The Magic Invisible Cloth That Only Wise Men Can See
About Oakland — and Tablet PCs — Is There Any There There Yet?  
By Roger L. Kay
I hate to break it to you, but the emperor is virtually naked.  At Comdex in November 2002, and with
great fanfare, Bill Gates introduced the tablet as the next mainstream mobile platform.  Non-
Windows tablets had been in use for years as niche products serving vertical markets like
healthcare and insurance. When questioned about whether the tablet was really up to
shouldering the mainstream computing needs of the broad horizontal market, Gates was
unwavering in his assertion that Windows XP Tablet Edition would make it so.  Microsoft’s focus-
group research, he said, showed that people hated the tablet the first day, grumbled about it on
the second, sort of got it on the third, and so on until the 10th day, when they said they couldn't live
without it.  I wasn't convinced, but many early forecasts reflected Gates’ thinking, showing growth
in the tablet market reaching 5 million in 2005, 9 million in 2006, and 14 million by 2007.  Well,
here we are mid-2005 and not on a run rate to hit even 1 million for the year.

Those early forecast curves were truly exponential, but you’d need some sort of rocket fuel to hit
14 million by 2007.  By 2004, two years after the Windows tablet’s introduction, it was clear that
these forecasts were not going to be realized.  So, some market watchers revised their forecasts.  
But the revisions did not actually change the slope of the adoption curve, just pushed it out farther
in time.  So, now it’s time to make a serious revision to the actual slope of the curve.  What follows
is the reasoning behind this revision.

Vertical, Yes; Horizontal, Maybe Not

The verticals I get: healthcare, insurance, field sales and service, utilities, all these make sense
for a pen-based tablet.  You see, a pen is good at selecting things, tapping radio buttons, and so
on.  And selecting things is what you do on a form.  And forms-based computing is by definition
vertical because a form has to be a form of something, like an insurance form, a medical form, an
inventory form, and so on.  So, tapping with a pen on a slate tablet makes lots of sense for the few
hundred thousand people who buy them every year.  Slates are the preferred form factor of the
vertical markets, where applications are truly mobile (i.e., walking), and forms-based computing
can be done with one hand holding the device and the other tapping the pen.  I expect this market
to continue to grow at a modest pace.

But what is the killer app that's going to drive the horizontal market?  The real-looking signature at
the bottom of the email looks nice, but how much are you going to pay for that?  In the commercial
market, sketching a rough for a slide presentation is fine, but who has a secretary much less an
art department these days to turn your inspiration into finished art?  How about annotating
someone else's work with handwritten comments?  That's a good one, but killer?  None of these
functions is killer and justifies the premium and the alternative usage model.  Now, artists love
tablets, but they don't have any money.  How about handwriting recognition, or at least the storing
of metadata associated with handwritten files, data that can be searched and queried?  Sounds
good on paper, so to speak, but the reality is handwriting recognition will never be completely
accurate, and some data will be readable only by the human who created it, and if it's me, then
often not.  Meanwhile, searching text in various types of documents — Word, PowerPoint, HTML
pages, Excel — finds 100% of the instances sought.  Not to mention that a whole generation of
computer users has grown up using the keyboard as input.  Most people I know who have bravely
carried a tablet about, proclaiming that it’s the wave of the future, have abandoned it after a few
months at most.

The best form factor for the horizontal market is the convertible, the "notebook plus," which, in the
ideal case, is a great notebook with a screen that spins around on a mono-hinge and snaps into
a slate form factor for true tablet applications.  One issue facing the convertible crowd is whether
to go with a subnote (i.e., under five pounds with a 12.1" or less screen) or a heftier thin-and-light.  
Lenovo with its X41T, Fujitsu with its T series, and Acer with its 300 series have opted for the
former, while Gateway with its M275, Toshiba with its Tecra M4 have gone for the latter.  Why this
choice makes any difference is that the larger models make better notebooks, potentially
replacing a desktop as a primary computer, but are pretty heavy for holding in one hand and using
as a tablet, and the smaller models, while easier to use as tablets, are a tough sell as a user's
sole computer given their lack of screen real estate and compromises on keyboard size.  Unit
shipments in the subnote category, from which the smaller tablets are expected to carve share,
are low precisely because these systems can serve to replace desktops only for selected
segments (i.e., highly mobile, price-insensitive professionals in the United States and Europe,
and Japanese users, who prefer smaller machines).  Thus, the convertible camp, on which the
future of the horizontal category rests, is divided.

Gates appeared to be basing his belief that the tablet would become the dominant mobile PC
form factor on the supposition that the tablet premium would decline to near zero, and every
notebook would be tablet enabled at some point with an active pen, digitized screen, and
Windows XP Tablet OS.  Now, it might have been early, but Acer actually did come out with one of
these.  It had a funny hinged brace that you could set to keep screen in place while you leaned
over the keyboard (without touching it!) and penned against the tilted screen.  I hear that all four
customers were completely satisfied with it.

Let's look at that premium issue.  The XP Tablet Edition OS is more expensive than XP Pro, and
the hinge (for the convertible) and screen digitizer cost more.  Various OEMs have masked the
premium.  Lenovo's X41T tablet is only $100 more than the X41 vanilla, but the costs are further
apart, some vendors say $200-300.  Oh, and there's the active pen.  Don't lose that or your
cooked.  With a PDA, you can use your fingernail in a pinch, but the tablet digitizer requires an
active pen, at extra cost.  Three years after introduction, the tablet premium remains stubbornly in
place.  Economics would say if you want something to become mass market, you lower rather
than raise its price.

Forecast Reswizzle

So, where are we in all this?  Early forecasts said 14 million by 2007.  A revised version said 14
million in 2009.  Are you ready?  Take a seat.  How about 3.5 million in 2009, 1.2 million slates
and 2.3 million convertibles (Figure 1)?
© 2006 Endpoint Technologies Associates, Inc. All rights reserved.
A Second Look at the PC Tablet Forecast
The assumptions behind this forecast include the following:

  • Rather than becoming a general-purpose computing platform, tablets will settle in as a
    long-term niche product.
  • The fact that Windows Vista will have dedicated tablet functionality will drive adoption only
    moderately.
  • Improved handwriting recognition and digital inking will be only moderate drivers.
  • Economies of scale will reduce the tablet-over-notebook component-cost premium from
    $300 at launch to $75 in the out years of the forecast.
  • A factor in the cost-reduction assumption is that passive screens will begin to replace
    active screens in the next year or two.
  • Education will be the one “horizontal” segment that will adopt tablets somewhat broadly
  • Third-party software will continue to make tablets more attractive.
  • Third-party hardware will enhance tablet functionality.
  • People might not adopt tablet functionality even if it were free because there are some
    inherent negative attributes to tablets (e.g., handwritten material is less usable, hinges
    may break, switching to tablet mode can be a nuisance).
  • ·Horizontal markets will never develop as compelling a usage model as the one for
    verticals.
  • The total available horizontal market is overall larger than the total available vertical
    markets.
  • Vertical markets will experience a much higher adoption rate than the horizontal market,
    but the size of the total available horizontal market will lead the horizontal tablet market to
    exceed that of the sum of all vertical markets.
  • Microsoft will attempt to promote tablet adoption by tying functionality to other products,
    such as Office and Explorer, but will not take extraordinary steps — such as a huge
    advertising campaign, extremely liberal use of market development funds, and dramatic
    decreases in the cost of the Tablet OS — to widen with market further.
  • Microsoft will loosen the tablet specifications somewhat to allow more variation in form
    factor.
  • OEM support will come and go, with Lenovo having entered recently, but others, such as
    Dell, staying on the sidelines, and some, such as HP, withdrawing products (the TC
    series) from the market.
  • Most of the new introductions will be convertibles, and the convertible-slate ratio will
    continue to rise.

Conclusions and Recommendations

As a “notebook-plus” product, the convertible will cannibalize notebooks.  Slates, on the other
hand, derive most of their market from older dedicated-hardware markets or replacement of
manual (pen and paper) methods.  The tablet PC is a generally good idea, and Microsoft is
especially motivated to have a success in this form factor.  One issue facing the company is how
Longhorn, now named Windows Vista, is going to make a splash when most of the new
technology is hidden in the system.  One good way is to have new form factors enabled by the
new OS.  Tablet functionality built into the OS is one way to help create a feeling that Windows
Vista really is revolutionary.  

Meanwhile, alternative form factors have arisen to handle some of the demand that might
potentially have gone to tablets, form factors such as Blackberries and converged phones.  
Mobility is clearly important, and yet there are a number of possible ways of getting a good mobile
computing experience.

OEMs that currently have slate strategies are in pretty good shape, but there isn't a whole lot of
room for new entrants in this limited arena.  Those that have convertibles in the market must do
everything they can to promote the category, particularly finding a way to find and promote, if not a
killer horizontal app, then at least a package of "wounding" apps that together make a compelling
story.  They also must do everything they can to induce Microsoft to lend greater support to the
category.  And those considering entering the tablet market might best be counseled to watch the
market for another year or two to see whether any of that exponential growth predicted early on
materializes.

Three years after introducing the tablet, Microsoft has largely left the OEMs to their own devices,
so to speak.  It does match qualified marketing funds one to one, which is a help, but other
support is pretty thin.  The prospect of a large supporting ad campaign has faded, and the
company itself doesn’t seem as excited about tablets as it used to be.  It would be a bad thing to
have taken the OEMs for a long stroll through the park only to abandon them before leading the
way home.  The OEMs have made substantial investments to help realize the future as
articulated by Gates in Vegas in 2002.  And, so far, there doesn’t appear to be much there there.  
In fact, I think I see an emperor in his birthday suit.