Apple's (NASDAQ:AAPL) long awaited upgrade of its iPad and iPad mini line was so well known due to the abundance of leaks leading up to the announcement that expectations were in the air that something new and hidden was bound to be introduced. While I believe there is a "Road Warrior" tablet with 8GB DRAM hovering in the wings that will be named the iPad Pro, the big news this week was the price war that Apple intends to open up between Microsoft and Intel, otherwise known as the old "Wintel" empire. Both need each other to preserve their corporate footprint but they can only remain competitive in terms of market share if they agree to work together in giving in on their pricing in the new "64-bit" mobile market. Apple enjoys a margin stack advantage that will grow now that they have a full lineup of 64-bit A7 powered mobiles. How Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) respond in the months ahead will be interesting as they do not have a lot of time to stop Apple's assault on the mobile market.
The 64-bit iPad Air and iPad minis are impressive and will separate Apple from the rest of the market that for the most part will be shipping 32-bit based tablets. More telling on the direction of Apple is the renaming of the iPad to iPad Air. It's a statement about performance capabilities that it believes are on a par with the Macbook Air utilizing an Intel Haswell Processor. Users now have a choice of buying an iPad Air with a high-resolution Retina display and powered with a $30 A7 processor or buying a Macbook Air with a lower resolution screen and using Intel's $200+ Haswell ULV processor. Seeing as the tasks to be performed on both are likely to be low level emailing, reading pdf docs and watching movies, my guess is that the iPad Air will pull more users its way in the coming year.
Apple's decision to offer iWork for free creates additional "marketing goodness" around the iPad as Microsoft continues to dither on whether to bring Office to iOS. Steve Ballmer's decision to allow Office to be held hostage to the Surface folks will likely go down as one of his worst decisions as it provides the bulk of the revenue and profits to the company and should be running on all devices. Apple's free iWork, along with Google's (NASDAQ:GOOG) free offering on its Docs suite, is the firing shot in a new marketing war that is no less than an effort to cut down in size the value people should place on Office after all these years of being held hostage with no alternatives. To attack one's enemy with "free" is the greatest threat to long-term sustainability. But there is more to Apple's strategy.
For the past couple years, Intel has attempted to kick-start the mobile PC market with its ultrabook platform that is a takeoff of the Macbook Air. Apple was able to utilize the higher power Ivy Bridge processors in its thin form factors by taking the slowest versions and aggressively clocking them down if the heat rose too fast or if the mobile wanted to extend battery life. Users never noticed the behind the scenes clock manipulation, which is a sign that, despite benchmarks, Intel was selling processors that were an overkill for the extreme mobile end of the market.
The Haswell processor was Intel's response to its heat issue by cutting maximum power in half. It still is higher than the A7 and has a premium price attached to it that is going to come under pressure in the year ahead. Intel would be safe with its pricing model if the whole market was selling ultrabooks and the iPad didn't exist, however, iPad is the future of Apple and it happens to be priced on the value of the ecosystem and not the speed of the processor.
With Apple's positioning of the 64-bit A7 as a "desktop-class" processor, the rule book has been rewritten and now with the renaming of the iPad as iPad Air, Intel is being pushed into a corner regarding what it should do next. Bay Trail, I predict, will be shunted aside to the lower cost tablet market as Haswell and the 14nm Broadwell are recruited to fight the lower cost A7. The corporate world is about to be exposed to Apple literature showing that the iPad Air is more than comparable to the Haswell ULV processor running in the Macbook Air and PC ultrabooks. Assuming this is successful, then Intel will need to move on the pricing of Haswell to be in line with A7. I am not suggesting a complete writedown, but even an average ASP move of a few dollars will significantly impact Intel's business. A move of $4 on average ASP could shave over a billion dollars off of Intel's revenues.
In effect, Apple in the past 45 days has repositioned itself in a way that exposes Intel's price model that generates $33B of its $54B total revenue and it has started a software free model that exposes Microsoft's revenue stream in the burgeoning tablet market. Each company will likely make business decisions independent of the other to preserve its stake in the computing market. However, the Apple moves are also meant to split the Wintel empire as the PC market has to withstand both the Microsoft O/S tax and the Intel x86 tax that together make ultrabooks and tablets uncompetitive vs. Apple's lineup. The PC OEMs will need a $30 x86 processor and a Windows 8 O/S that is closer to Free than where it is today. I expect that each will slowly walk down their pricing in a "managed retreating" fashion. Microsoft may decide that the only recourse is to plunge further ahead with Surface at the expense of its PC customers while Intel tries to enable Android in the corporate space. Thus each will be going its own way as it falls further behind.
Within a few months, the playing field in mobile may look vastly different than what we see today. The introduction of the iPad Pro is now on the table and is likely to be a design that features 11" to 13" screen that effectively brackets the Macbook Air and Macbook Pro but weighs much less. Perhaps it will arrive when the A8 processor is ready. Either way, Apple is betting that lighter weight, high-resolution screens and long battery life is more in tune with where the market is headed than the ability to run Microsoft Office. For Microsoft and Intel, this means that while the legacy business can remain at today's prices, the question is how big this market will be in long term relative to the growing tablet and ultrabook markets, and can they be competitive with Apple as the latter defines and brands the requirements to its advantage?
Disclosure: I am long AAPL, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.