19 Feb 2013

When Will Tablet Shipments Overtake PCs?

PC vs. Tablet Shipments

I have previously written about the similarities between the evolution of the smartphone and tablet markets. These similarities aren't just limited to the evolution of leading platforms, but can also be used to predict the disruptive impact of new technology paradigms on existing markets. Let's use the evolution of the smartphone industry to predict the impact of tablets on PC shipments.

Modern vs. Legacy Smartphone Platforms

I had previously defined the distinction between legacy and modern smartphone platforms as follows:

It is important to understand that ever since the iPhone and Android were launched, the market was segmented into legacy smartphone platforms (Blackberry, Symbian & Windows Mobile) and modern smartphone platforms (iOS, Android & Windows Phone). We can say this with a certain degree of confidence, as consumers upgrading their smartphones would almost always move from a "legacy" platform to a "modern" platform. Platform shifts, after this change, were almost always within "modern" platforms. 

For our current study, we'll be looking at 16 quarters of data since the iPhone launch, i.e. Q2 2007 to Q4 2010. As a result, our research on modern smartphones can be limited to iOS and Android. Let's take a look at the sales of legacy and modern smartphone platforms during this period:

Modern vs. Legacy Smartphone Sales

As we can see, while legacy smartphones continued to grow after the iPhone launch, modern smartphones grew at a much faster pace. Legacy smartphones finally registered a drop in sales once modern platforms had attained parity. This was because global smartphone penetration was still a paltry 11% when the iPhone was launched. As a result, both legacy and modern smartphones diffused into the market, but at vastly different rates. Even though the overall market was growing, the growth of modern platforms shows that legacy smartphone purchases were increasingly being substituted by modern smartphone purchases. It is this "substitution rate" that holds the key to predicting technology dominance.

Substitution Rate: Why Smartphones & Tablets Are Comparable

Substitution rate can be defined at the ratio of the market share, shipments or sales of a newer technology to that of the older technology prevalent in the market. Substitution rate measures the rate at which a newer technology (in our case, modern smartphones & tablets, respectively) is adopted and not the rate at which an older technology (legacy smartphones & PCs) is discarded, i.e. it measures the rate at which purchases are replaced, and not usage. Let's take a look at the substitution rate of modern vs. legacy smartphones and compare it to that of tablets vs. PCs:

Substitution Rate - Smartphones & Tablets

As the chart clearly shows, the substitution rate patterns between the two markets are remarkably similar, showing a correlation of nearly 93% over the first 11 quarters. It is also interesting to note that tablet/PC substitution seems to be happening at a faster pace - This is function of high PC penetration and the impact of smartphone penetration on tablet adoption. Taking historical data and cyclicality into account, I've projected the tablet/PC substitution rate for the next year. In order to be conservative, I've assumed that the deviation between the two patterns will narrow over this period.

Estimating Tablet & PC Shipments

Using the projected tablet/PC substitution rate, we can forecast the following shipment pattern for tablets and PCs:

Projected Tablet vs. PC Shipments

Unlike the early days of the smartphone market, the PC market is fairly saturated. As a result, the average growth in combined shipments of tablets and PCs is likely to remain in the low-single digits - of course, cyclicality in demand in likely to have an impact, which I have taken into account. As per these estimates, quarterly shipments of tablets are likely to overtake those of PCs by Q1 2014. However, a more balanced substitution rate projection shows this change of guard happening earlier, in Q4 2013, when tablet shipments reach 75-80 million units. This shift is likely to be driven by quicker adoption of high quality, cost-effective tablets in emerging markets and the resulting impact on PC replacement rates.