Analyst's Couch: the rebirth of the tablet PC

I'm tired of handwriting notes in meetings only to have to go back to my PC and retype those same remarks. I don't need a note-taking "trial run"; I want an efficient way to take and store notes electronically once. Some co-workers take their notebook computers into meetings, but I'm uncomfortable typing away on my computer while everyone else in the room assumes I'm surfing through ESPN.com or catching up on e-mail. And I want a notebook computer that works more like a paper tablet, unobtrusive and easy-to-use. Ideally, what I am really looking for is a convertible tablet PC, but I cannot justify note taking/filing at a $2,399 price point when my plain old paper notebook costs $2.39.

Convertible Tablet Market

The convertible tablet, which first entered the market in late 2002, is a traditional notebook computer packaged with tablet functionality. The display can be rotated and lowered so the screen is laying flat on top of the computer. These notebooks carry Microsoft's Tablet PC operating system with handwriting recognition capability which makes it possible for users to input information with a stylus similar to the writing instruments which come with handheld devices and the tablet handwriting recognition software offers much better results than what we see in handhelds today.

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A convertible tablet is obviously useful but sales figures are so far unimpressive, accounting for less than 1% of the U.S. retail notebook market. The adoption rate of these portable computers is slow for two primary reasons - minimal channel presence and high price tags.

Only a limited number of manufacturers currently offer convertible tablet models and the majority of these systems sell through the direct and e-commerce channels. The tablet market's major players are Toshiba, Acer, HP (Compaq), Gateway, Fujitsu, and ViewSonic. In retail, Toshiba's M205-S810 model is the only convertible tablet PC consistently available.

Because most tablet manufacturers target the corporate market, it is not surprising there are a limited number of models offered through the retail channel. However, to ensure mass adoption of this technology, manufacturers need to make a stronger play in the retail channel, which caters to many small and medium business customers as well as home users.

A price point over $2,000 is the convertible tablet's real Achilles heel. Many of the convertible models offer standard processor, memory, and hard drive features at price points significantly higher than those of traditional notebook computers. As a result, tablet functionality today is a nice-to-have, but not a need-to-have.

The majority of the notebooks available for the retail market are desktop replacement systems with displays over 15 inches. But even with a smaller form factor, the current crop of convertible tablets have a tough time defending their price points. For example, the Toshiba M205-S810 convertible tablet lacks a system configuration that justifies the premium price it carries over its retail competition, which ranges from a few hundred dollars to well over one thousand dollars. Even the ultra-portable Sony S150, which has an integrated optical drive, higher performance processor, and a premium brand name, promises a price savings of $400 compared to the Toshiba convertible.

A comparison of existing retail Tablet PC offerings to traditional retail systems:

What will break open the market is a convertible tablet offered at a price point competitive with the cost of a traditional notebook. Consumers will not pay more than a $100-$150 price premium for the added tablet functionality.

A Welcome New Arrival

Averatec is partnering with AMD to release a convertible tablet that will be price competitive against traditional retail models. Averatec's new C3500 line will carry an AMD 2200 + (1.8GHz) processor (in October, this system will be available with the 64-bit AMD Athlon processor) and come loaded with 512MB of RAM, a 60GB hard drive, an integrated DVD/CD-RW with a 12.1 inch display, and will be 802.11g-compliant. Battery life is rated at a respectable four hours.

While the integrated optical drive is a big plus, the key selling point of the system is its price point. This model will be offered at $1,349 before all promotions.

Averatec's new convertible tablet will be available at Staples, Circuit City, and Costco. The system is expected to be featured in a Tablet PC kiosk to help the Averatec model stand out in the store. And the C3500's wide distribution will help Averatec take a piece of the pie from eMachines, HP, Toshiba, and Sony.

In the retail market today, only a handful of thin and light models appear on store shelves. The limited competition and the niche nature of this retail segment will give Averatec an advantage in this segment. The C3500 will compete directly against Toshiba's convertible M205-S810 but the Averatec system features an integrated drive and is offering a price/performance advantage of approximately $1,000 over the Toshiba convertible.

The new Averatec Tablet PC is comparable to the following other thin and light models offered in retail today:

Will the Convertible Succeed?

Although tablet form factors have been available for years, we are at a turning point for the market which will give us a good idea if these are, in fact, the next big thing. Consumers want the functionality of handhelds and notebooks combined, but they are not willing to pay an excessive price premium for the technology.

This market's success is in the hands of Microsoft and the leading tier one PC manufacturers. For the convertible retail market to pick up momentum, Microsoft needs to drop the price on its Tablet OS, one of the major obstacles blocking manufacturers from building affordable feature-rich convertibles.

The AMD/Averatec team was playing to each of the individual companies' strengths and as a result built a $1,349 machine that is going to change the playing field. But for the heavy hitters to follow suit in price, they will need a helping hand from Redmond.

Finally, the last piece needed to set the convertible market in motion is support from the tier one notebook players which would come in the form of competitively-priced offerings. Three players that will help move this market to mass adoption are Apple, IBM, and Dell.

Dell and Averatec are both targeting a similar consumer base, the value shopper. Therefore, Dell needs to price its model accordingly. IBM and Apple however, appeal to consumers who are not as price-sensitive. If those companies produce models that are innovative and extremely easy-to-use, the Apple and IBM notebooks will attract their target customer. Apple users love innovation and who wouldn't want to see what kind of sleek design the fellas in Cupertino could produce? And IBM users seek efficient models in the commercial space, a perfect match with the convertible platform concept.

Takeaways

*Adoption of Tablet PCs has been weak due to high costs (both to manufacturers related to the exorbitant expense of licensing the Tablet OS and to end users who have to contend with a too-steep price tag).

*Adoption of Tablet PCs is due to begin its growth phase as the price delta between a traditional notebook and a convertible PC drops significantly (the Averatec release is the first step towards wider platform adoption).