Battle lines in the ecosystem war will be drawn according to screen size

In yesterday’s post, we referenced the interview with Best Buy CEO Hubert Joly:

The tablets boomed and now are crashing. The volume has really gone down in the last several months. But I think the laptop has something of a revival because it’s becoming more versatile. So, with the two-in-ones, you have the opportunity to have both a tablet and laptop, and that’s appealing to students in particular. So you have an evolution. The boundaries are not as well defined as they used to be.

The line between tablet and laptop have indeed blurred. People are increasingly using tablets and laptops for both work and play. Going forward, I believe the most meaningful market segmentation is not one based on devices (phones, tablets, laptops, desktops), as we tend to do today, but by screen size (2-inches and below, 3- to 6-inches, 7- to 9-inches, 10- to 13-inches, 14- to 17-inches, and above).

From those lens, the positions of the three incumbents — Apple, Microsoft and Google — look different. Apple doesn’t seem as strong; Microsoft still has a chance; and Google just needs to extend its disruption upwards.

How you use a device is driven primarily by its screen size; and is therefore the most meaningful segmentation.

2-inches and below is the nascent wearable market. It’s still too early to make any prognostications here. Android Wear has potential but the first two devices are underwhelming.

3-inches to 6-inches are phones and phablets. I believe the dominant size in this segment will be 5-inches; US and Europe will follow Asia and eventually realize that a 4-inch phone is unnecessarily small.

7- to 9-inches are mini tablets; this market will get squeezed by the segments above and below. This will end up being a niche market for consumers willing and able to purchase a device just for eBooks. For everybody else, a big screen phone is sufficient; if not, certainly a larger device from the next category.

10- to 13-inches is what’s most interesting in the context of our discussion yesterday. At this screen size, productivity is possible and most consumers will want to do some work with such a device. I’m seeing more people purchase keyboard covers for their iPads; and of course, 2-in-1 PCs address this segment as well. Going forward, no device in this category will be purely about consumption or purely about work — consumers will expect to do both on a device this size. That is why Google acquired QuickOffice; Apple is rumored to debut a 12-inch iPad Pro soon; and why Microsoft is desperately courting developers to create for consumers.

14- to 17-inches is the traditional domain of laptops used for work. However, tablet-styled devices will eventually make an appearance here. How does a 15-inch tablet weighing less than 1.5 pounds sound? I think there is a significant market for it and only a matter of time before technology makes it possible.

18-inches and above. I predict the desktop market will fare well long-term. With everything going to the cloud, there’s less need for laptops to lug around with you from home to work and back; instead, give me as big of a monitor as possible and a cheap thin client. I’ll buy two of those: one for home and one for work.

Taking a step back, if these (admittedly crazy) predictions are right, there are important implications for our three ecosystem companies.

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Apple stock has outperformed over the past five years

For Apple, the iPhone 6 is a big step in the right direction. With an alleged 4.7-inch and 5.5-inch sized SKUs, Apple’s future in the 6-inch and below category is reasonably addressed; even if it may have already lost the market share battle. The 10- to 13-inch market too is of some concern. Apple can either improve the productivity capabilities of the iPad Air or the consumption abilities of the MacBook. Based on their stated philosophy (something about not combining a fridge with a toaster), Apple will likely go for the former, especially with the rumored iPad Pro; but they must aggressively do so or lose more ground to cheap Android tablets and capable 2-in-1 PC hybrids. Lastly, based on the iPad Air, I actually believe Apple is best positioned to create my idealized, thin and light 15-inch tablet.

For Microsoft, they should make a Lumia phone that is 5-inches in size and priced like a Lumia 530. Microsoft made the right move in not releasing the Surface mini and probably never should — let OEMs address what will be a shrinking, niche market. They should instead continue to improve the Surface line to win the 10- to 13-inch category; they still have an advantage in productivity although that differentiation is rapidly diminishing. I’d love to see Microsoft innovate with a Surface Max that’s 14- to 17-inches in size and weighing less than 2 pounds. Satya Nadella indicated Microsoft is racing towards a future of Windows in the cloud; if so, Microsoft can win the thin client market.

For Google, their priority is taking their dominance in the 6-inch and below category (as evinced by their 85% share) and moving upwards. They are already making inroads with Android tablets, and it’s only a matter of time before Android is officially adapted to laptops. Android OEMs are already attempting it regardless of how well the OS currently fits with a keyboard and mouse. Chrome OS can be a major player in a cloud-first future. In terms of momentum, Google is sitting pretty; the only thing standing in their way is Microsoft’s PC legacy.

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