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May 31, 2012
MORGAN STANLEY BLUE PAPER
MORGAN ST ANLEY RESEARCH
Global
1
Kathryn Huberty, CFA
1
Adam Holt
1
Joseph Moore
1
Sanjay Devgan
Francois Meunier
2
1
Ehud Gelblum, PhD
1
Scott Devitt
3
Jasmine Lu
Grace Chen
4
Sharon Shih
4
5
Shawn Kim
6
Kazuo Yoshikawa, CFA
Global Technology Team
Tablet Landscape Evolution
Window(s) of Opportunity
The tablet is the fastest ramping mobile device in history. To measure the rapid rate
of change in this important but still nascent market, we revisit our initial Blue Paper
published in February 2011 and update our list of global stocks best-positioned and
challenged in the tablet market. Below are our three key takeaways.
1. The market is even bigger and growing faster than we initially forecast. Tablet
shipments in the last two years were over 20% higher than we estimated in the last
Blue Paper, and purchase intentions in our new survey indicate shipments of 133
million and 216 million in 2012 and 2013, or 57% and 112% larger than our initial
estimates.
See page 2 for all contributors to this report
1 Morgan Stanley & Co. LLC
2 Morgan Stanley & Co. International plc+
3 Morgan Stanley Asia Limited+
4 Morgan Stanley Taiwan Limited+
5 Morgan Stanley & Co. International plc, Seoul
Branch+
6 Morgan Stanley MUFG Securities Co., Ltd.+
Please see “Tablet Demand and Disruption:
Mobile Users Come of Age”, February 14, 2011
Morgan Stanley Blue Papers focus on critical
investment themes that require coordinated
perspectives across industry sectors, regions,
or asset classes.
2. Microsoft shifts from a challenged to a best-positioned company in the tablet
market, as Windows 8 with Office has the potential to drive market growth and share
gains. Our survey suggests 25% of users expect to buy Windows 8 tablet and Office is
a key feature, especially for those considering their first tablet purchase.
3. Pricing is the key variable that will determine the success of Microsoft and its
partners. We believe Microsoft will bundle Office with Windows 8 at a discount to
bring OEMs on board and drive user adoption. Our analysis suggests Microsoft could
charge $82-114 for Windows and Office before OEMs would lose money on tablets.
AlphaWise conducts evidence-based investment
research to help validate key investment debates
on behalf of Morgan Stanley Research analysts
worldwide.
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.
* = This Research Report has been partially prepared by analysts employed by non-U.S. affiliates of the member. Please see page 2 for the name of each non-U.S.
affiliate contributing to this Research Report and the names of the analysts employed by each contributing affiliate.
+= 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
May 31, 2012
Tablet Landscape Evolution
Global Technology Team
Contributors to this Report
US Hardware
Kathryn Huberty, CFA1
Scott Schmitz1
Dan Dolev1
Jerry Liu1
+1 (212) 761-6249
+1 (617) 856-8074
+1 (212) 761-3206
+1 (212) 761-3735
[email protected]
[email protected]
[email protected]
[email protected]
+1 (415) 576-2320
+1 (212) 761-3665
+1 (212) 761-4149
+1 (212) 761-3607
[email protected]
[email protected]
[email protected]
[email protected]
+1 (212) 761-7516
+1 (415) 576 2382
[email protected]
[email protected]
+44 20 7425-6603
+44 20 7425-2630
[email protected]
[email protected]
+1 (212) 761-8564
+1 (212) 761-1738
[email protected]
[email protected]
+1 (212) 761-3365
+1 (212) 761-8094
+1 (212) 761-5978
[email protected]
[email protected]
[email protected]
+852 2239-1348
+886 2 2730-2890
+886 2 2730-2865
+82 2 399-4940
+81 3 5424-5389
+886 2 7712-3031
+886 2 2730-2989
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
US Software
Adam Holt1
Jennifer Swanson Lowe, CFA1
Keith Weiss, CFA1
Melissa Gorham1
US Semiconductors
Joseph Moore1
Sanjay Devgan1
Europe Semiconductors
Francois Meunier2
Andrew Humphrey2
US Communications Equipment
Ehud Gelblum, PhD1
Jeremy David1
US Internet
Scott Devitt1
Jordan Monahan1
Andrew Ruud1
Asia Technology
Jasmine Lu3
Grace Chen4
Sharon Shih4
Shawn Kim5
Kazuo Yoshikawa, CFA6
Po-Ling Chen4
Brad Lin4
1
2
Morgan Stanley & Co. LLC
Morgan Stanley & Co. International plc
3
4
Morgan Stanley Asia Limited
Morgan Stanley Taiwan Limited
5
6
Morgan Stanley & Co. International plc, Seoul Branch
Morgan Stanley MUFG Securities Co., Ltd.
See page 30 for recent Blue Paper reports.
2
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Table of Contents
MORGAN STANLEY BLUE PAPER
Executive Summary ..............................................................................................................................................................

There are three key findings in this Blue Paper: (1) tablet market is even bigger than we initially forecast; (2)
Microsoft has the potential to drive tablet market growth and take share; and (3) pricing is the key variable that will
determine the success of Microsoft and its partners.

Investment conclusions: best-positioned and challenged stocks.

Survey data on market size, penetration and usage of popular computing devices.
Hardware................................................................................................................................................................................

Apple continues to dominate the tablet market, though several other traditional PC vendors are poised to gain
share.

Tablet cannibalization of PC and printing demand are more severe than we initially thought.

Best-positioned: Apple, Lenovo

Challenged: Lexmark, HP, Dell, Seagate, Western Digital
Software and Internet............................................................................................................................................................

Microsoft will be more competitive in the tablet market in late 2012 and in 2013 with the new release of Windows 8
and Office 15, which will include versions on ARM processor architecture.

Best-positioned: Microsoft

Challenged: Google, Amazon.com
Semiconductors and Communications Equipment ...........................................................................................................

ARM and its vendors continue to dominate the application processor market.

Leading NAND flash vendors benefit from tablet proliferation.

Baseband, connectivity and related suppliers benefit from tablet proliferation and adoption of multi-device carrier
data plans.

Best-positioned: ARM, NVIDIA, Texas Instruments, Samsung, Toshiba, SanDisk, Qualcomm, Broadcom, Avago,
Skyworks

Challenged: Intel, AMD
Components and Assembly Supply Chain .........................................................................................................................

Suppliers and assemblers with exposure to Apple will benefit from its dominant position in the market.

The survey suggests touchscreen quality and large display size are important tablet features, which should benefit
TPK.

Best-positioned: Hon Hai, AAC, TPK and Foxconn Tech
Appendices: Tablet and PC Models.....................................................................................................................................
4
10
16
21
26
28
3
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Executive Summary
The tablet is the fastest ramping mobile device in history.
Apple, the market leader, just shipped more iPads in the
December 2011 quarter than any single PC vendor shipped
PCs, a remarkable feat considering the company only
established the category in early 2010. Cumulative tablet
shipments in 2010 and 2011 were more than double the
cumulative shipments of any other mobile device in its first
two years.
Exhibit 1
Tablets Are the Fastest Ramping Mobile Device
Cumulative Shipments of Mobile Devices in First Five Years
800
Tablets
Smartphones
600
Feature Phones
Netbooks
400
Gaming Devices
MP3 Players
200
Notebooks
E-Readers
0
1
2
3
4
5
Exhibit 2
The Tablet Market Will Be 57% and 112% Larger
Than We Initially Forecast by 2012 and 2013
2010
2011
2012e
2013e
2014e
2015e
16
19
55
70
85
133
102
216
114
282
122
352
21%
26%
57%
112%
147%
188%
245%
258%
54%
92%
20%
62%
12%
30%
7%
25%
Shipments (Millions)
Original Estimates
New Estimates
Difference
Y/Y Growth
Original Estimates
New Estimates
Source: IDC, Morgan Stanley Research
2. Microsoft Windows 8 with Office has the potential to
drive tablet market growth and take share. In the last two
years, Apple iPad has dominated the market with 62% unit
share, while Google Android-based tablets have had mixed
results. However, Microsoft has made a lot of progress since
our last survey with its Metro user interface, first introduced in
Windows Phone 7 and included in the upcoming Windows 8
release. Consumers, especially those considering their first
tablet purchase, believe Microsoft Office is a key feature,
suggesting Windows 8 with Office could overtake Android as
the second largest platform in the tablet market.
Source: Gartner, IDC, Company Data, Morgan Stanley Research
Exhibit 3
There are three key findings in our second global tablet
survey. To measure the rapid rate of change in this important
but still nascent market, we revisited our initial survey and
Blue Paper published in February 2011 in this follow-up.
1. The market is even bigger and growing faster than we
initially forecast. We conducted a second tablet survey in
May 2012, reaching 7,500 respondents in the US, UK,
Germany, France and Japan. Purchase intentions indicate
tablet shipments will increase to 133 million and 216 million in
2012 and 2013, or 57% and 112% larger than our initial
estimates. In 2010 and 2011, the tablet market was already
more than 20% larger than we first forecast in the last Blue
Paper.
Microsoft Windows 8 with Office Could Become the
Second-Largest Tablet Platform
Tablet Purchase Intentions by Platform
Other, 7%
Google
Android,
22%
Apple iOS,
46%
Microsoft
Windows 8,
25%
Note: Other includes Amazon.com and Barnes & Noble
Source: AlphaWise, Morgan Stanley Research
3. Pricing is the key variable that will determine the
success of Microsoft and its partners. The maximum price
respondents said they would be willing to pay for Windows 8
tablets with Office is $469, or a 6% discount to Apple’s iPad. It
is unclear how much Microsoft will charge OEMs for Windows
8 and Office, but we conduct a scenario analysis assuming a
Windows tablet’s cost of goods is roughly 0-10% more
4
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
expensive than an iPad’s due to lower volume discounting,
while R&D and SG&A expenses are lower than for an iPad.
Our analysis shows the maximum Microsoft could charge is
$114 before OEMs would lose money on a Windows tablet,
assuming similar component costs relative to an iPad. If
Microsoft OEMs’ component costs are 10% higher than
Apple’s, Microsoft could charge a maximum $82 for Windows
and Office. We expect Windows 8 tablet license pricing to be
similar to PC license pricing of ~$50. This suggests a $32-$64
license price for Office, which may be lower than what
Microsoft currently charges. However, the bundled version of
Office with Windows RT (the ARM version) will likely be a
“light” version, so it is entirely reasonable to assume Microsoft
will price it at a discount to normal editions. If Microsoft only
charged $50 for software, OEMs would earn a reasonable
margin of ~7%, assuming 10% more expensive component
prices for a Windows tablet relative to an iPad.
provide is a win. Other variables that could help OEMs price
Windows 8 tablets at a discount to the iPad and still at least
breakeven include lower retailer margins and/or OEMs willing
to accept low- to mid-single digit margins long-term, like the
PC market, vs. smartphone margins.
Exhibit 4
Microsoft Windows 8 and Office License Fees Key
Variables for a Successful Second Tablet Platform
Price
Component Cost vs. iPad
Components
Microsoft Licenses
Manufacturing
Tablet with Wi-Fi and 16GB
Scenario 1
Scenario 2
Windows 8
Windows 8
469
469
Scenario 3
Windows 8
469
306
0
10
+0%
306
114
11
+5%
321
98
12
+10%
337
82
13
Total COGS
316
431
431
432
Gross Profit
GM
183
37%
38
8%
38
8%
37
8%
12
32
9
28
9
28
9
28
45
38
38
38
138
28%
0
0%
0
0%
0
0%
R&D
SG&A
In the near term, multiple partners could launch products and
try to establish a foothold in the tablet market. While tablets
with modest or flat margins are not entirely compelling, OEMs
are already seeing high cannibalization rates in the PC market
and a better foothold in the tablet market than Android could
iPad 3
499
Total OPEX
Operating Profit
OPM
Source: iSuppli, Company Data, Morgan Stanley Research
5
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Key Investment Conclusions
We have higher conviction and an increased number of
stock ideas to play the tablet proliferation thesis,
compared to our original tablet Blue Paper. This report
applies the thesis to the four main segments of the tablet
value chain: (1) hardware, (2) software and Internet, (3)
semiconductors and communications equipment, and (4)
components and assembly supply chain. Below is a summary
of our investment ideas in each segment.
Exhibit 5
Best Ways to Play Tablet Proliferation
Best-Positioned
Hardware
Apple
Lenovo
Tablet vendor
Tablet vendor
Software and Internet
Microsoft
Operating system vendor
Semiconductors and Comm. Equipment
ARM
Processor designer
NVIDIA
Processor supplier
Texas Instruments Processor supplier
Samsung
NAND supplier
Toshiba
NAND supplier
SanDisk
NAND supplier
Qualcomm
Processor and baseband supplier
Broadcom
Baseband and connectivity supplier
Avago
Filter and power amplifier supplier
Skyworks
Power amplifier supplier
Challenged
Lexmark
Seagate
Western Digital
HP
Dell
Printing vendor
Hard drive supplier
Hard drive supplier
PC and printing vendor
PC vendor
Google
Amazon.com
Operating system vendor
Tablet vendor and e-commerce
Intel
AMD
Processor supplier
Processor supplier
Components and Assembly Supply Chain
Hon Hai
Tablet assembly
AAC
Acoustics supplier
TPK
Touch panel lamination
Foxconn Tech
Metal casing supplier
Source: Morgan Stanley Research
Hardware
The most direct way to play tablet proliferation is through
Apple, which has dominated the market with 62% unit share
with its integrated software and hardware ecosystem. Lenovo
moves from challenged to best-positioned, as it has executed
well in Asia and Europe since launching its products just a
year ago. Although Samsung is second with 6% unit share,
we believe the company will continue to focus on
smartphones instead of tablets due to the former’s favorable
margin profile.
We are starting to see a longer list of challenged
hardware companies. We are still in the early stages of PC
and print cannibalization, and expect HP, Dell and Lexmark to
remain challenged. As a derivative of the PC headwinds, we
see long-term impact to Seagate and Western Digital despite
recent consolidation in that industry.
Software and Internet
The big change in software is Microsoft, moving from
challenged to best-positioned. A year ago, we put Microsoft
on the challenged list because Windows 7 could not truly
address key tablet requirements, such as low power and
touch interface, and Windows Phone 7 specifications did not
fit the tablet form factor. A lot has changed since then, as
Microsoft previewed Windows 8 with the Metro interface
optimized for touch and announced support for ARM-based
devices, which is the processor architecture the vast majority
of tablets use today. Survey responses suggest Windows 8
tablets with Office have the potential to expand the market
and take share if offered at the right price—although with
additional features, such as pre-bundled Office, Microsoft may
not need to necessarily compete on price.
In contrast, Google is in a more challenged position
compared to a year ago. Android-based vendors have had
mixed results since Google launched Honeycomb, a tabletoriented Android release in February 2011, while Apple iPad’s
market share has been steady. Our survey suggests Microsoft
is poised to take share from both Android-based tablets and
iPad. We are not counting Google out, as it took Android
about two years after the iPhone launched to gain traction in
the smartphone market, and the company recently acquired
Motorola Mobility. However, Microsoft could be a credible
alternative platform for hardware OEMs in tablets, which was
not the case a few years ago in the smartphones.
Amazon.com was not in our Blue Paper a year ago. After
a rapid Kindle Fire ramp in 4Q11, its long-term share
looks uncertain. The company gained 17 points of tablet
market share in 4Q11 after launching the Kindle Fire in midNovember. Just as quickly, the product lost steam and fell to
4% share in 1Q12. While the company looks to be committed
to the tablet market long-term, it is not a preferred way to play
tablet proliferation given the current uncertainty in our view.
Semiconductors and Communications Equipment
ARM and its vendors continue to dominate the
application processor market, led by Apple and Samsung’s
proprietary solutions. Survey respondents indicated battery
life and price as the top two criteria when purchasing a tablet,
which plays to ARM’s strengths.
We suggest two new groups of suppliers as derivative
plays on tablet proliferation: NAND and connectivity.
Tablets could consume about 12% of NAND flash demand in
2012 and more over time, and we believe the leading NAND
suppliers are best-positioned in this market. We also believe
Qualcomm, Broadcom, Avago and Skyworks will benefit as
baseband, connectivity and related suppliers given their
6
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
exposure to the right tablet vendors and increasing 3G/4G
penetration in tablets.
Similar to the last Blue Paper, we view Intel and AMD as
challenged. The survey revealed higher-than-expected PC
cannibalization rate, and a bigger and faster growing tablet
market. Even if tablet application processors become
meaningful for Intel beyond 2013, the company would be
trading $120 notebook microprocessors for $20 tablet
application processors. Therefore, we estimate tablet
processors would still account for less than 1% of Intel’s total
revenue in an Intel success case.
Components and Assembly Supply Chain
We believe suppliers and assemblers with high exposure
to Apple will benefit from the latter’s dominant position in the
market. In this context, Hon Hai, AAC and Foxconn Tech are
best-positioned.
We also see TPK as the major beneficiary of a design
shift to thin and light touch solutions. Our survey suggests
touchscreen quality and large screen as important features
when choosing a tablet.
7
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
AlphaWise Survey Findings
Market Sizing
Tablet penetration and purchase intentions are higher
now compared to a year ago. In our new survey, 25% of
respondents said they plan to purchase tablets in the next 12
months, compared to 19% that have them today.
Evidence
Core Questions for Evidence Research
 What
platform(s) will gain relevance and address the tablet
market beyond Apple?
 What are consumer’s tablet purchase intentions?
 How will tablet purchases impact spending on other devices?
 How are consumers using PCs and tablets?
 Do tablets change consumers’ printing behavior?
Exhibit 6
2012 Survey Indicates 25% Plan to Purchase
Tablets in the Next 12 Months vs. 19% That Have
Tablets Today
Tablet Ownership and Purchase Intentions in 2011 vs. 2012 (%)
25
What Gives Us Confidence
 We
surveyed 7,500 consumers across the US, UK, France,
Germany, and Japan in May 2012
19
17
 Sample is representative of the online adult population in terms
of age, gender, and income of each country
 Conclusions
based on the total sample have a maximum
margin of error of 3.2% at 90% confidence level
5
2011 Survey
Penetration
2012 Survey
Plan to Buy
Note: 2011 and 2012 Blue Paper surveys conducted in October 2010 and April to May 2012
respectively.
Source: AlphaWise, Morgan Stanley Research
We expect tablet shipments to exceed notebook
shipments in 2013 and almost match total PC shipments
by 2015. The survey results suggest 25% of respondents plan
to purchase tablets in the next 12 months while 19% of
respondents have tablets today, which implies shipments from
2Q12 to 1Q13 will be 32% higher than the current tablet
installed base. In our model, we discount the 32% growth rate
by 20% in order to be conservative. Therefore, in the
developed markets, we apply a 27% growth rate to the 84
million unit installed base (1Q10 to 1Q12) and forecast 107
million unit shipments from 2Q12 to 1Q13. In addition, we
forecast shipments in Asia-Pacific, excluding Japan, will grow
77% over the installed base over the same period. The region
accounted for one-quarter of shipments in 1Q12. We believe
this is also reasonably conservative because the region grew
over 400% in 2011 and Windows 8 will be a new catalyst in
late 2012.
Exhibit 7
Updated Tablet and PC Model
2010
Shipments (Millions)
Desktops
157
Notebooks
200
Subtotal
Tablets
Total
2011
2012e
2013e
2014e
2015e
155
209
156
210
156
215
153
217
152
218
357
363
366
371
370
370
19
70
133
216
282
352
377
433
499
587
652
722
-1%
4%
1%
1%
0%
3%
-1%
1%
-1%
0%
Y/Y Growth
Desktops
Notebooks
Subtotal
Tablets
Total
Unit Mix
Desktops
Notebooks
Tablets
42%
53%
5%
2%
1%
1%
0%
0%
258%
92%
62%
30%
25%
15%
15%
18%
11%
11%
36%
48%
16%
31%
42%
27%
26%
37%
37%
24%
33%
43%
21%
30%
49%
Source: IDC, Morgan Stanley Research
Tablet Penetration
Smartphone and tablet penetration increased the most
over the last year. Somewhat surprisingly, increase in
gaming console penetration was a close third despite starting
with a larger installed base. As expected, desktop was the
only product where penetration decreased as consumers
continue their multi-year migration towards a variety of
8
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
devices that are more mobile. The low penetration of tablets
relative to other devices gives us further conviction that our
tablet market growth rates are achievable.
Exhibit 8
Tablets Saw the Second Highest Increase in
Penetration but Absolute Penetration Remains Low
Computing Device Penetration
(%)
80
-2 pts
+5 pts
+12 pts
60
+23 pts
40
+14 pts
+6 pts
20
Tablets are the third-best device, just behind desktops,
for content consumption. Notebooks and desktops are still
the most used devices for both content consumption and
creation. However, respondents use tablets much less for
content creation. While this may be partly due to the ease and
speed of using the keyboard and mouse compared to the
touch screen for power users, it is likely also due to a much
lower penetration of tablets in the enterprise and fewer
enterprise applications compared to the PC ecosystem so far.
E-readers and gaming consoles, along with tablets, are the
only devices that respondents use more for content
consumption than creation, which is not a surprise. The ability
to take pictures greatly boosted the smartphone as a content
creation device.
+10 pts
Exhibit 10
0
Desktop
Notebook
Netbook
Tablet
2011 Survey
E-Reader Smartphone Gaming
Console
Notebooks and Desktops Lead in Content Creation,
but Tablets a Close Third for Content Consumption
% of Owners that Use Their Devices at Least Once a Week
(Average % Across Content Consumption vs. Creation Tasks)
2012 Survey
Source: AlphaWise, Morgan Stanley Research
60%
Computing Device Usage
50%
Respondents rank notebooks and desktops as the most
useful and enjoyable devices, followed by tablets and
smartphones. Not surprisingly, netbooks rank last among
multi-purpose computing devices. While Ultrabooks rank
relatively low today, we believe the category could improve as
OEMs introduce products with higher quality hardware and
lower prices in late 2012 or 2013.
40%
30%
20%
10%
0%
Notebook
Desktop
Tablet
Smartphone
Content Consumption
Ultrabook Netbook
E-Reader
Gaming
Console
Content Creation
Source: AlphaWise, Morgan Stanley Research
Exhibit 9
Notebooks and Desktops Most Used Useful and
Enjoyable Devices, Followed by Tablets and
Smartphones
Devices Ranked by How Useful and Enjoyable They Are
(Higher Score = Most Useful and Enjoyable)
8
6.2
6.1
5.6
6
5.4
4.9
4.7
4.2
4.1
4
2
0
Notebook
Desktop
Tablet
Smartphone
Ultrabook Netbook E-Reader
Gaming
Console
Source: AlphaWise, Morgan Stanley Research
9
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Hardware
US Tech Hardware
Asia Technology
US Internet
Katy Huberty
Scott Schmitz
Dan Dolev
Jerry Liu
Grace Chen
Shawn Kim
Scott Devitt
Jordan Monahan
Andrew Ruud
Exhibit 11
Apple to Lose Unit Share but Remain the Dominant
Leader, while Most Other PC Vendors Gain Share
Tablet Ownership vs. Purchase Intentions by Vendor
(%)
54
Apple
Which hardware vendors are best-positioned to benefit from tablet
proliferation?
3
Acer
What is the impact to the legacy PC market and the printing market?
7
Sony
2
Dell
2
HP
1
Toshiba
1
Asus
Amazon.com
 Best positioned: Apple, Lenovo
RIM
 Challenged: Lexmark, HP, Dell, Seagate, Western Digital
HTC
Lenovo
Tablet Vendors
We increase our Apple iPad estimates 8% in 2012 and
18% in 2013 on strong demand highlighted by our survey.
Apple remains the dominant tablet leader. While the survey
indicates it stands to lose eight points of unit share, that is
more than offset by higher tablet market growth.
11
14
Samsung
Apple continues to be the dominant leader, though several other
traditional PC vendors are poised to gain share, potentially with
Windows 8 tablets. There is decreasing interest in Amazon.com’s Kindle
Fire and little interest in platforms outside of Apple iOS, Microsoft
Windows 8, and Google Android.
Tablet cannibalization of PC and printing demand are more severe
than we initially thought due to a combination of higher cannibalization
rates and a larger tablet market.
46
Other
5
4
4
Current Installed Base
3
3
3
Purchase Intentions
5
3
2
2
0
2
1
1
15
7
Source: AlphaWise, Morgan Stanley Research
Exhibit 12
Our Apple Tablet Forecast May Be Conservative as
Actual Share Exceeded Last Survey by Nine Points
Apple Market Share: Survey Results vs. Tablet Model
We believe our new estimates are likely conservative as
Apple’s actual market share was nine points higher than the
last survey predicted from 4Q10 to 3Q11, while we only model
market share to be four points higher than the new survey
predicts for the next 12 months. Furthermore, while the
survey shows a share shift toward PC vendors, we believe
this is unlikely to be meaningful before Windows 8 ships in
volume – sometime in 4Q12. In 2013, our Apple model
implies 45% tablet share, which is actually below our survey
result of 46% share.
80%
+9 pts
60%
+4 pts
40%
20%
0%
4Q10-3Q11
Survey Results
2Q12e-1Q13e
IDC Historical / MS Estimate
Source: IDC, AlphaWise, Morgan Stanley Research
10
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Amazon.com is the other vendor we expect to lose unit
share. The Kindle Fire saw strong initial demand heading into
the holiday season after launching in November 2011,
allowing Amazon.com to garner 17% tablet unit share in
4Q11. However, the product quickly lost momentum in 1Q12,
ending with 4% market share. We think Amazon.com has a
unique offering long-term for consumers—cheaper product,
and better content and e-commerce offerings—and we would
not count them out yet given their ability to improve with each
iteration, as they did with the Kindle in the e-reader market.
However, our survey suggests lower purchase intentions at
least in the near term.
Several PC vendors are poised to gain tablet share,
though they start from a small base and are dependent on
Windows 8 gaining traction. Acer, Sony, Dell, HP and Toshiba
could gain 2-4 points of share according to purchase
intentions. Although Samsung remains second in terms of
purchase intentions, we believe the company will focus on
developing and marketing smartphones, such as Galaxy S III
and Note, instead of tablets given the favorable margin profile
in smartphones and a lack of traction with Android in tablets.
PC brands’ potential traction in tablets could become a
long-term advantage for Microsoft against Google.
Interestingly, consumers are also willing to pay more for
tablets from historically PC-oriented brands than smartphoneoriented brands. Microsoft’s design principle with Windows 8
is to provide an uncompromised operating system for both
PCs and tablets, as opposed to Apple’s belief that tablets
should share an operating system with smartphones but not
PCs. Microsoft and its long-term PC partners have an
opportunity to capitalize on this consumer preference with
Windows 8.
So far, there is little interest in tablets from nontraditional players, such as Chinese Internet service
providers Baidu and Alibaba. Excluding Apple iOS,
Microsoft Windows 8 and Google Android, all other operating
systems totaled only 7% share in purchase intentions.
Similarly, there does not seem to be materially higher demand
for the Asus Transformer form factor, which is an Androidbased tablet that has a keyboard dock, as purchase intentions
for Asus is in line with most other Android vendors.
Enterprise Adoption
One of the biggest surprises versus a year ago is the
significant tablet adoption in the enterprise. Six percent of
employers either purchased or subsidized survey
respondents’ tablet for work use and another 10% are allowed
to access their corporate network with a tablet purchased on
their own. This is consistent with the recent uptick in
enterprise tablet adoption, as noted in Morgan Stanley’s April
CIO Survey. Sixty-five percent of companies currently
purchase tablets for some employees while nearly 50% allow
employee-owned tablets on their network; both numbers
increased steadily over the past three quarters. Tying the
CIO survey data directly back to our consumer tablet survey,
the 6% of respondents that have a company purchased or
subsidized tablet (7% in the US) compares closely to the 9%
of employees that CIOs say they purchase tablets for
currently.
Exhibit 14
Employers Fund Tablet Purchases for 6% of
Respondents…
Enterprise Adoption of Tablets
71%
Exhibit 13
Consumers Willing to Pay More for Tablets from PC
Vendors (Blue) than Smartphone Vendors (Yellow)
Maximum Respondents Willing to Pay for Next Tablet
554 532
511 500 492
Average = $503
467 459 451 446
432 424
401 400
338
2%
4%
Employer
subsidizes
tablet
Employer
provides
tablet
10%
12%
Employer
allows own
tablet to
access
company’s
network
Employer
does not
allow own
tablets on
company’s
network
Employer has
no rules / not
applicable
To er
sh
ac iba
kB
er
ry
So
n
M
ot y
or
ol
a
Am Go
og
az
on le
.c
om
P
Bl
H
Ac
TC
H
Sa D e l
m l
su
ng
le
ov
o
Le
n
As
Ap
p
us
Source: AlphaWise, Morgan Stanley Research
Source: AlphaWise, Morgan Stanley Research
11
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Exhibit 15
Exhibit 17
…which Matches Closely with CIO Feedback
Tablet Cannibalization Weighing on Corporate PCs
Percent of Employees for Which Corporate Tablets Are
Currently or Planned to Be Purchased
Percentage of PC Installed Base That Could Shift to Tablet
Form Factor
14%
15%
5%
% of PC Installed Base
% of Respondents
9%
9%
6%
4.0%
4%
12%
10%
9%
5%
5%
3%
0%
Oct 11
Survey
Jan 12
Survey
Apr 12
Survey
Oct 11
Survey
Jan 12
Survey
Currently
Apr 12
Survey
4%
2.9%
3%
2.3%
3%
2%
1.7%
2%
1%
1%
0%
Today
In 1 Year
In 3 Years
Jan 2012 Survey
Note: n = 75 (US and EU data)
Source: Morgan Stanley CIO Survey
Apr 2012 Survey
Note: n = 75 (US and EU data)
Source: Morgan Stanley CIO Survey
Exhibit 16
Growing Number of Companies with Tablet Strategy
CIOs Currently Purchasing Corporate Tablets or Allowing
Employee-Owned Tablets on Corporate Network
65%
70%
% of Respondents
60%
53%
57%
45%
50%
49%
39%
40%
Tablet Cannibalization of PCs
We lower our PC shipment forecast for 2012 and 2013
from 2% and 5% respectively to 1% due to a combination of
higher-than-expected PC cannibalization rate, increase in
tablet shipment forecast, and anemic PC demand until at least
fall 2012 when Microsoft launches Windows 8.
30%
Exhibit 18
20%
Lowering 2012 and 2013 PC Unit Growth to 1%
10%
2010
2011
2012e
2013e
2014e
2015e
Shipments (Millions)
Previous Estimates
New Estimates
347
357
352
363
358
366
376
371
NA
370
NA
370
Difference
3%
3%
2%
-1%
NA
NA
2%
2%
2%
1%
5%
1%
NA
0%
NA
0%
0%
Purchase for Employees
Oct 11 Survey
Allow Employee-Owned Tablets on
Network
Jan 12 Survey
Apr 12 Survey
Note: n = 75 (US and EU data)
Source: Morgan Stanley CIO Survey
Enterprise tablets begin to replace notebooks. Morgan
Stanley’s April CIO Survey points to a 26% tablet
cannibalization rate in the enterprise, based on 9% employee
tablet penetration divided by the 2.3% of the PC installed
base in which tablets replace PCs today. Anecdotal evidence
from our conference calls with CIOs and commentary from
vendors like Dell suggest the early adopters of tablets as
replacements for notebooks are sales people, healthcare
professionals and K-12 schools. Higher tablet adoption and
notebook replacement rate in the enterprise is a key factor in
our lower global PC unit forecast.
Y/Y Growth
Previous Estimates
New Estimates
Source: IDC, Morgan Stanley Research
Our new survey suggests 41% of tablet shipments in 2012
will delay or eliminate PC purchases. The 37%
cannibalization rate in 2011, according to the new survey, was
also higher than the 29% we estimated based on our original
tablet survey. In fact, consumer PC shipments to developed
regions have declined Y/Y every quarter since 3Q10 when the
Apple iPad launched. Given the fast adoption of enterprise
purchases and bring-your-own-device programs, we now
expect both enterprise and consumer tablet purchases to
cannibalize PC shipments, as opposed to just consumer
purchases previously.
12
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Exhibit 19
Tablet Cannibalization of PC Shipments Higher
Than Expected in 2011 and Likely Even Higher in
2012
Estimated vs. Actual PC Cannibalization (% of Tablet
Shipments that Delay or Eliminate PC Shipments)
41%
37%
develop special applications and localized content. (Our
survey shows a lower tablet share than IDC as about twothirds of its shipments are to Asia-Pacific.) On the PC front,
Lenovo should see less PC cannibalization impact than HP
and Dell as it continues to gain PC share in the commercial
market and has higher exposure to faster-growing emerging
markets (i.e., lower tier cities in China), where tablet
cannibalization of PCs is smaller.
29%
2011 Estimate
2011 Actual
2012 Estimate
We continue to believe tablet cannibalization of PCs is an
incremental challenge for Seagate and Western Digital, in
addition to several other long-term challenges, including solidstate drive adoption in servers, storage and PCs and the
potential for desktop virtualization and cloud computing to
drive higher utilization rates and a mix shift to lower priced
hard disk drives.
Source: AlphaWise, Morgan Stanley Research
Tablet Cannibalization of Printing
While tablet cannibalization is a headwind to all PC
vendors, we are incrementally more negative on HP and
Dell. Both vendors have large legacy PC exposures, with the
industry accounting for about 30% and 18% of Dell and HP’s
operating profits this year. In the last quarter, both companies
also noted pricing pressure and Y/Y share loss, compounding
the issue of tablet cannibalization. HP and Dell plan to attack
the tablet market again with Windows 8 tablets despite their
inability to gain traction with webOS and Android software last
year. While they have scale and distribution advantages in
some regions and the survey suggests a potential increase in
their tablet market share, we believe HP and Dell will find it
challenging to reconcile their stated intentions to improve
margins and focus on opportunities in enterprise data centers
long term with their plans to participate in Windows 8 tablets.
See the software section for further analysis of Windows 8
tablet margins.
Tablets are also having a bigger than anticipated impact
on printing. In our survey, 57% of potential tablet purchasers
expect no change to their printing habits while 36% expect to
decrease printing. However, the actual impact on printing is
bigger than expected. Among current tablet users, only 51%
report no change to printing while 39% report a decrease.
Exhibit 20
Tablet Users Cut Printing by More Than They Expect
Change in Printing Behavior Due to Tablet Usage
60%
50%
40%
30%
20%
10%
Among PC vendors, Apple is best-positioned and Lenovo
moves from challenged in our last Blue Paper to bestpositioned. Apple iPhone and iPad should account for over
80% of the company’s operating profits while Macs should
account for less than 10% this year, in part because the
former two having much higher margins. Apple also stands to
gain share as consumers shift away from PCs, as it has 20%
and 59% smartphone and tablet unit share (much higher in
profit share) but only 5% PC unit share in the last 12 months.
Lenovo moves from our challenged list in the last Blue Paper
to best-positioned in this one. While it only had 3% tablet unit
share in 1Q12 according to IDC, Lenovo has executed well
since launching its products just a year ago, and has a unique
opportunity to capitalize on the Chinese tablet market given its
strong branding, higher market share and initiatives to
0%
Significantly Moderately
Slightly
decreased decreased decreased
Current Tablet Users
No change
Slightly
increased
Moderately Significantly
increased increased
Potential Tablet Purchasers
Source: AlphaWise, Morgan Stanley Research
Our current survey echoes key findings from our
February 2012 survey of 700 tablet users in the
enterprise. Respondents in our February survey said they
planned to cut their printing by up to 16% as tablets ramp and
companies move to curtail printing, the high end of our
previous 8-15% estimate.
Respondents who own tablets expect to print even less a
year from now. Our February survey showed that 57% of
respondents say they will print less in one year, up from 46%
13
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Exhibit 21
Tablet’s Adverse Impact on Printing Will Likely
Strengthen in the Future
Expected Impact on Printing Today vs. in 1 Year
54%
42%
43%
32%
Exhibit 23
Tablets Could Cut Printer Supply Revenue by 3% in
2013
2013
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Home Printing Decline %
currently. This is not surprising given that 41% view “printing
less” as a key benefit of the tablet. The attempts of many
companies to curb printing (e.g. by eliminating individual
printers) may also play a role in the decline of print volume.
0%
0%
0%
0%
0%
0%
0%
0%
1%
1%
1%
3%
0%
1%
1%
1%
1%
1%
1%
1%
1%
1%
5%
1%
1%
1%
1%
1%
1%
1%
1%
2%
2%
Office Printing Decline %
8% 10% 13% 15% 18% 20% 23%
1% 2% 2% 3% 3% 4% 4%
1% 2% 2% 3% 3% 4% 4%
2% 2% 2% 3% 3% 4% 4%
2% 2% 3% 3% 3% 4% 4%
2% 2% 3% 3% 4% 4% 4%
2% 2% 3% 3% 4% 4% 5%
2% 2% 3% 3% 4% 4% 5%
2% 2% 3% 3% 4% 4% 5%
2% 3% 3% 3% 4% 4% 5%
2% 3% 3% 4% 4% 4% 5%
Source: IDC, Morgan Stanley Research
15%
13%
Now
Will print significantly less
In 1 Year
Will print somewhat less
Will not change
Source: AlphaWise, Morgan Stanley Research
Exhibit 22
Companies Implementing Page-Reduction
Measures
Attempts to Curtail Printing for Participants Who Reported
Printing Significantly Less
Printing and Supplies Spend Remains Weak
Printing and Supplies Spending Plans Over Next 12
Months
23%
Requires password for printing
documents
Printer in the pantry/central
location without a password
20%
5%
10% 15% 20% 25% 30% 35% 40%
Source: AlphaWise, Morgan Stanley Research
Across our coverage, Lexmark is the most exposed to a
decline in enterprise printing. Our analysis shows that a
15% decline in enterprise print volumes combined with a 15%
decline in personal print volumes translate into a 3% decline
in 2013 supplies demand in the developed markets. Assuming
roughly 60% gross margin, this would translate into an 8% hit
to Lexmark’s 2013 EPS (~43% of sales impacted) and 1% hit
to HP’s 2013 EPS (~6% of sales impacted).
% of Respondents
21%
15%
(across recent surveys)
10%
5%
8%
9%
11%
-27%
-29%
-27%
Oct 11 Survey
Jan 12 Survey
Apr 12 Survey
0%
-5%
Decrease Spend
Printer in the pantry/central
location with a password
Increase Spend
34%
No more individual printers
0%
Exhibit 24
36%
None of these
Our April CIO survey also showed that printing and
supplies spending outlook continues to deteriorate as
tablet adoption increases. Only 11% of CIOs are planning to
increase printing and supplies spending in the next 12
months, while 27% plan to decrease spending. As noted
above, an increase in enterprises tablet adoption should
further pressure printer and supplies spending. In the April
survey, 44% of CIOs said they plan to decrease supplies
spending due to tablet adoption, while only 3% plan to
increase spending.
-10%
-15%
-20%
-25%
-30%
Note: n = 75 (US and EU data)
Source: April 2012 CIO Survey, Morgan Stanley Research
14
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Exhibit 25
Tablet Cannibalization of Supplies Spend
Impact of Tablets on Supplies Spending
Over Next 12 Months
Increase
Supplies Spend,
3%
Decrease
Supplies Spend,
44%
Flat Supplies
Spend, 54%
Note: n = 75 (US and EU data)
Source: April 2012 CIO Survey, Morgan Stanley Research
15
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Software and Internet
US Software
Adam Holt
Jennifer Swanson Lowe, CFA
Melissa Gorham
US Internet
Scott Devitt
Jordan Monahan
Andrew Ruud
ARM should help Microsoft challenge the iPad, giving it a
better chance of unit upside in 2H12. Buy-side expectations
are very low for Microsoft’s tablet release, and we currently
have zero tablet units in our above-consensus estimates for
CY13.
How will tablet adoption impact Microsoft?
While Microsoft has more than 90% share of the PC market, we
believe that tablet cannibalization will have only a modest
impact on Microsoft’s revenue and earnings in 2012/2013 as
Microsoft begins to ramp tablet share with Win 8. If we assume a
tablet cannibalization rate of 41% on PC sales vs. our Microsoft
model which already assumes cannibalization of ~30% while
Windows captures ~22% of the tablet market in CY13, we estimate
that tablets would add $0.10 to Microsoft’s earnings in 2013, or
approximately 3%, from incremental Windows revenue alone. We do
not currently have tablets in our model, given the lack of pricing and
availability detail to date, but we do reflect the impact of some
cannibalization in our model with 4% and 6% PC growth in CY12 and
CY13, respectively—despite stronger expected corporate growth.
What is Microsoft’s tablet strategy and can Windows 8 help it
increase tablet share?
We think that Microsoft will be more competitive in the tablet
market in late 2012/2013 with the new release of Windows 8,
which will include Windows RT, the likely dominant tablet platform
for Microsoft while Office on ARM will help Microsoft challenge the
iPad and Android-based tablets, and gives Microsoft a better chance
of unit upside in 2H12. Our survey supports this data as 25% of
respondents indicate they plan to buy a Win 8 tablet vs. 46% that
plan to buy an iPad and 22% a Google Android tablet. Medium term,
as tablets become more prominent in the enterprise, Microsoft has
significant advantages in security, application compatibility, and
management that will likely enable Microsoft to garner a prominent
role in the enterprise segment. If x86 chips can become a more
important influence in the tablet market or if more Ultrabooks and
hybrid devices emerge, Microsoft will likely benefit.
 Best positioned: Microsoft
 Challenged: Google, Amazon.com
Apple is the clear tablet operating system leader today
and will likely remain so for the foreseeable future, but we
are cautiously optimistic that Windows 8 will allow Microsoft to
grow share and establish itself as a viable second player.
Microsoft will be releasing two separate versions of
Windows—Windows 8 (x86-based) and Windows RT (ARMbased) and in the near-term, we expect ARM-based devices
to be Microsoft’s dominant tablet platform while Office on
Additionally, while Microsoft has more than 90% share of the
PC market, we believe that tablet cannibalization will have
only a modest impact on Microsoft’s revenue and earnings in
2012/2013 while better than expected traction would offset
any EPS downside. If we assume a tablet cannibalization rate
of ~41% on PC sales vs. our Microsoft model at ~30%, and
Windows captures ~22% of the tablet market in CY13, we
estimate that tablets would impact Microsoft’s earnings by
+$0.10 in 2013, or approximately 3%. Win 8 should also help
Microsoft’s relative positioning in the tablet market, which has
weighed on the multiple. At the same time, there are myriad
other product catalysts from Windows 8 to SQL 2012 that are
not fully in consensus, margins are too low for CY13, and we
look for Microsoft to raise the dividend later this summer. At
7x EPS net cash, the risk-reward remains compelling and the
above catalysts should drive the stock.
Microsoft well-positioned to grow the market and take
share with the release of Win 8 by end of 2012. Our survey
showed that Apple is the dominant tablet vendor, with 54% of
the current installed base and 46% of prospective tablet
buyers plan to purchase an iPad—which shows that Apple
may cede a modest amount of share. Conversely, some of
Microsoft’s key OEM partners, including Acer, Dell, and HP,
could gain tablet market share—albeit off a small base.
While Windows 8 tablets are not yet on the market, our
survey data points are more bullish than we expected. Of
the respondents that intend to purchase a tablet, 25% plan to
purchase a Win 8 tablet vs. 46% an iPad and 22% an Android
tablet (with Win tablets at any price). Of those respondents
that are planning on buying a tablet not from Apple,
Amazon.com, Barnes & Noble, Blackberry, Google or
Motorola, 54% said they plan on purchasing a device with
Windows 8 vs. 42% who plan on purchasing an Android
device. This suggests that Microsoft may be well-positioned
to take share from Android and increase adoption from
minimal share today to mid-teens of the tablet installed base.
Additionally, when asked what tablet respondents would
prefer if similarly priced, 34% of respondents chose an iPad
and 30% a Win 8 tablet vs. 13% a Google Android tablet.
However, given that Win 8 is not yet released—and likely will
16
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
not be until Q4—consumer demand will be shaped by the
early feedback and reviews, and there could be upside to this
estimate if Win 8 is better than expected.
Exhibit 27
Key Windows Partners Acer, Sony, Dell, HP,
Toshiba and Asus Are Poised to Gain Share
Tablet Ownership vs. Purchase Intentions by Vendor
(%)
Exhibit 26
25% of Respondents Plan on Purchasing a Win 8
Tablet vs. 46% for an iPad and 22% for Android
Tablet Purchase Intentions by Platform
Other, 7%
Google
Android,
22%
54
Apple
46
11
14
Samsung
3
Acer
Apple iOS,
46%
Microsoft
Windows 8,
25%
Source: AlphaWise, Morgan Stanley Research
2
Dell
2
HP
1
Toshiba
1
Asus
Amazon.com
RIM
Android-based vendors have had mixed results since
Google launched Honeycomb, a tablet-oriented Android
release in February 2011. We are not counting Google out, as
it took Android about two years after the iPhone launched to
gain traction in the smartphone market, and the company just
acquired Motorola Mobility. However, Microsoft could be a
credible alternative platform for hardware OEMs in tablets,
which was not the case a few years ago in the smartphones.
Amazon.com’s Kindle Fire is also seeing less interest—
with only 4% of the current tablet installed base and with only
3% of prospective tablet owners planning to purchase an
Amazon.com tablet. However, we believe Amazon.com may
refresh the Kindle Fire in Q3, with an update to the current 7inch product and potentially a new 10-inch Kindle Fire.
Amazon.com has been elusive about any upcoming product
releases and consumers have not seen any prototype, so
potential demand for a refreshed 7-inch Fire and a new 10inch Fire tablet are likely not fully captured in this survey.
While the company looks to be committed to the tablet market
long-term, it is not a preferred way to play tablet proliferation
given the current uncertainty in our view.
7
Sony
HTC
Lenovo
Other
5
4
4
Current Installed Base
3
3
3
Purchase Intentions
5
3
2
2
0
2
1
1
15
7
Source: AlphaWise, Morgan Stanley Research
Our survey indicated Microsoft Office is the most
important software feature to consider when purchasing
a tablet, especially for first-time purchasers. Today, tablets
are used mainly for content consumption activities, such as
reading, web browsing, and watching videos. However,
tablets are evolving from their main use of content
consumption towards content creation, and consumers—
along with enterprises—are requiring more fully featured
productivity applications. Sixty-one percent of prospective
tablet purchasers indicated that Office was the most important
software feature vs. 44% for current tablet owners—which
suggests there may be pent up demand for a tablet offering
with a prepackaged Office bundle.
Microsoft is creating two versions of Office and will release
Office 15 with Win 8 on ARM processor architecture (WOA),
which is key for Microsoft in the tablet market, while Office 15
for x86 processors may be released separately. The Office 15
beta should be out this summer, which means Office 15 for
WOA should be out this Fall, with x86 shortly after. While
WOA Office 15 applications will be included with the WOA
launch, it is unclear if Microsoft will be offering the Office
applications pre-installed for free or for an additional cost.
17
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
However, we do expect Microsoft to bundle a version of Office
with its ARM based tablets. Given that Microsoft seeks to gain
tablet market share, Microsoft may offer some form of Office
15 for free or as a trial on the initial WOA devices to incent
consumer adoption.
Exhibit 28
Windows Office Is a Key Software Feature for
Future Tablet Purchasers
Most Important Software Features when Considering a
Tablet Purchase
61%
Ability to
use MS Office
44%
57%
Synch purchases
across devices
61%
52%
Amount media
content for purchase
45%
47%
Quality of
third-party apps
50%
33%
Number of
third-party apps
39%
Access to
previous
iTunes purchases
Voice
recognition
30%
34%
21%
All Potential Purchasers
27%
with the Win 8 / Win RT release, while Office 15 will be
released concurrently with Win RT—which will be key to
consumer adoption.
Additionally, over time, we believe Microsoft can differentiate
its app store from iOS and Android, and attract developers
through better economics and features. Microsoft will also
offer a dashboard to developers to provide insight into
application usage, while Microsoft will offer a tiered revenue
sharing model—with Microsoft taking a 20-30% cut of the app
rev, depending on scale, compared to 30% for iOS and
Android, and the economics accrue to the developer as usage
scales. With 1.25 billion PCs today, according to Gartner, a
developer can reach more than $1 million in revenue by
targeting less than 1% of the Win base—a more compelling
value proposition for the developer community than other
platforms.
Pricing will be key for Windows. While we do not yet have
any details on pricing of Win 8 tablets, our survey shows that
customers want to pay less for a Microsoft tablet with Office
than an Apple iPad. The maximum price consumers would be
willing to pay for a Win 8 tablet with Office is $469, a 6%
discount to an iPad at $500. However, we do not know what
the actual bundling will look like with Office, Skype and other
features. Pricing preferences may shift and Microsoft may not
necessarily compete on price.
Current Tablet Owners
Source: AlphaWise, Morgan Stanley Research
The quality of third-party applications is more important
than quantity. The availability of applications is key to tablet
adoption, but our survey suggests that the quality of available
applications is more important to consumers than the quantity
as 47% of prospective tablet purchasers highlight the quality
of applications as a top-three software feature vs. 33% that
note the number of applications as a top-three feature. Both
iOS and Android currently lead Microsoft in terms of tabletfriendly content, with Google Play (Android) citing ~500K
applications as of May 2012 and iOS with >725,700
applications (>90K specifically for the iPad) as of February
2012. However, Microsoft has the opportunity to catch up in
quality applications given the breadth of its developer base.
Windows 8 will include the Windows Store, which will offer
“Metro-style” applications accessible via Win 8 or the more
tablet-friendly ARM-based Win RT. This means that legacy
x86 applications will not be available via the Windows Store
and application vendors or third parties will be responsible for
the development of new Win 8 applications, which will likely
take some time. However, we expect a number of important
partners to announce Metro-friendly applications concurrent
Consumers are willing to pay a slight premium for a Windows
versus Android device, which illustrates the potential for
Windows to gain share in the mid-priced tablet market,
whereas Android devices and particularly Amazon.com Kindle
Fire may be more successful in the mid to low-end of the
market. Additionally, Android devices are likely to capture
more share in China, where a number of Chinese OEMs are
coming out with modestly priced Android devices.
Exhibit 29
Price Consumers on Average Are Willing to Pay for
a Windows Tablet Is at a 6% Discount to the iPad
Maximum Price Willing to Pay for Each Offering vs. the Apple iPad
520
500
469
480
456
446
440
422
400
360
Apple iPad
Discount
vs. iPad:
Microsoft
Windows 8
Google
Android
-6%
-9%
Asus Eee Amazon.com
Pad
Kindle Fire
Transformer
-11%
-16%
Source: AlphaWise, Morgan Stanley Research
18
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Exhibit 30
Exhibit 31
Hypothetical Tablet Platforms and Offerings Used in
the Above Survey Question
Microsoft Windows 8 and Office License Fees
Could Drive a Successful Second Tablet Platform
Windows 8
Tablet
Operating System
Windows 8
Communications
Skype
Cloud Service
SkyDrive
Online Store
Windows Store
and Xbox Live
Prepackaged
Office Suite
Special Features
Google Android
Tablet
Android
Asus Eee Pad
Transformer
Android
Google Voice,
Skype
Google+ Hangout
(Video)
Google Drive
Asus MyCloud and
Webstorage
Amazon.com
Kindle Fire
Android
Skype
Amazon.com
Cloud and
Whispersync
Google Play
Google Play
Amazon.com
Appstore
Amazon.com Silk
Google+ account
Full QWERTY
settings,
keyboard and 16 browser, and one
month free
bookmarks, etc
hours of battery
subscription to
integration
life when docked,
Prime
and prepackaged
with Polaris Office
software
Source: AlphaWise, Morgan Stanley Research
Price
Component Cost vs. iPad
Components
Microsoft Licenses
Manufacturing
iPad 3
499
Tablet with Wi-Fi and 16GB
Scenario 1
Scenario 2
Windows 8
Windows 8
469
469
Scenario 3
Windows 8
469
306
0
10
+0%
306
114
11
+5%
321
98
12
+10%
337
82
13
Total COGS
316
431
431
432
Gross Profit
GM
183
37%
38
8%
38
8%
37
8%
12
32
9
28
9
28
9
28
45
38
38
38
138
28%
0
0%
0
0%
0
0%
R&D
SG&A
Total OPEX
Operating Profit
OPM
Source: iSuppli, Company Data, Morgan Stanley Research
Microsoft license pricing is a variable that will determine
the success of Microsoft and its partners. It is unclear how
much Microsoft will charge OEMs for Windows 8 and Office,
but we conduct a scenario analysis assuming a Windows
tablet’s cost of goods is roughly 0-10% more expensive than
an iPad’s due to lower volume discounting, while R&D and
SG&A expenses are lower than for an iPad. Our analysis
shows the maximum Microsoft could charge is $114 before
OEMs would lose money on a Windows tablet, assuming
similar component costs relative to an iPad. If Microsoft
OEMs’ component costs are 10% higher than Apple,
Microsoft could charge a maximum $82 for Windows and
Office. We expect Windows 8 license pricing to be similar to
PC pricing of ~$50, which suggests a $32-$64 price for Office,
which may be lower than what Microsoft currently charges.
However, the bundled version of Office with Windows RT will
likely be a “light” version, so it is entirely reasonable to
assume Microsoft will price it at a discount to normal editions.
If Microsoft charged $50 for software, OEMs would earn a
reasonable margin of ~7%, assuming 10% more expensive
component prices for a Windows tablet relative to an iPad.
In the near term, multiple partners could launch products and
try to establish a foothold in the tablet market. While tablets
with modest or flat margins are not entirely compelling, OEMs
are already seeing high cannibalization rates in the PC market
and a better foothold in the tablet market than Android could
provide is a win. Other variables that could help OEMs price
Windows 8 tablets at a discount to the iPad and still at least
breakeven include lower retailer margins and/or OEMs willing
to accept low- to mid-single digit margins long-term, like the
PC market, vs. smartphone margins.
To better illustrate potential outcomes over the next two
years, we present a scenario analysis of tablet OS market
share. Apple is likely to maintain market share leadership in
the near term, but we also expect increasing fragmentation
over time, similar to that of the smartphone market. To
calculate the impact to Microsoft’s EPS, we analyze several
scenarios that calculate potential revenue from Windows
share gains in the tablet market versus incremental tablet
cannibalization based on our survey results. Our current
Microsoft model assumes 4% and 6% PC unit growth in CY12
and CY13, respectively, which implies ~30% cannibalization
to PCs from tablets. However, our survey shows ~41% PC
cannibalization, which will yield 1% PC growth in both CY12
and CY13. Using the new assumptions on PC cannibalization
and growth, Microsoft may see an incremental 6 million and
17.5 million in cannibalized PCs in CY12 and CY13,
respectively. However, this could be offset by incremental
share gains in the tablet market.
We base our assumptions on our base case forecast of
22% Windows market share in new tablet shipments, which is
below the 25-30% expected purchases implied by the survey.
We also assume that the Windows OS on a tablet will garner
approximately the same price point as it does on a
cannibalized unit, but that assumption may be conservative,
given that we expect netbooks to be the most affected by
cannibalization, and Windows on a netbook has a 30-40%
lower ASP than on a traditional notebook.
Scenario A— Microsoft breaks even in CY13. iOS, 55%
share; Android, 25% share; Windows, 8% share.
Scenario B— Windows becomes third market leader. iOS,
45% share; Android, 22% share; Windows, 22% share.
Scenario C— Windows overtakes Android. iOS, 42%
share; Android, 20% share; Windows, 30% share.
19
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Exhibit 32
Windows Likely to Suffer Some Additional Cannibalization Relative to our Model but Total EPS Impact
Should Be Offset by Incremental Share Gains in 2013
Windows
Incremental
Cannibalized Units
2012
2013
Total
6.1
17.5
23.6
Tablet OS Market Share
Windows
iOS
Android
Other
Total
Units
Windows
Apple
Android
Other
Total
55
89
143
MSFT Revenue Impact
Cannibalized Units
2012
2013
Total
Windows Market Share
Windows Units
6
18
24
Windows ASPs
$50
$50
$50
MSFT Rev. Impa
MSFT EPS Impact
305
875
1,180
Scenario A
Incremental Tablets
2012
2013
Scenario B
Incremental Tablets
2012
2013
Scenario C
Incremental Tablets
2012
2013
5%
60%
25%
10%
8%
55%
25%
12%
15%
54%
21%
10%
22%
45%
22%
11%
15%
54%
21%
10%
30%
40%
20%
10%
100%
100%
100%
100%
100%
100%
6
80
33
14
18
119
54
26
20
72
28
13
48
97
48
24
20
72
28
13
65
87
43
22
133
216
133
216
133
216
Scenario A
Incremental Tablets
2012
2013
5%
8%
6
18
$50
$50
2
0.00
0
0.00
Scenario B
Incremental Tablets
2012
2013
15%
22%
20
48
$50
$50
696
0.04
1,505
0.10
Scenario C
Incremental Tablets
2012
2013
15%
30%
20
65
$50
$50
696
0.04
2,370
0.15
Source: AlphaWise, Company Data, Morgan Stanley Research
20
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Semiconductors and Communications Equipment
US Semiconductors
Joseph Moore
Sanjay Devgan
US Communications Equipment
Ehud Gelblum. PhD
Jeremy David, CFA
Europe Semiconductors
Francois Meunier
Andrew Humphrey
Japan Semiconductors
Kazuo Yoshikawa
Exhibit 33
Battery Life and Price Clearly Most Important When
Considering a Tablet Purchase
Most Important Hardware Features when Considering a Tablet Purchase
Which semiconductor vendors are best-positioned to benefit from
tablet proliferation?
60%
50%
40%
30%
20%
10%
NAND suppliers should also benefit from tablet proliferation. Tablets
could consume about 12% of NAND flash demand in 2012 and more over
time. We believe Samsung, Toshiba and SanDisk are best-positioned in
this market.
Can family data plans or tablet upgraders boost cellular connectivity
adoption in tablets?
Yes, at no incremental cost to consumers. We expect family/shared
data plans to appear over the summer at Verizon and possibly AT&T,
allowing subscribers to split data plans across users and/or devices. We
believe this is likely to increase cellular penetration rate in tablets, with
two-thirds of WiFi-only purchasers upgrading to cellular tablets in our
survey. Our survey also indicates that current tablet owners perceive
cellular connectivity to be a key requirement of tablets even more than
non-tablet users. As the market matures, we expect to see increasing
3G/4G penetration. Qualcomm, Broadcom, Avago and Skyworks are
best-positioned to benefit.
 Best positioned: ARM, NVIDIA, Texas Instruments, Samsung,
Toshiba, SanDisk, Qualcomm, Broadcom, Avago, Skyworks
 Challenged: Intel, AMD
First-Time Purchasers and Upgraders
NFC
Camera
Thinness
4G LTE
Connectivity
Bright, Hi-Res
Screen
LightWeight
Large
Screen
Touchscreen
Quality
Processor
Price
0%
Battery
Life
The application processor market continues to be dominated by
ARM vendors, led by Apple’s proprietary solution (fabricated at
Samsung), Samsung’s proprietary solution, and merchant solutions from
Qualcomm, Texas Instruments, and NVIDIA. The success of tablets is an
incremental negative for the PC supply chain, particularly Intel and AMD,
as the replacement rate for PCs should continue to slow.
Upgraders
Source: AlphaWise, Morgan Stanley Research
ARM
ARM has an advantage in terms of battery life… ARM has
been a pioneer in enabling long standby time for devices, with
the ability to leave most of the chip in idle mode. More
importantly, the power curve of ARM chips is more scalable in
our view, and the chip will only use the amount of power it
needs with a higher level of granularity than competition. The
battery life advantages of ARM are also based on (1) its
proprietary instruction set architecture, (2) processor microarchitecture, and (3) system-on-chip design allowing more
direct communication with the memory.
… yet it is also scalable in performance. ARM’s roadmap
shows that it can deliver even stronger performance than
today’s chips, which Apple uses in the iPad. The processing
power of the second-generation iPad, based on a dual core
Cortex A9 at 1.2GHz, outperforms the first-generation iPad by
a factor of 2.5x. The roadmap for a 2GHz quad-core Cortex
A15 shows a 20x improvement over the first iPad.
Battery life and pricing are the most important criteria
when considering tablet purchases, according to our
survey, with above 50% of respondents citing each criterion.
21
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Exhibit 34
Scalable Power Processing
20.0x
10.0x
5.0x
2.5x
1.0x
Cortex A8, 1Ghz Cortex A9, dual
(1st-Gen iPad)
core, 1.2GHz
(2nd- and 3rdgen iPads)
Cortex A15,
1.5GHz
Cortex A15, dual Cortex A15, quad
core, 1.5GHz
core, 2GHz
Source: Company Data, Morgan Stanley Research
ARM provides a cost advantage for the market leaders.
The three generations of the iPad have shown that tablets
could become “content creation devices” despite running on a
low-priced chip ($15-25 according to our estimates). iPhoto
and iMovie run on a relatively small processor core yet can
match the performance of Intel-based laptops for the average
user. We also believe that Apple and Samsung generate cost
savings by designing their own chips rather than using thirdparty providers, which would have to generate 40-60% gross
margin above the wafer cost. Assuming savings of $10-15 per
chip and a run-rate of 15 million iPads per quarter, this
represents savings of $150-225 million for iPads alone.
Furthermore, the market leaders reuse the same IP in other
platforms, such as Apple TV, iPod Touch and iPhone for
Apple, providing significant scale advantage in terms of
development costs (OS, software in particular).
ARM is present in many other chips in tablets. ARM also
provides cores for GPS, Bluetooth, WiFi, touchscreen
controllers, and all 3G and LTE basebands. Intel does not
have a LTE solution ready yet—we expect it to be sampling
by the end of the year—while the survey shows that 33% of
respondents care about 4G connectivity. This might give a
first-mover advantage to the ARM camp (Apple, Samsung,
Qualcomm), in our view. Note that all 3G/LTE basebands use
ARM cores, including those designed by Intel.
ARM-based Processor Vendors
We are similarly enthusiastic about ARM’s customer,
NVIDIA, given its tablet product portfolio. NVIDIA’s
application processor family, Tegra, is particularly well-suited
for tablets and very high-end smartphones. NVIDIA’s dual
core ARM 9-based application processor, Tegra 2, had a very
good year in 2011 with non-Apple tablets, with tablet designs
from Acer, Asus, Lenovo, LG, Motorola Mobility, Samsung
and Toshiba. Unfortunately, the tablet addressable market
excluding Apple and Samsung has taken a while to develop,
and with high sell-in in 2011 (and low sell-through), we do not
think tablets will drive much growth for NVIDIA this year.
Tegra 3, which is ARM-based quad-core solution, will drive
2012 tablet revenue, and its upgraded features from Tegra 2
including a fifth companion core for extremely efficient
standby activity and improved graphics. Announced tablet
customers include several repeats from Acer, Asus, Lenovo,
and LG, though build rates are more cautious this time
around. NVIDIA will not have the same participation from
Samsung, who will increasingly use its own application
processors. NVIDIA’s next generation Tegra 4, a quad-core
Cortex A15, ships in early 2013.
We also think NVIDIA could have success with Windows
8 tablets, as we have heard from some in the supply chain
that NVIDIA has had reasonably good experience designing
for the Windows RT tablet market, given the company’s
history of writing drivers with Windows compatibility, which will
be a key challenge for the Windows RT supply chain.
We are also enthusiastic about the potential for Texas
Instruments’ OMAP application processors in tablets,
though with the same caveat as NVIDIA—that tablet success
has not really spread far beyond Apple and sell-through of
those products has been inconsistent. TI’s OMAP 4 has had
good success in getting tablet design wins. In particular, it
was the reference design for Google’s Ice Cream Sandwich
tablet operating system early this year at CES, and has a
flurry of new designs with Archos, Fujitsu, LG, Toshiba and ereaders (Kindle Fire and Nook).
OMAP 5 will ship later this year, with dual-core Cortex A15
built on 28nm. We do not think Windows 8 will be written to
run on Cortex A15 initially, but this could be an important
indicator for 2013.
Tablet Impacts on Intel and AMD
Intel has the most to lose from the continued success of
tablets, to the extent that tablet purchases lead to delays in
PC purchases, as our survey data shows. The company has
put together a strong multipronged strategy to drive success
in tablets, but we think it will take a while to play out.
In our view, tablet application processors are unlikely to
become meaningful for Intel in 2012-13. It is very hard to
imagine revenues from tablets or phones being relevant to a
22
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
$60 billion revenue company in the next two years, which
means tablet and smartphone trends will continue to be a net
negative for Intel. Even if Intel is successful in tablets, tablet
cannibalization of PCs is a net negative, as $20 application
processors replace $120 notebook microprocessors.
The other aspect of Intel’s strategy is “Ultrabook”, a very
thin and light notebook similar to Apple’s Macbook Air, which
seems likely to become a “convertible” (laptop with
detachable keyboard) market next year when Haswell has
better low power characteristics.
The Intel tablet/smartphone strategy is threefold: (1) build
a better smartphone processor, Medfield, and penetrate the
traditional phone and tablet market; (2) build a more powerefficient PC processor, Haswell, in 2013 and move it down
market into tablets; and (3) build foundry capacity to build
tablet application processors.
The survey indicates that only 15% of the respondents who
do not own an Ultrabook type of product intend to buy one in
the next 12 months. Of those who do not own a tablet, 31%
intend to buy one in the next 12 months. E-readers and
netbooks had similar purchase intentions to Ultrabook. Of
course, the bulk of product introductions, and Intel marketing
dollars, are still ahead of us.
Intel’s latest tablet/smartphone offering, Medfield, appears to
be a significant leap in performance over prior efforts. It is a
testament to what Intel can do, very quickly, when it falls
behind in segments of the market. Importantly, the strong
benchmarks for Medfield are also proof that if there is any
inherent power consumption disadvantage to having x86
overhead, Intel will be likely to able to overcome it. Medfield
is a nice proof point, with good performance from a singlecore processor on an aging process technology. Once Intel
ramps dual-core products on advanced technologies over the
next couple of years, the benchmarks should continue to
improve.
We do not think Medfield puts Intel on a level playing field
in terms of performance with ARM just yet, though it is a
big improvement. Most benchmarks we have seen pit
Medfield against ARM’s Cortex A9. In our view, the more
appropriate comparison would be Medfield vs. Cortex A15
architectures, such as Qualcomm’s Krait, in actual devices
rather than development environments, which we should see
in the coming months. Intel is now part of the debate, after
proving it can make an x86 architecture that is much more
competitive within ARM’s core markets.
At best, a couple of years down the road, we see Intel,
NVIDIA, and TI vying for fourth place behind Apple’s custom
application processor, Samsung’s internal application
processor, and Qualcomm. It would be very impressive, in
our view, if Intel’s Medfield and its follow-on products could
catch up to NVIDIA or TI in these businesses within 2-3 years.
NVIDIA earned $360 million in Tegra revenue last year and
we estimate that TI did $630 million in OMAP, and we have
fairly low growth estimates for both this year. An Intel
success case would be overtaking these two vendors. This is
unlikely to occur, in our view, and even if it did, application
processors would still represent less than 1% of Intel’s
revenue.
AMD will also enter the low power x86 market for tablets
with its "Hondo" processor, essentially an ultralow power
(4.5 Watt) version of Brazos, likely in 4Q12 in conjunction with
Windows 8 tablets. The company will then migrate to a 28nm
product code-named "Tamesh" next year, based on the same
Jaguar core as the other low-priced client CPU businesses on
the 2013 roadmap. AMD has also alluded to being
"instruction set agnostic", meaning they could pursue an ARM
license at some point, though we think servers would be the
target of any such activity. We do not expect much traction
this year within tablets, while any slowing in the notebook
market due to tablet cannibalization will obviously impact
AMD.
Tablets a Boost for the Memory Markets
Tablets will consume about 12% of NAND flash in 2012,
and we expect that number to keep growing over time.
NAND is a unique enabler of both smartphones and tablets,
and as prices fall, we expect to see large increases in content
per unit in 2013. Twenty-to-forty percent of respondents said
they use applications weekly that require substantial NAND
content, including watching videos (28%), recording video
(29%) or reading magazines (37%), and we think applications
such as games (42%) will continue to grow over time. Apple
in particular has been very successful in using NAND content
to price discriminate, charging substantial premiums for higher
NAND content devices. With NAND prices well below $1 per
gigabyte, we expect higher NAND content next year.
23
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Exhibit 35
20-40% of Respondents Use Applications that
Require Substantial NAND Content Weekly
% of Respondents that Use Their Tablet for the Following Tasks
at Least Once a Week
80%
60%
40%
20%
Creating
documents
Watching TV
programmes
Watching
films
Taking
pictures/video
Listening to
music
Reading
Social
networking
Playing
games
E-mail
Using
applications
Web browsing
0%
Source: AlphaWise, Morgan Stanley Research
amongst respondents who planned to buy WiFi only tablets,
two-thirds would actually change their purchasing intentions to
cellular connectivity if they could add their new tablet to their
existing smartphone data plan at no extra charge. Therefore,
the tablet market could move to 90%+ wireless penetration
over time as wireless pricing (upfront and monthly charges)
becomes more consumer-friendly. We believe the
introduction of family/shared data plans, likely over the
summer, and the potential success of Windows-based tablets
– which we expect to open up lower price points for baseband
equipped tablets – should together finally catalyze the
adoption of cellular connectivity in tablets.
Exhibit 36
62% of Tablets Bought in 1Q12 Were WiFi-Only, but
76% of Consumers Want Wireless Connectivity
Connectivity Preference for Next Tablet Purchase (%)
We are bullish on NAND generally, and specifically on
Samsung Electronics, Toshiba and SanDisk. We believe
Samsung Electronics (SEC) should be a key beneficiary of
increasing NAND demand. Given its technology leadership
and economies of scale, we expect SEC to maintain its
market leadership and continue to be the key NAND supplier
for Apple’s iPad and SEC's Galaxy Tab.
Toshiba also has relatively high exposure to embedded
NAND. Due to higher requirement for reliability, we think that
most of Toshiba's embedded products are 24nm or 32nm
process currently. However, we expect Toshiba to develop
embedded and SSD products based on its leading-edge
19nm process this year, which will enable the company to
maintain cost competitiveness.
Although we view SanDisk as one of the best-positioned
NAND vendors, we should note, however, that it has relatively
low exposure to embedded NAND currently. That helped the
company’s profitability last year, because categories such as
retail or embedded flash cards sold to OEMs were more
profitable than embedded tablet opportunities, but as more of
the NAND market becomes embedded SanDisk will have to
migrate. We think they will successfully do so.
62
42
34
27
24
11
Wi-Fi Only
Wi-Fi + 3G
Purchase Intentions
Wi-Fi + 4G LTE
1Q12 IDC Data
Source: AlphaWise, Morgan Stanley Research
Exhibit 37
Two-Thirds of WiFi Tablet Purchasers Would Add
Cellular Connectivity If They Could Add the Tablet
to Their Current Data Plan at No Extra Cost
Tablet Connectivity Preferences if Carrier Data Plans
Allowed Multiple Devices
66%
34%
Baseband, Connectivity and Related Vendors to
Benefit
Family data plans likely to boost wireless penetration in
tablets. According to IDC, 62% of tablets purchased in 1Q12
were WiFi only. However, we believe consumers aspire to
wireless connectivity, as 76% said they plan to buy a tablet
with 3G or 4G connectivity, with only 24% intending to
purchase a WiFi only tablet. In addition, we found that
3G or 4G LTE
Wi-Fi only
Source: AlphaWise, Morgan Stanley Research
Wireless tablets provide a superior consumer experience.
Our survey also indicates that 32% of current tablet owners
consider 4G connectivity as one of the top three most
24
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
important hardware features in a tablet, much higher than the
15% of respondents planning to purchase a tablet in the next
12 months, suggesting that, as the replacement market
grows, wireless penetration rate in tablets is likely to increase.
Exhibit 38
4G Connectivity Is More Important for Repeat Tablet
Purchasers than for First-Time Tablet Buyers
Most Important Hardware Features when Considering a Tablet Purchase
60%
50%
differentiates its solutions relative to competing solutions.
Moreover, while most of Broadcom’s competitors are bringing
first- or second-generation solutions to the market, Broadcom
has delivered seven different generations of connectivity
solutions. Lastly, we believe the integration of new radios
(802.11ac and NFC), which many of Broadcom’s existing
connectivity competitors currently lack, will serve to drive
further differentiation that will enable Broadcom to continue to
grow its connectivity business. Beyond connectivity, we note
that Broadcom is also the major supplier for Apple iPad touchscreen controller.
40%
30%
20%
10%
First-Time Purchasers and Upgraders
NFC
Camera
Thinness
4G LTE
Connectivity
Bright, Hi-Res
Screen
LightWeight
Large
Screen
Touchscreen
Quality
Processor
Price
Battery
Life
0%
Upgraders
Source: AlphaWise, Morgan Stanley Research
Qualcomm best-positioned to benefit from tablet
proliferation and the increase in wireless penetration.
The move to 3G/4G (vs. WiFi-enabled) tablets is a positive for
Qualcomm, as it expands the 3G/4G device market (on which
Qualcomm collects royalties) while increasing the market
opportunity for basebands and application processors.
Qualcomm is the market leader in baseband, with a product
portfolio across all tiers, and leading multi-band LTE chipsets.
While the New iPad uses a Qualcomm LTE chipset and an
Apple application processor, we expect Windows 8 tablets to
embrace integrated solutions, with Qualcomm well positioned
to sell its integrated application processors.
We believe Broadcom is one of the best-positioned
names within the semiconductor space to benefit from
the proliferation of tablet devices, with 65%+ share in
wireless connectivity (Bluetooth, WiFi, GPS, FM). Broadcom
is the incumbent supplier into Apple’s iPad platform, and has
been for three generations. While connectivity solutions in
general are standards-based (i.e., engineered in accordance
with IEEE specifications), Broadcom’s ability to deal with radio
interference across multiple radios within a single die
We believe the migration to the LTE air standard will
serve as a growth catalyst given Avago’s leadership
position within the filter space. Avago’s film bulk acoustic
resonator (FBAR) filters are the only available solution that we
are currently aware of that can support band-2 of the LTE air
interface. Consequently, for handset vendors looking to
deliver global handsets, there exists a high probability that
Avago’s FBAR filter technology will be used. Beyond Avago,
we believe TriQuint Semiconductor is attempting to develop
its own FBAR filter technology, although we do not believe
TriQuint has any commercially available silicon. Lastly, while
it has not traditionally been a major player within the power
amplifier space, we believe Avago’s differentiated FBAR
technology has opened up additional content opportunities to
“piggy-back” sales of its power amplifiers with its filters. This
was clearly reflected within the iPad as Avago has won the full
front-end module (FEM) that incorporates both a filter and
power amplifier.
With the completion of the SiGe and AATI acquisitions,
Skyworks now has one of the broadest portfolios of
radiofrequency (RF) products. Specifically, Skyworks is
capable of providing power amplifiers (cellular, Bluetooth,
WiFi, GPS), antenna switch modules, and filters.
Consequently, while it historically only had 1-2 sockets
available within a given smartphone or tablet, we now believe
there are up to 6-7 sockets that Skyworks can capture.
Moreover, we note that similar to Broadcom and Avago,
Skyworks is one of the incumbent suppliers within Apple’s
current iPad, currently supplying two WCDMA power
amplifiers.
25
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Component and Assembly Supply Chain
Asia Technology
Jasmine Lu
Sharon Shih
Po-Ling Chen
Brad Lin
Who benefits most among the tablet supply chain from vendor
share changes in 2012-13?
We believe Hon Hai, the main iPad assembler, and Foxconn Tech,
Hon Hai’s main metal casing subsidiary, should benefit from the
larger tablet market and the tightened supply relationship with Apple.
On the component front, we identify AAC as the key beneficiary
given its new penetration into the tablet market starting from 2012,
especially with the iPad, which we estimate to account for around 15-20%
of total sales.
Which component supplier is better-positioned among the desired
tablet feature shift?
We view TPK as the major beneficiary of a design shift to thin and
light touch solutions given its dominant supplier share in Apple’s iPad,
numerous non-Apple tablet design wins for 2H12, proven yield and
production capability, and its full range of touch design offerings. The
survey suggests battery life, price, processor, touchscreen quality and
large display size are the most important tablet features for respondents’
next tablet purchase.
 Best positioned: Hon Hai, AAC, TPK and Foxconn Tech
Implications of Tablet Vendor Share Shifts
Apple remains the dominant tablet vendor. Amazon.com
is expected to lose unit share while several PC vendors
are poised to gain share. Our in-house iPad forecasts were
increased by 8% in 2012 and 18% in 2013 to 70 million units
(up 72% Y/Y) and 97 million units (up 39% Y/Y),
respectively. Our survey suggests lower purchase intentions
for Amazon.com’s Kindle Fire, while a few PC brands, such
as Acer, Sony, Dell, HP and Toshiba, could gain 2-4 points
of share off a low base.
 Assembly – Hon Hai is expected to handle at least 80%
of iPad assembly orders with Pegatron sharing the rest.
With the increased iPad volume estimates and improved
yield and efficiency after Hon Hai’s site relocation to
Chengdu, China for more than a year, we see upside risk
to our estimates for iPad contribution. Note, our channel
checks suggest Hon Hai is likely one of the assemblers
for Amazon.com’s new tablet projects in 2H12. If these
projects continue to cannibalize regular notebooks, Hon
Hai is the net beneficiary given its limited exposure to
notebook assembly.
 Components – AAC Technology is best-positioned.
We believe AAC is the key beneficiary in terms of share
allocation and sales contributions from tablets, especially
from iPad and to a lesser extent Amazon.com’s new
tablet projects. AAC emerges as a new supplier to the
third-generation iPad since late 1Q12 and we estimate
the iPad alone contributes nearly 15-20% of total sales.
Foxconn Tech, as the dedicated metal casing supplier to
Hon Hai, will benefit from Hon Hai’s growing tablet
exposure in 2013.
Exhibit 39
Apple Remains the Dominant Tablet Vendor, while
Several PC Vendors Are Poised to Gain Share
Tablet Ownership vs. Purchase Intentions by Vendor
(%)
54
Apple
46
11
14
Samsung
3
Acer
7
Sony
2
Dell
2
HP
1
Toshiba
1
Asus
Amazon.com
RIM
HTC
Lenovo
Other
5
4
4
Current Installed Base
3
3
3
Purchase Intentions
5
3
2
2
0
2
1
1
15
7
Source: AlphaWise, Morgan Stanley Research
Implications of Respondents’ Desired Tablet
Features
Battery life and price are two major factors for potential
tablet purchasers. Processor and touchscreen quality are
also important while tablet thinness, camera resolution and
near-field communication (NFC) turn out to be less
important.
26
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
 Battery life: Due to continuous display resolution
upgrades, backlight module redesign, and processor
power enhancement, the demand for better battery life
continues to rise. For example, the battery life of the
third-generation iPad increased by 70%; and thus the
price of the battery pack is also 25% higher. We see the
same adoption trend in non-Apple tablet products, which
bodes well for the battery pack suppliers, such as Simplo
and Dynapack.
Exhibit 40
Respondents Care about Battery Life, Processor,
Touchscreen Quality and Large Screen Size
Most Important Hardware Features when Considering a Tablet Purchase
60%
50%
40%
30%
20%
10%
First-Time Purchasers and Upgraders
 Large screen size: The survey indicates potential tablet
buyers prefer a 10” or 12” display size, larger than most
of the existing design. We believe this suggests
consumers care about reading comfort when using
tablets. This implies the display design is important,
including large screen size, greater display resolution but
at the same time, optimization of color contrast ratio.
This offers room for differentiation for most panel
makers, including Sharp, Samsung, LG Display and
AUO.
NFC
Upgraders
Source: AlphaWise, Morgan Stanley Research
Exhibit 41
Potential Tablet Purchasers Prefer Large Screen
Sizes, with 10” and 12” the Top Two Choices
Screen Size Preference for Next Tablet Purchase (%)
38
 Touchscreen quality: Touch design in tablets is moving
toward thinner and lighter requirements but the touch
sensitivity/quality should not be sacrificed at the same
time. Thus, the single-glass touch design (OGS) and
glass-film (G/F) touch structures are seeing increasing
adoption for new tablet projects to debut in 2H12. We
view TPK as a net beneficiary for touch design progress
given its dominant supplier share for Apple’s iPad,
proven yield and production capability, as well as its full
range of touch design offerings (G/G, touch-on-lens, G/F
and G/F/F).
Camera
Thinness
4G LTE
Connectivity
Bright, Hi-Res
Screen
LightWeight
Large
Screen
Touchscreen
Quality
Processor
0%
Price
continues to evolve from dual-core to quad-core design
and upgrade to 28/32nm production process for
enhanced 3D game effect, video editing and lower power
consumption, etc. Examples include Apple A5X and
potentially A6 (iPhone and iPad), Samsung Exynos
(Galaxy S III), NVIDIA Tegra 3 (Asustek tablet) and
Qualcomm Snapdragon S4 (HTC One X). We view
Kinsus as the major beneficiary of the continuous
processor upgrade for its FC-CSP substrate offerings to
Qualcomm and Apple and, to a lesser extent, Unimicron
for exposure to NVIDIA Tegra 3.
Battery
Life
 Processor: The core processor adopted in tablets
25
9
2
2
5”
6”
7”
11
8”
8
9”
5
10”
11”
12”
Source: AlphaWise, Morgan Stanley Research
Exhibit 42
iPad Supply Chain
Ticker
2018.HK
2317.TW
4938.TW
4958.TW
6269.TW
6153.TW
8046.TW
3044.TW
2313.TW
3037.TW
2368.TW
3189.TW
3673.TW
6121.TW
3211.TW
2392.TW
6230.TW
6286.TW
3406.TW
3008.TW
2327.TW
2354.TW
6176.TW
5371.TW
3042.TW
3149.TW
Company
AAC
Hon Hai
Pegatron
Zhen Ding*
Flexium*
Career*
NY PCB*
Tripod
Compeq*
Unimicron
Gold Circuit*
Kinsus
TPK
Simplo*
Dynapack*
Cheng Uei*
CCIC*
Richtek
GSEO*
Largan
Yageo*
Foxconn Tech
Radiant*
Coretronics*
TXC*
G-Tech Opto*
iPad 2
iPad 3
2011 Sales % 2012 Sales %
Items Supplied
0%
15-20%
Acoustic components
6-8%
9-11%
Assembly
0%
~4%
Assembly
5%
5-10%
Flexible PCB
~5%
5-10%
Flexible PCB
~5%
~5%
Flexible PCB
<5%
0%
PCB
5-10%
5-10%
PCB
3-5%
3-5%
PCB
0%
3-5%
PCB
<5%
0%
PCB
0%
<3%
IC substrate
25%+
~20%
Touch panel
25%+
20-25%
Battery
40%+
50-55%
Battery
NA
NA
Connectors
NA
NA
Heat dissemination module
3-4%
5-10%
Power management IC
NA
NA
Camera lens
~5%
8-10%
Camera lens
<2%
<2%
Passive components
<5%
<5%
Casing
20%
23%
Backlight module
<5%
0%
Backlight module
<5%
<5%
Crystal resonator
10-20%
10-20%
Glass
Source: Company Data, Morgan Stanley Research
* non-covered companies; estimates from company
27
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Appendix I: Tablet Model
1Q11
2Q11
3Q11
4Q11
1Q12e
2Q12e
3Q12e
4Q12e
1Q13e
2Q13e
3Q13e
4Q13e
2010
2011
2012e
2013e
2014e
2015e
3.5
1.3
2.2
1.0
8.0
6.7
2.6
3.3
2.1
14.7
7.1
3.4
4.8
2.9
18.2
14.4
4.7
5.2
4.4
28.7
6.8
3.6
4.7
3.5
18.7
10.7
5.6
7.3
5.0
28.6
10.7
5.7
10.5
6.5
33.4
21.6
8.1
12.5
10.6
52.7
9.6
5.4
10.9
7.4
33.3
15.0
8.4
13.9
9.6
46.8
15.0
8.6
17.8
12.3
53.7
30.3
12.1
21.2
19.0
82.5
10.3
3.8
3.1
2.2
19.4
31.7
11.9
15.5
10.5
69.6
49.8
23.0
35.0
25.6
133.4
69.8
34.5
63.8
48.3
216.3
83.7
41.4
89.3
67.6
282.0
96.3
47.6
120.6
87.9
352.3
192%
354%
2872%
371%
330%
188%
236%
497%
325%
266%
159%
111%
141%
302%
160%
96%
184%
114%
246%
134%
60%
120%
120%
140%
96%
50%
70%
120%
120%
83%
50%
70%
140%
140%
83%
40%
50%
130%
110%
78%
40%
50%
90%
90%
64%
40%
50%
70%
90%
61%
40%
50%
70%
80%
57%
207%
212%
406%
369%
258%
57%
93%
126%
145%
92%
40%
50%
82%
89%
62%
20%
20%
40%
40%
30%
15%
15%
35%
30%
25%
46%
17%
22%
15%
37%
17%
26%
19%
32%
16%
29%
22%
30%
15%
32%
24%
27%
14%
34%
25%
Units (Millions)
United States
Western Europe
APAC ex-Japan
ROW
Total
Y/Y Unit Growth
United States
Western Europe
APAC ex-Japan
ROW
Total
Q/Q Unit Growth
United States
Western Europe
APAC ex-Japan
ROW
Total
-37%
-44%
3%
-6%
-28%
91%
103%
50%
105%
83%
7%
32%
44%
40%
24%
102%
41%
9%
49%
58%
-52%
-25%
-9%
-19%
-35%
56%
58%
54%
42%
53%
0%
2%
44%
29%
16%
102%
41%
19%
63%
58%
-56%
-34%
-12%
-29%
-37%
56%
58%
27%
29%
41%
0%
2%
28%
29%
15%
102%
41%
19%
54%
54%
Unit Mix
United States
Western Europe
APAC ex-Japan
ROW
44%
16%
28%
13%
46%
17%
23%
14%
39%
18%
26%
16%
50%
17%
18%
15%
37%
19%
25%
19%
37%
20%
26%
18%
32%
17%
31%
19%
41%
15%
24%
20%
29%
16%
33%
22%
32%
18%
30%
20%
28%
16%
33%
23%
37%
15%
26%
23%
53%
20%
16%
11%
Source: IDC, Morgan Stanley Research
28
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Appendix II: PC Model
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12e
3Q12e
4Q12e
1Q13e
2Q13e
3Q13e
4Q13e
2010
2011
2012e
2013e
2014e
2015e
Units (Millions)
Product Summary
Desktops
Notebooks
Total
Tablets
Total
37
48
85
8
93
38
49
87
15
101
40
55
96
18
114
39
56
96
29
124
39
50
89
19
108
38
47
85
29
114
39
53
91
33
125
41
60
100
53
153
39
54
93
33
126
39
51
90
47
137
39
54
92
54
146
39
57
96
83
178
157
200
357
19
377
155
209
363
70
433
156
210
366
133
499
156
215
371
216
587
153
217
370
282
652
152
218
370
352
722
Segment Summary (Ex-Tablets)
Developed consumer
Developed commercial
Emerging consumer
Emerging commercial
Total
19
17
27
22
85
17
17
29
23
87
19
19
33
25
96
22
18
31
24
96
18
17
30
23
89
16
17
30
23
85
17
18
32
25
91
23
18
32
26
100
19
17
32
25
93
16
17
31
25
90
17
17
33
25
92
21
16
32
26
96
89
73
107
88
357
76
72
120
95
363
74
71
124
97
366
73
68
129
101
371
69
64
133
105
370
65
60
136
109
370
Consumer
Commercial
Total
46
39
85
46
41
87
51
44
96
53
43
96
49
40
89
45
40
85
49
43
91
56
45
100
51
42
93
47
42
90
50
42
92
53
42
96
196
161
357
197
166
363
198
167
366
202
169
371
202
169
370
201
169
370
Developed
Emerging
Total
35
50
85
34
52
87
38
58
96
40
55
96
36
53
89
33
53
85
35
56
91
41
59
100
36
57
93
33
56
90
34
58
92
37
58
96
163
195
357
148
215
363
145
221
366
141
230
371
132
238
370
124
245
370
1%
1%
1%
92%
15%
0%
3%
1%
62%
18%
-1%
1%
0%
30%
11%
-1%
0%
0%
25%
11%
Y/Y Unit Growth
Product Summary
Desktops
Notebooks
Total
Tablets
Total
2%
8%
5%
266%
19%
-4%
3%
0%
160%
17%
5%
5%
5%
134%
16%
0%
-3%
-2%
96%
12%
-4%
-5%
-5%
83%
9%
3%
6%
5%
83%
23%
1%
7%
5%
78%
17%
1%
8%
5%
64%
20%
0%
2%
1%
61%
17%
-4%
-5%
-4%
57%
17%
8%
19%
14%
8%
-1%
5%
2%
330%
15%
20%
-1%
4%
2%
258%
15%
-20%
-5%
11%
9%
-1%
-19%
-1%
14%
11%
2%
-7%
1%
12%
11%
5%
-12%
-4%
13%
2%
0%
-1%
3%
11%
3%
5%
-8%
-2%
1%
0%
-2%
-11%
-6%
-2%
-2%
-5%
6%
0%
5%
8%
5%
3%
0%
6%
8%
5%
3%
1%
6%
9%
5%
1%
-8%
4%
3%
1%
-10%
-10%
0%
-2%
-4%
5%
8%
26%
15%
14%
-15%
-2%
12%
8%
2%
-3%
-1%
3%
2%
1%
-2%
-4%
4%
4%
1%
-6%
-6%
3%
4%
0%
-5%
-6%
2%
4%
0%
-4%
3%
-1%
0%
5%
2%
4%
7%
5%
1%
-1%
0%
6%
3%
5%
-2%
-1%
-2%
-5%
-4%
-5%
5%
5%
5%
5%
5%
5%
5%
6%
5%
3%
-1%
1%
-4%
-5%
-4%
15%
12%
14%
0%
3%
2%
1%
1%
1%
2%
1%
1%
0%
0%
0%
0%
0%
0%
-13%
10%
-1%
-11%
13%
2%
-3%
12%
5%
-8%
8%
0%
1%
7%
5%
-5%
0%
-2%
-8%
-2%
-5%
3%
6%
5%
1%
7%
5%
2%
7%
5%
-3%
4%
1%
-10%
-1%
-4%
6%
21%
14%
-9%
10%
2%
-2%
3%
1%
-3%
4%
1%
-6%
3%
0%
-6%
3%
0%
Product Summary
Desktops
Notebooks
Total
Tablets
Total
-10%
-12%
-11%
-28%
-13%
3%
1%
2%
83%
9%
6%
14%
10%
24%
12%
-2%
1%
0%
58%
9%
-2%
-11%
-7%
-35%
-13%
-2%
-6%
-4%
53%
6%
2%
12%
7%
16%
10%
5%
13%
10%
58%
23%
-4%
-10%
-7%
-37%
-17%
-2%
-5%
-4%
41%
8%
0%
5%
3%
15%
7%
2%
6%
4%
54%
22%
Segment Summary (Ex-Tablets)
Developed consumer
Developed commercial
Emerging consumer
Emerging commercial
Total
-26%
-11%
0%
-8%
-11%
-9%
3%
7%
5%
2%
12%
10%
11%
8%
10%
16%
-5%
-5%
-2%
0%
-17%
-5%
-2%
-7%
-7%
-14%
-3%
-3%
1%
-4%
7%
6%
8%
6%
7%
38%
1%
1%
8%
10%
-19%
-5%
0%
-7%
-7%
-14%
-2%
-3%
2%
-4%
6%
-3%
6%
0%
3%
23%
-1%
-2%
3%
4%
Consumer
Commercial
Total
-12%
-10%
-11%
0%
4%
2%
11%
9%
10%
3%
-3%
0%
-8%
-6%
-7%
-7%
0%
-4%
8%
6%
7%
14%
5%
10%
-8%
-6%
-7%
-7%
1%
-4%
6%
-1%
3%
6%
1%
4%
Developed
Emerging
Total
-19%
-4%
-11%
-3%
6%
2%
11%
10%
10%
6%
-4%
0%
-11%
-4%
-7%
-9%
-1%
-4%
7%
7%
7%
19%
4%
10%
-13%
-3%
-7%
-8%
-1%
-4%
1%
4%
3%
11%
0%
4%
Segment Summary (Ex-Tablets)
Developed consumer
Developed commercial
Emerging consumer
Emerging commercial
Total
-3%
0%
-1%
Consumer
Commercial
Total
Developed
Emerging
Total
Q/Q Unit Growth
Source: IDC, Morgan Stanley Research
29
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Morgan Stanley Blue Papers
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MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
The China Files
Asian Corporates & China’s
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The China Files
European Corporates &
China’s Megatransition
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31
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
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approvals, as well as other customary closing conditions.
Babcock & Wilcox has agreed to pay fees to Morgan Stanley for its financial advisory services.
Morgan Stanley is acting as financial advisor to IBM in relation to its definitive agreement announced April 17, 2012, whereby Toshiba TEC, a
subsidiary of Toshiba Corp., will acquire IBM's Retail Store Solutions ("RSS") business. This transaction is subject to the satisfaction of regulatory
requirements and customary closing conditions. IBM has agreed to pay fees to Morgan Stanley for its financial services. Please refer to the notes
at the end of this report.
32
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Disclosure Section
The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A.,
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LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V. and their affiliates as necessary.
For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the
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For valuation methodology and risks associated with any price targets referenced in this research report, please email
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Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and
that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in
this report: Grace Chen, Po-Ling Chen, Terence Cheng, Sanjay Devgan, Scott Devitt, Ehud Gelblum, Sunil George, Adam Holt, Katy Huberty,
Jennifer Lowe, Bill Lu, Jasmine Lu, Francois Meunier, Joseph Moore, Masahiro Ono, Shoji Sato, Sharon Shih, Young Suk Shin, Keith Weiss, Kazuo
Yoshikawa.
Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
Global Research Conflict Management Policy
Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at
www.morganstanley.com/institutional/research/conflictpolicies.
Important US Regulatory Disclosures on Subject Companies
The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or
recommends in Morgan Stanley Research: Terence Cheng - Apple, Inc.(common or preferred stock); Jasmine Lu - Acer Inc.(common or preferred
stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as
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As of April 30, 2012, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in
Morgan Stanley Research: Acer Inc., Amazon.com, Apple, Inc., ARM Holdings Plc, Asustek Computer Inc., Broadcom Corporation, DELL, Google,
Hon Hai Precision, HTC Corporation, Microsoft, NVIDIA Corp., SanDisk Corporation, Seagate Technology, Sharp, TPK Holding.
Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Broadcom Corporation,
Hewlett-Packard, Samsung Electronics, Sony.
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Amazon.com, Avago Technologies Ltd,
Broadcom Corporation, DELL, Google, Hewlett-Packard, Hon Hai Precision, Intel Corporation, Lenovo, Microsoft, Qualcomm Inc., Samsung
Electronics, SanDisk Corporation, Seagate Technology, Sharp, Sony, Texas Instruments, Toshiba.
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AAC Technologies
Holdings, Amazon.com, Apple, Inc., ARM Holdings Plc, Avago Technologies Ltd, Broadcom Corporation, DELL, Google, Hewlett-Packard, Hon Hai
Precision, HTC Corporation, Intel Corporation, Lenovo, Lexmark International, Microsoft, NVIDIA Corp., Qualcomm Inc., Research In Motion Ltd.,
Samsung Electronics, SanDisk Corporation, Seagate Technology, Sharp, Sony, Texas Instruments, Toshiba.
Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from AAC
Technologies Holdings, Acer Inc., Amazon.com, Apple, Inc., Asustek Computer Inc., AU Optronics, Avago Technologies Ltd, Broadcom Corporation,
DELL, Google, Hewlett-Packard, Hon Hai Precision, Intel Corporation, Lenovo, Lexmark International, Microsoft, Qualcomm Inc., SanDisk
Corporation, Seagate Technology, Sharp, Sony, Texas Instruments, Toshiba.
Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client
relationship with, the following company: AAC Technologies Holdings, Amazon.com, Apple, Inc., ARM Holdings Plc, Avago Technologies Ltd,
Broadcom Corporation, DELL, Google, Hewlett-Packard, Hon Hai Precision, HTC Corporation, Intel Corporation, Lenovo, Lexmark International,
Microsoft, NVIDIA Corp., Qualcomm Inc., Research In Motion Ltd., Samsung Electronics, SanDisk Corporation, Seagate Technology, Sharp, Sony,
Texas Instruments, Toshiba.
Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the
past has entered into an agreement to provide services or has a client relationship with the following company: AAC Technologies Holdings, Acer
Inc., Amazon.com, Apple, Inc., ARM Holdings Plc, Asustek Computer Inc., AU Optronics, Avago Technologies Ltd, Broadcom Corporation, DELL,
Google, Hewlett-Packard, Hon Hai Precision, HTC Corporation, Intel Corporation, Lenovo, Lexmark International, Microsoft, NVIDIA Corp.,
Qualcomm Inc., SanDisk Corporation, Seagate Technology, Sharp, Sony, Texas Instruments, Toshiba.
Morgan Stanley & Co. LLC makes a market in the securities of Amazon.com, Apple, Inc., ARM Holdings Plc, AU Optronics, Avago Technologies Ltd,
Broadcom Corporation, DELL, Google, Hewlett-Packard, Intel Corporation, Lenovo, Lexmark International, Microsoft, NVIDIA Corp., Qualcomm
Inc., Research In Motion Ltd., SanDisk Corporation, Seagate Technology, Skyworks, Sony, Texas Instruments, TSMC, Western Digital.
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STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below).
Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not
the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since
Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley
Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as
investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings)
and other considerations.
33
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Global Stock Ratings Distribution
(as of April 30, 2012)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell
alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the
stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended
relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy
recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
Stock Rating Category
Coverage Universe
Investment Banking Clients (IBC)
% of
% of % of Rating
Total
Count
Count Total IBC Category
Overweight/Buy
Equal-weight/Hold
Not-Rated/Hold
Underweight/Sell
Total
1115
1254
100
471
2,940
38%
43%
3%
16%
459
474
25
124
1082
42%
44%
2%
11%
41%
38%
25%
26%
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual
circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan
Stanley received investment banking compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the
analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the
relevant broad market benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant
broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant
broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index;
Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.
Stock Price, Price Target and Rating History (See Rating Definitions)
34
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
Important Disclosures for Morgan Stanley Smith Barney LLC Customers
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35
MORGAN STANLEY RESEARCH
May 31, 2012
Tablet Landscape Evolution
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36
MORGAN STANLEY RESEARCH
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Close Price
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Ticker
Company Name
Close Price
(as of 05/30/2012)
2018.HK
AAC Technologies Holdings
HKD 24.50
LXK.N
Lexmark International
USD 25.10
2353.TW
Acer Inc.
TWD 30.55
MSFT.O
Microsoft
USD 29.34
AMZN.O
Amazon.com
USD 209.23
NVDA.O
NVIDIA Corp.
USD 12.57
Pegatron Corporation
TWD 41.45
USD 57.45
AAPL.O
Apple, Inc.
USD 579.17
4938.TW
ARM.L
ARM Holdings Plc
GBp 508.50
QCOM.O
Qualcomm Inc.
2357.TW
Asustek Computer Inc.
TWD 299.00
RIMM.O
Research In Motion Ltd.
2409.TW
AU Optronics
TWD 12.20
005930.KS
Samsung Electronics
AVGO.O
Avago Technologies Ltd
USD 33.06
SNDK.O
SanDisk Corporation
USD 33.62
BRCM.O
Broadcom Corporation
USD 32.19
STX.O
Seagate Technology
USD 24.32
DELL.O
DELL
USD 12.56
6753.T
Sharp
2354.TW
Foxconn Technology
TWD 107.5
GOOG.O
Google
HPQ.N
2317.TW
SWKS.O
Skyworks
USD 588.23
6758.T
Sony
Hewlett-Packard
USD 22.74
TXN.O
Texas Instruments
Hon Hai Precision
TWD 87.50
6502.T
Toshiba
TPK Holding
USD 10.351
KRW 1211000
JPY 411
USD 25.81
JPY 1050
USD 28.95
JPY 295
2498.TW
HTC Corporation
TWD 430.00
3673.TW
INTC.O
Intel Corporation
USD 26.13
2330.TW
TSMC
TWD 85.10
3189.TW
Kinsus Interconnect Tech.
TWD 86.50
3037.TW
Unimicron
TWD 32.25
0992.HK
Lenovo
WDC.N
Western Digital
USD 32.23
© 2012 Morgan Stanley
HKD 6.60
TWD 445