail chip
  • up to 64GB solid state storge
  • WiFi and Bluetooth support
  • 1.3 megapixel front-facing and 3.2 megapixel rear-facing cameras
  • 1024-by-600 pixel resolution 4.8-inch diagonal multi-touch display
  • 1GB RAM, upgradable to 2GB
  • mini USB and full USB connectors
  • microSD memory card expansion slots
You can literally hold a specialized PC in your hand. Can you imagine what people would have thought 20 years ago to see even an older model PlayStation DS?

Computers no longer have to be general. For the price of a PC ten years ago, you could get a tablet, a smartphone, and maybe have enough left over for a cheap desktop. The conditions that drive the business are now scattered. That's why Steve Jobs has been so successful with the iPad. It's just cheap enough and focuses on consuming media -- not building spreadsheets, not writing reports, not other tasks that might be better suited to a general PC. The iPad is a specialized tool. Like other tools, people will expand the range of uses, but it owes its success to the narrow intent.

This is the challenge facing PC developers. They still want to create general machines. Tablets from them most likely will be like smaller notebooks with a touch interface. The vendors will want to put too much in. That's why they may have trouble countering Apple -- not because of Apple versus Microsoft, but because they insist on making a Swiss Army multi-use tool when people often want only a small and light folding knife.

Not all computers must do everything. Cut the range of activities, and you can cut complexity, simplify, lighten, reduce power drain, and shrink costs. However, to move to such a strategy means that vendors must pull out of a decades-long mindset and look anew at what consumers want and how they would prefer to have it delivered, whether the consumers consciously realize it or not. That's a lot of unlearning by companies that have made many billions of dollars by rounding up the usual suspects. By the time most even begin to realize the changes they'd need to make, let alone make them, there will be a host of new players.

It won't be an Apple world. Instead, it will be a world that belongs to companies that aren't tied to the regular PC past. Of course you'll see HP (HPQ) and Dell (DELL) and other familiar names. But the historic dominance could experience a big shake-up. Motorola (MOT), HTC, and others more associated with the mobile world who well understand computers as specialized devices.