Apple's Laptop Opportunity

| About: Apple Inc. (AAPL)
This article is now exclusive for PRO subscribers.


JPMorgan analyst Rod Hall has estimated the size of the market for $500-$1,000 laptops to be $63 billion in 2013.

Apple has no laptop offerings below $999, but Hall suggests that an iPad with a keyboard could address this market.

I believe Apple would address this market more effectively with a lower cost MacBook based on Mac OS X.

To lower its cost, Apple could build a MacBook with Mac OS X running on an Apple ARM processor.

Rod Hall, an analyst with JPMorgan, has concluded that Apple (NASDAQ:AAPL) is missing out on the "sweet spot" of the laptop market, with machines priced from $500 to $1,000. As reported by Philip Elmer-DeWitt, Hall's analysis shows that about a third of the 315 million PCs sold in 2013 were laptops in this price range, with total sales of $63 billion.

Keyboard Fetish

Apple's least expensive laptop is the MacBook Air which starts at $999, so Apple doesn't really play in this price range. Hall's solution? An iPad with a keyboard. I can already hear the Windows users chuckling, as well they should.

Not that an iPad with a keyboard isn't a credible computing device. It is, but iPad users can already pair their iPads with Bluetooth keyboards, including some that are integrated into compact iPad protective cases, such as the clamcase. The solution Hall proposes already exists.

To some degree, the under $1,000 notebook market has already been impacted by the iPad. Remember the Netbook? Following the advent of the iPad, Netbook sales collapsed in 2011. To the extent that iPad and other tablets had the ability to impact low-end laptop sales, it already has, and that's reflected in the current market segmentation between tablets and PCs. As of 2013 Q4, worldwide tablet shipments totaled 76.9 million according to IDC, while there were about 82 million total PC shipments according to IDC, including desktops and laptops.

Since the advent of the iPad, there's been a tendency on the part of Windows advocates to make something of a fetish of the keyboard: a computer couldn't be "useful" without one. Even when Microsoft (NASDAQ:MSFT) fielded its own Surface tablets, it had to turn them into quasi-laptops with keyboards cleverly embedded into folding covers. And of course, we've seen Intel (NASDAQ:INTC) push convertible "two-in-one" tablets that feature detachable keyboards.

My point here is not that keyboards aren't useful things, even keyboards attached or paired with tablets. My point is that keyboards have not proved to be important discriminators, and the keyboards attached to the ~100 million low-cost laptops sold in 2013 were not really decisive in prompting consumers to buy them. Likewise, adding a keyboard to an iPad would not dramatically increase Apple's iPad sales.

The Laptop Value Proposition

Laptops in this price range offer two very important things you can't get from a tablet. They offer Intel or AMD processors, which are generally much more capable than ARM processors found in tablets, even the A7 in the Apple iPad Air. Often the laptops include graphics processors from nVidia or AMD, making them even more capable. They also offer a full-up desktop operating system in Windows 7 or 8.1.

What these laptops don't usually offer is a particularly nice physical design, light weight or a high definition screen. But they are very capable computers able to run office-type applications, do video editing, or play immersive PC games, albeit at the lower resolution (usually 1366x768) of their LCD screens. For consumers looking for the maximum mobile computing power for their money, there just isn't a better choice right now.

Consumers who buy these laptops have already weighed the alternatives and found them wanting. Although Apple eschews attached keyboards, there are plenty of Android tablet convertibles that these consumers have already passed over. Adding a keyboard to iPad would not change its relative valuation in the eyes of these laptop buyers.

A Low-Cost MacBook Air?

Mr. Hall correctly points out that Apple owns the premium laptop market (68% market share in North America) with its MacBook line, so I have to believe that if Apple offered a MacBook for roughly $500 it would meet with considerable success. The problem, as it almost always is with Apple, is one of margin. Apple isn't willing to live with the kinds of margins common in the PC industry. In its most recent fiscal quarter, HP's (NYSE:HPQ) gross margin was 22.8%, while Apple's was 37.9%. A MacBook with a polycarbonate body is certainly conceivable; Apple's done that before. Going cheaper on the body doesn't really solve the margin problem as long as Apple is buying Core i5 or i7 processors from Intel. Intel lists the tray price for the base processor of the current MacBook Air as $315.00.

Apple could lower cost by going with a less expensive AMD (NASDAQ:AMD) processor, but with AMD stuck with a 28 nm process (vs. Intel's superior 22 nm FinFET), I doubt Apple would find the power consumption performance acceptable. With AMD's foundry partner Global Foundries claiming to be starting 14 nm FinFET production this year, that consideration might go away, but there's really no telling when the new process will come online.

Another possibility is that Apple could port Mac OS X to an ARM (NASDAQ:ARMH) processor, perhaps a quad core variant of its current A7. This has been much discussed in the past, but it was never really feasible until the A7. The whole point of developing iOS was to tailor the requirements of Mac OS X to fit within the capabilities of the ARM processor. This meant abandoning multi-tasking in early versions of iOS, and placing severe limits on memory and processor usage by individual apps. With the development of the A7, Apple proved that it could build a processor comparable in performance to Intel's Bay Trail, which is capable of running Windows 8.1.

Mac OS X on a quad-core A7 variant could enable a new generation of even thinner, lighter MacBook Airs with even longer battery life, while being less expensive than its Intel counterparts. The IHS estimate for the cost of the A7 in the iPhone 5s is just $19. Given the potential market for a low-cost laptop and the cost differential between ARM and Intel, the economic motivation for porting Mac OS X to ARM becomes very compelling.

Microsoft's port of Windows to ARM for its Surface RT provides plenty of precedence, as well as a case study in what not to do. In porting Windows to ARM, Microsoft created a whole new class of apps (Modern UI, or Windows Store apps) that were incompatible with Win7 apps. Developers couldn't port a Win7 app directly to Modern UI.

Apple wouldn't need to do that for a Mac OS X port to ARM, and it wouldn't be advisable. Apple should provide developers with a straightforward port of their existing code to ARM. Making it easy for developers would be a lot of work for Apple, but it would be worth it to quickly establish an app ecosystem for Mac OS X on ARM.

What Are the Chances?

In making predictions, I try not to rely on inside information or rumors but to identify what I would call techno-economic imperatives. In thinking about the analysis of Rod Hall, I feel I may have stumbled upon just such an imperative. Here, the idea is that if I see it, and it's real, then the executives at Apple can see it too. In fact, they probably have thought about it long before now.

I have felt for some time that the chances of Apple eventually migrating some or all of its MacBooks to ARM was very good. It was just a matter of time until ARM processors became sufficiently capable. That time has arrived, but is Apple ready to make the move? A Bay Trail MacBook Air would be a safe although probably more expensive alternative to ARM that would get the cost of the Air below $999.

If Apple has plans for any ARM-based Mac OS X products for this year, it will need to spill the beans at this June's WWDC. App developers will need time to get familiar with the new Xcode developer tools, port their code, and test their apps. If no announcement is made at WWDC, then Apple is locked into Intel for at least another year, and investors have to hope for a Bay Trail MacBook Air.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.