2013 is shaping up to be the true year of the tablet war from a manufacturer's point of view. While 2010 and 2011 have been dominated by Apple (AAPL), with its fantastic products and great margins, the future will be much different. I believe that Apple should easily be able to defend a large part of its market, but the other tablet makers will be heavily competing on price, technology, accessibility, and operating systems.
Two-way market becomes a three-way market: Android may move downmarket
Apple has earned a mountain of cash because it has been extremely successful at defining the new tablet computing market and at the same time building an extremely strong brand following. As it currently stands Apple had a Q4-11 tablet market share of 57% while a mix of Amazon (AMZN), Samsung, Barnes & Noble (BKS) and a slew of others had the rest of the market (see chart 1).
From the standpoint of operating systems, Apple has a market share of 57% while Google's (GOOG) Android had a 39% market share. But Microsoft Windows 8 has the potential to create a 3 way fight between operating systems and I believe that this will most likely impact the mid-price to higher price tablets.
Windows 8 has primarily been built as an operating system for small devices which can be synched across devices, much like the iOS has done. This is where Windows 8 can get a huge leg up on Google's Android platform. Because the Android software is open source and free, the lower end tablets will most likely benefit from using the Android software to keep their unit prices low (depending on how Microsoft prices its Windows 8 OS for tablets and smartphones), while Window 8 might capture the mid to higher price market segmentation.
Windows entrenched in corporations
Windows 8 has a much better chance of capturing the corporate tablet market than the iOS or Android. Because Windows 8 will be integrated across platforms, and hence work PCs, Windows 8 should be a strong contender to compete for the emerging corporate tablet market.
Many manufacturers are planning on focusing on Windows 8 tablets, with Nokia (NOK) going exclusively for Windows 8. Dell (DELL) has kept relatively quiet but given its strategy of going for the corporate market, it is to be expected that Dell will mostly focus on the Windows 8 operating system. HP (HPQ) has also indicated they will focus on Windows tablets to stay away from the fierce competition of Android tablets. So while manufacturers will compete on technology, pricing and so on they will also be competing on operating systems.
Should Windows 8 become a hit - and the market seems to be betting that it will - any manufacturer who is not carrying Windows 8 might be at a disadvantage. But if Windows 8 fails, companies that depend on the operating system, like Nokia, will be the first casualty.
So who stands the benefit from all this?
Since Windows has currently no tablet presence and extremely minimal smartphone presence, I believe that it is mostly only upside for Microsoft since they will not have to compete on the hardware side. The hardware side should become extremely competitive with Dell and Nokia being highly dependent on Windows 8 to boost stagnant sales. As with the PC and portable market, expect a price war to ensue with consumers to benefit.
From the investing side of things, Microsoft should benefit if it does not drop the ball and I believe that Apple will continue to roll along for the next couple of years as the major tablet players get established. In general I am highly bullish on tech stocks.