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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 Morgan Stanley Blue Papers address long-term, structural business changes that are reshaping the fundamentals of entire economies and industries around the globe. Analysts, economists, and strategists in our global research network collaborate in the Blue Papers to address critical themes that require a coordinated perspective across regions, sectors, or asset classes. Recently Published Blue Papers Financials: CRE Funding Shift EU Shakes, US Selectively Takes May 25, 2012 Cloud Computing Takes Off Market Set to Boom as Migration Accelerates May 23, 2011 The China Files The Logistics Journey Is Just Beginning April 24, 2012 China High-Speed Rail On the Economic Fast Track May 15, 2011 Solvency The Long and Winding Road March 23, 2012 Asian Inflation Consumers Adjust As Inflation Worsens March 31, 2011 Wholesale & Investment Banking Outlook Decision Time for Wholesale Banks March 23, 2012 Wholesale & Investment Banking Reshaping the Model March 23, 2011 Banks Deleveraging and Real Estate Implication of a €400-700bn Financing Gap March 15, 2012 Global Gas A Decade of Two Halves March 14, 2011 The China Files China’s Appetite for Protein Turns Global October 25, 2011 Tablet Demand and Disruption Mobile Users Come of Age February 14, 2011 The US Healthcare Formula Cost Control and True Innovation June 16, 2011 The China Files Chinese Economy through 2020 November 8, 2010 30 MORGAN STANLEY RESEARCH May 31, 2012 Tablet Landscape Evolution The China Files Asian Corporates & China’s Megatransition November 8, 2010 The China Files European Corporates & China’s Megatransition October 29, 2010 Petrochemicals Preparing for a Supercycle October 18, 2010 Solvency 2 Quantitative & Strategic Impact, The Tide is Going Out September 22, 2010 The China Files US Corporates and China’s Megatransition September 20, 2010 Brazil Infrastructure Paving the Way May 5, 2010 To find downloadable versions of these publications and information on Other Morgan Stanley reports, visit www.morganstanley.com 31 MORGAN STANLEY RESEARCH May 31, 2012 Tablet Landscape Evolution Morgan Stanley provided certain financial advice to Barnes & Noble Inc. ("Barnes & Noble") with respect to the formation of a strategic partnership with Microsoft Corp. in a new Barnes & Noble subsidiary, as announced on April 30, 2012. Please refer to the notes at the end of the report. Morgan Stanley is acting as financial advisor to Seagate Technology plc ("Seagate") in connection with its exclusive agreement with LaCie Group S.A. ("LaCie") to acquire a controlling interest in LaCie, as announced on May 23, 2012. Following the receipt of the customary approvals and the close of this transaction, Seagate would commence a tender offer to acquire the remaining outstanding shares of LaCie in accordance with the General Regulation of the French Autorité des Marchés Financiers. This report and the information provided herein is not intended to (i) provide advice with respect to whether to tender LaCie shares, (ii) serve as an endorsement of the proposed transactions, or (iii) result in the procurement or exchange of a security by a security holder. Seagate has agreed to pay fees to Morgan Stanley for its financial services that are contingent upon the consummation of the proposed transaction. Please refer to the notes at the end of the report. Morgan Stanley is currently acting as financial advisor to Google Inc. ("Google") with respect to its proposed stock dividend, as announced on April 12, 2012. Certain aspects of the proposal are subject to approval by Google's shareholders. Google has agreed to pay fees to Morgan Stanley for its financial advice. Please refer to the notes at the end of the report. Morgan Stanley is acting as financial advisor to Babcock & Wilcox with respect to its definitive agreement to make an investment alongside Toshiba Corporation in USEC Inc., as announced on May 25, 2010. The proposed transaction is subject to specific preconditions, including regulatory 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., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. 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 Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any price targets referenced in this research report, please email [email protected] with a request for valuation methodology and risks on a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA. 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 defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. 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. 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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. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. 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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 Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. 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Additional information on recommended securities/instruments is available on request. 36 MORGAN STANLEY RESEARCH MORGAN STANLEY BLUE PAPER The Americas 1585 Broadway New York, NY 10036-8293 United States Tel: +1 (1)212 761 4000 Ticker Europe 20 Bank Street, Canary Wharf London E14 4AD United Kingdom Tel: +44 (0)20 7425 8000 Company Name Japan 4-20-3 Ebisu, Shibuya-ku Tokyo 150-6008 Japan Tel: +81 (0)3 5424 5000 Asia/Pacific 1 Austin Road West Kowloon Hong Kong Tel: +852 2848 5200 Close Price (as of 05/30/2012) 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
