Why Apple's iTouch Tablet Will Become Its Flagship Product

Includes: AAPL, AMZN, S, T, VZ
by: Jason Schwarz

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 (NASDAQ: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 (NYSE: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 (NASDAQ: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 (NYSE:S) customers who would love to have the iPhone but don’t want to switch to AT&T (NYSE: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