Why Apple's iTouch Tablet Will Become Its Flagship Product

Digital content has been available for years, but the right vehicle to consume the content has been lacking. We still cut down trees and hand deliver newspapers to people's homes. That worked in 1900, but 2009? Are you kidding me? The iTouch Tablet is about to change society as we know it. The demand for this product is going to overwhelm Apple (AAPL).

Let’s connect the dots from the latest round of leaks, rumors and inferences regarding the Apple Tablet. In March, Reuters reported that Apple had ordered a substantial batch of 10 inch touchscreens from Taiwan to be delivered in Q3 of 2009. In April, the Wall Street Journal reported that Steve Jobs was actively involved in the development of the Tablet. In July, the China Times reported that Apple will debut their new product in October for $800 after agreeing to production deals with Foxconn, Wintek, and Dynapack. TheStreet.com is reporting that Apple will release a subsidized Tablet through Verizon (VZ). Then, in this week's earnings call, Apple management went out of their way to trash the netbook space but they refused to deny the coming Tablet, saying they will only release products that are ‘innovative and that they are proud of'. These are all reputable sources that seem to unveil the secrecy surrounding the pending product.

Will the tablet have a substantial impact on Apple’s core business? I see this device taking its place at the high end of the iPod family; it will be a larger version of the iPod Touch. This product won’t fall quietly into place however. The iTouch Tablet launch is primed to be the most significant in the history of Apple. The following four reasons provide support for the claim:

1) Apple Finally has an App Machine. Steve Jobs has mentioned that he has never seen anything like success of the App Store in his career. If he is saying that, then I’m saying that this 9.7 inch iTouch that has been designed to optimally utilize the apps will become the flagship Apple product. We are witnessing a transition in the way the Internet is used. Mobile content requires a tailor made user experience that is not efficiently delivered by the traditional website model. Although we have grown accustomed to navigating the Web by browsing websites on our PC, consumers are showing an affinity for the App Store model. Mobile Apps are designed for usability and the 1.5 billion downloads thus far from Apple’s App Store clearly demonstrate a user experience in high demand. The trend is in place that shows consumers will desire an app rather than visit a website. Perhaps we will one day see that apps are more popular than actual websites. The unspoken secret about the iPhone is that it wasn’t designed to become the ultimate App Store device. The screen is too small. The order of operations for the iPhone are phone first, iPod second, Apps third, and Internet browser fourth. This new iTouch is principally designed to take advantage of the App Store gaming, books, news, entertainment, social networking, etc...

2) Mobile High Speed Connectivity. Until now, a truly portable Internet device hasn’t been possible because of the scarce network availability. Verizon’s new Mi-Fi technology appears to be changing the landscape as it enables a Wi-Fi connection anytime and anywhere. It’s looking like this iTouch will mark the beginning of a relationship between Verizon and Apple. The anytime and anywhere connection will allow this product to serve as an up to the moment e-reader. By next year, we will all be wondering how the newspaper industry survived as long as it did with its outdated paper delivery model. The iTouch will replace newspapers, magazines, and books. Imagine a college student not having to lug around his $600 worth of textbooks each semester. Imagine not having to load up on magazines at the airport. The digitization of education and media has arrived. This is the first device that caters to digital readers on the go. Amazon’s (AMZN) black and white Kindle was such a poor attempt that it’s not even worth analyzing. Same goes for the netbook fad.

3) Free Communication. Why do I think the iTouch will be more significant than the iPhone? Because the trend of communication technology is being routed away from wireless cellphone carriers and towards the Internet. Through the use of Skype you can make phone calls over an Internet connection and through the use of Apple’s iChat you can communicate by video for free. There are no overage charges, there are no hidden fees, you just pay for your Internet connection and communicate at will. The rumors are swirling that the next generation iTouch will include a camera and a microphone thereby making this capability a reality for Apple customers.

4) No Carrier Exclusivity. There is no doubt that iPhone sales have suffered because of the exclusivity agreement between Apple and its carriers. In the United States there are millions of Verizon and Sprint (S) customers who would love to have the iPhone but don’t want to switch to AT&T (T). It appears that the iTouch will be openly available. All those people who wanted an iPhone but couldn’t make the carrier switch will flock to the iTouch Tablet. Apple will struggle to produce enough of these to meet the demand.

Being a member of the iPod family means that this new iTouch will be announced at the typical iPod refresh event during the first full week of September. I anticipate the euphoria of Steve Jobs being back on stage introducing a revolutionary new product will cause the stock to surge ahead of the unveiling. Seeing adults stand in line while wearing their pajamas in the early morning hours to purchase the first iTouch Tablet will cause the stock to react again in October. The conclusion is simple. Apple owns the tech revolution. The rise of the dot-coms got out of control at the beginning of the decade for all the right reasons but the infrastructure wasn’t ready to justify the digital transition. Now that the infrastructure is ready, society will embrace the iTouch Tablet in a way that might even surprise the visionary himself.

Disclosure: Long AAPL

Comments

[LuMoS]

Great article, but as far as the App-Store running on the tablet I believe you might be mistaken. Every app in the App-Store is currently developed to fit on the typical 3.5 inch touch-screen, not a 10 in. So in order for apps to run natively they'd have to be re-done or fixed to run on both versions. Which I doubt deva will have the time or patience to create apps for more than 1 device. Although it also opens up speculation as to wheather Apple will implement a Premium App-Store. In which case you might see those
better more expensive App. Running natively on a 10 in screen.

2009 Jul 24 08:32 AM

[davesmall]

This is a great article Jason. I think you have made some very good points.

You should give some additional thought to where Apple might be able to go with a tablet, or perhaps a family of tablet computers. A tablet could become one piece of a more robust system.

Start with a 13" MacBook Pro or a MacBook Air to visualize the kind of overall quality I have in mind. Now make the lid detachable. When detached the lid becomes a tablet computer running the iPhone version of OS X with touch Keypad. When attached the computer runs the regular version of OS X with physical keyboard and ability to run all applications such as Photoshop, etc. Both versions of the OS can coexist and run simultaneously using virtualization. In other words, the detached lid works like a giant iPod Touch but morfs into a full-featured computer with the complete OS X when attached to the bottom unit and keyboard.

Connect the base to the lid with Bluetooth. Put some semiconductor storage in the lid and a big hard disk in the base. You'll need one of those non-user changeable long-life Apple batteries in each unit.

When riding in an airplane put the base in overhead storage and use the lid as a tablet on your tray table. Save files to disk wirelessly using Bluetooth.

Incorporate a pull-out bluetooth headset in the design for phone calls via Mi-Fi (or use an iPhone and access the internet with tethering).

So you're in a restaurant making a sales presentation to a client. The base (computer bottom) is in your briefcase alongside your chair. Your presentation is stored there on the hard disk. The presentation is to be displayed on the bright high res LED 1280 X1024 display on your tablet and sent from disk via Bluetooth. You are connected to the internet via tethering to your iPhone or MiFi. You will also use your iPhone as a remote control for the slide presentation.

A product like this could be sold in pieces. Buy the lid as a huge iPod Touch. Buy the base later with keyboard, hard disk, and SuperDrive to convert to a full fledged laptop. Buy an iPhone to get Internet tethering via 3G (or a Mi-Fi modem as your article suggests).

It is important that it be able to run iPhone Apps so it can piggy-back on the amazing App Store. But it wouldn't have to run that version of OS X exclusively thanks to virtualization.

2009 Jul 24 08:38 AM

[Roger Knights]

"Every app in the App-Store is currently developed to fit on the typical 3.5 inch touch-screen, not a 10 in."

I've read that Apple's guidelines for its ap developers advised them to write their code in a size-independent manner, presumably through an API that adjusts the ap's virtual screen to whatever size actual screen the ap is running on. It would have been silly of Apple not to have done this, and unthinkable for Jobs et al. not to have anticipated it.

2009 Jul 24 08:43 AM

[Greg Bates]

Nicely done. Reason 5 this will be a block buster: ebooks. If, as Fast company and others are rumoring, this will be the beginning of itunes adding ebooks, then it will capture all the would be kindle buyers who can't stomach owning a stand alone device that doesn't do all the things the touch does.

One corroborative piece of analysis: why have a 10 inch screen? Because that's about what you need to read a page the size of a large paperback. These are usually 6x9 inches, length x width of course; the 10 inches is a diagonal measure. Depending on the aspect ratio, that will leave you a little less than 9 inches. A book has a margin; if you subtract that margin, many 6x9 books have pages with text about 8 inches high, perfect for reading the page on the reader at 100% size.

--Greg Bates

2009 Jul 24 08:45 AM

[swissgerman]

Great Article, Jason. And great comments as well. Lets hope, that Apple is reading it (I am sure, they will) and surprises us with a product, that is even better than your Vision of the "iTouch".

2009 Jul 24 09:05 AM

[Roger Knights]

I agree that the iTablet will sweep the world and become the default e-book reader for most readers. But for heavy readers, the Kindle is better, because its e-ink is easier to read for long stretches and because there is no battery drain except when turning a page. I think it will continue to sell well.

2009 Jul 24 09:09 AM

[Roger Knights]

I agree that the iTablet will sweep the world and become the default e-book reader for most readers. But for heavy readers, the Kindle is better, because its e-ink is easier to read for long stretches and because there is no battery drain except when turning a page. I think it will continue to sell well.

2009 Jul 24 09:09 AM

[Governor]

You are so on the money it is awesome!

2009 Jul 24 09:43 AM

[jmmx]

The big question in my mind (after "Is this real or fantasy") is this:
Will it run apps only or will it run OSX (Snow Leopard).

+ Apple "Many owners of netbooks will not be happy with their experience"
+ One of the objectives of Snow Leopard was to pare down the size as well as increase efficiency.

The next question is what chipset.
It is possible that the long delay is was to allow the development of their new in-house chipset. Couple this with a rocking GPU to make a "handset" that is almost as powerful as a MacBook (white model) and you will have a pretty incredible device.

I suppose they will start at $799. Hopefully they will go down a bit after 6 months.

2009 Jul 24 09:48 AM

[jmmx]

@ LuMoS

This is not necessarily so or not necessarily to the extent you think.

Text based apps should scale without too much trouble. Other apps, if they are well designed, should already have facilities for dealing with with the issue of screen size. Programs should use global constants to determine display size that can be reset with a simple re-compile or even automatically set at startup as the program queries the device. One of the hallmarks of OSX is built in scaling.

Of course, real graphics programs might need to update the graphic base of its images to higher resolutions in order to achieve higher quality and save compute power of rescaling. But this is still not a major re-write as only the resources will be updated and the basic logic/computation part of the code will remain unchanged.

So there will be some costs, but not overwhelming.


On Jul 24 08:32 AM LuMoS wrote:

> Great article, but as far as the App-Store running on the tablet
> I believe you might be mistaken. Every app in the App-Store is currently
> developed to fit on the typical 3.5 inch touch-screen, not a 10 in.
> So in order for apps to run natively they'd have to be re-done or
> fixed to run on both versions. Which I doubt deva will have the time
> or patience to create apps for more than 1 device. Although it also
> opens up speculation as to wheather Apple will implement a Premium
> App-Store. In which case you might see those
> better more expensive App. Running natively on a 10 in screen.

2009 Jul 24 09:58 AM

[waf76]

Great article, i think you connect the dots pretty well which makes it very plausible that apple will come out with a tablet.

The classic ipod was being phased out as it is with people flocking to the itouch. This is evident in the sales figure.

With the iphone revenues being recognized over a 8 quarter period and with a $99 entry point, assuming the tablet comes in Q4, the stock looks poised for a massive run-up in 2010. And Apple TV hasn't even caught on like it should yet.

2009 Jul 24 10:25 AM

[:HAn.]

How can you say the iTouch will be more significant that the iPhone? Sure Skype and other communication apps are great... when you have an internet connection! The whole point of the iPhone's success is because it is mobile! Until we all have free Wi-Fi everywhere we go (good luck with that in our lifetimes), your touting of an internet based communication device over a mobile network one is totally unrealistic.

2009 Jul 24 10:26 AM

[brewer]

iPhone aps will run on a new device with a larger screen with no problem. Like any Apple software, they will likely make it support the older stuff as is until anything problematic can be rewritten. Don't expect they want to lose the app advantage they have already with iPhone apps! I think Apple might not even differentiate on the software base, but then again, the tablet software could be more involved and more expensive. With what they have already done, the entire model for distributing media is already in place, from software to books to magazine or newpaper subscriptions, it would be very simple to displace the Kindle, IMO.

2009 Jul 24 11:08 AM

[BurkPhoto]

Oh, please, you haven't even seen this device yet! Given the high resolution screens on the iPod Touch and the iPhone, I'd bet the high res screen on an iTouch Tablet or iPad or whatever they'll call it will be high enough res to do the job of virtual ink as good as, or better than, the Kindle. The Kindle is great, but it's a one-trick pony. Apple will release a general purpose device with much greater total utility.


On Jul 24 09:09 AM Roger Knights wrote:

> I agree that the iTablet will sweep the world and become the default
> e-book reader for most readers. But for heavy readers, the Kindle
> is better, because its e-ink is easier to read for long stretches
> and because there is no battery drain except when turning a page.
> I think it will continue to sell well.

2009 Jul 24 11:17 AM

[BurkPhoto]

It's often funny to watch the business media react to Apple, too often without understanding who they are, what they do, and why they do it. Jason, here, absolutely understands them. Apple's wizards are, first and foremost, about innovation, quality, user experience, and change agency.

Apple creates or relies upon confluences of events in the technological realm to meld various concepts together in new and meaningful ways. They are able to think and act multidimensionally, so that their products and services make sense, solve problems, improve life, and "just work." It's entirely likely that the forthcoming product will change our lives and our industries in ways most people can't even begin to imagine, but the folks at Apple have dreamed of these things for many years.

When someone at Apple pooh-poohs an existing product such as a netbook as "not worth their time," they really mean that they're working on something else that is worth their time! Given their track record (Apple II, Macintosh, Apple Store (retail), Apple Store (online), iPod, iTunes, iPhone, App Store...), would you doubt them? Would you expect less? They set the standards for the rest of the industry to follow. There are LOTS of people at cell phone manufacturers and service providers who are very worried about Apple's next moves right now. For consumers, that is a VERY GOOD THING.

2009 Jul 24 11:36 AM

[vloscomp]

Time to short APPL .... (millions of screamers) The key point of this story is the infrastructure that will allow mobile devices (not just APPL devices) to connect to the internet. I am so happy that you chumps had been cheering APPL for the last 24 months, but it is time (by Oct) for me to bid adew to APPL. Device technology have been competitive market (ie US Robotics 56K modems, HP Calculators ...) and the shelf life of a device is probably about 12 months or less. iTouch has no barrier to a competitive "me too", therefore, APPL will see erosion in profit.

2009 Jul 24 01:07 PM

[Spad]

I own a Kindle 2 and a Sony PRS-505 (also e-ink) and find that, despite its relatively small size, I actually prefer reading on the touch. The Kindle has much to recommend it--namely almost instant downloads from Amazon's rapidly growing ebook library--but they simply aren't geared for quick response to user needs. For example, there is no way to organize books within folders. Despite incessant complaining in Amazon's forums, they have so far failed to respond in any way. This isn't a problem with ten books or so, but many of us have more than 300 books on our Kindles and, trust me, this quickly becomes a real pain.

Another shot across Amazon's bow is the recent entry of Barnes and Noble into the ebook market, particularly their excellent B&N App that allows iPhone/touch access to Google's 500K+ public domain titles.

Also, AT&T is poised to enter the ebook fray with a new color touch screen ereader scheduled for 2010.

If Apple's rumored device comes to fruition I have no doubt that Apple will dominate the ebook arena in short order, and I'm placing my "bets" accordingly.

2009 Jul 24 01:23 PM

[relayer75]

Awesome, simply awesome.

As for the previous commentor who said it's time to short "APPL", good luck with that. You might consider going long AAPL (Apple Inc.) while you're shorting APPL, which apparenetly is the stock symbol of a pink sheet OTC stock called Appell Pete. Oh, and it's "adieu", not "adew".

2009 Jul 24 01:31 PM

[davesmall]

Reply to vloscomp who said, "The key point of this story is the infrastructure that will allow mobile devices (not just APPL devices) to connect to the internet. I am so happy that you chumps had been cheering APPL for the last 24 months, but it is time (by Oct) for me to bid adew to APPL. Device technology have been competitive market (ie US Robotics 56K modems, HP Calculators ...) and the shelf life of a device is probably about 12 months or less. iTouch has no barrier to a competitive "me too", therefore, APPL will see erosion in profit."

You obviously don't get the significance of the app store (50,000 apps and 1.5 Billion downloads in just one year); integration with iTunes including wireless downloads, and the elegance of Apple's user friendly designs. Sure they're going to be copied. Microsoft built their business on copying. But betting against Apple is high risk investing to say the least. Read BurkPhoto's second post (above). He says it very well.

2009 Jul 24 02:07 PM

[reagan]

Yea, short Apple. That's an intelligent comment. Apple is only scratching the surface with regards to the future. 200 easy by the end of the year. Who knows for 2010.

2009 Jul 24 03:17 PM