Tablet PCs: Thanks For All The Hype, Bill

Computer makers who caught Microsoft's new wave have been disappointed

Taiwanese computer maker Acer Inc. had big plans for the latest addition to its lineup, the Tablet PC. Microsoft Corp. (MSFT ) had developed the operating system and underlying technology for the portable computer, and Acer, Fujitsu (FTJSY ), NEC (NIPNY ) and four other hardware makers quickly signed up to sell the machines, which were launched with great fanfare in 2002.

With the backing of the software giant, Acer figured that in the first year it could sell as many as 250,000 tablets, which function like laptops but also let users write with a stylus directly on the screen. That target turned out to be a tad ambitious: Acer sold just 120,000 of the machines in 2003. "We expected more than this," says Jim Wong, president of Acer's information technology business group. "It has been a disappointment."

Other manufacturers -- especially in Asia -- also say sales have been slow. Some 300,000 tablets were sold in the first three quarters of 2003, says researcher IDC, so it's unlikely sales will reach the research house's original prediction of 500,000. "The overall market demand is not there," says John Villejo, vice-president at First International Computer Inc., a Taiwanese manufacturer that builds tablets for a top Japanese company. He says his company is shipping 2,000 a month -- about half what management had expected.

Were PC makers blinded by the hype? During the tablet's high-powered debut in the autumn of 2002, Microsoft made a concerted push to trumpet the tablet as the Next Big Thing, with William H. Gates III himself leading the charge. "The thing is incredible," Gates told BusinessWeek at the time. Gates also warned that the tablet's first year might be tough. So it was a pleasant surprise when in the first quarter of 2003 some 120,000 tablets were sold worldwide. In the second quarter, however, sales slowed to just 85,000, IDC says, and have remained slow since. Still, Microsoft insists the Tablet PC is on track. "We are happy we met our numbers," says Bill Mitchell, vice-president of Microsoft's mobile platform division, referring to the company's internal sales targets.

RICH NICHE. Why the slowdown? Executives at computer makers say one problem has been pricing. Acer says Microsoft's operating system for the tablet is 9% of the PC's total cost, vs. just 5% for a notebook PC. And while ordinary notebooks today have become so commoditized that companies can manufacture in huge numbers in low-cost Chinese factories, tablets are niche products with higher costs, especially for the touch-screen LCD panel and stylus. As a result, tablets cost anywhere from $1,500 to $3,000 -- usually $200 to $400 more than a standard notebook PC with a similar chip, hard drive, and weight, according to researcher Meta Group Inc. Granted, a notebook doesn't have a touch screen for writing and snazzy software from Microsoft that allows users to mark up documents with a stylus. But for most people, "how important is it to use a touch screen?" asks IDC analyst Kitty Fok. "Not very."

Now Microsoft and its partners are out to enhance tablets' appeal. Fujitsu Ltd. has introduced new tablets with faster processors and longer battery life, and Toshiba Corp.'s (TOSBF ) new machine can detect whether a user is holding it horizontally or vertically and adjust the display accordingly. Executives from Acer are now working more closely with their American counterparts to improve the marketing of the machines. And the price gap between tablets and notebooks may shrink in coming months if sales volumes rise. "We are confident that the pickup rate will increase," says Raymond Wah, Singapore-based vice-president for Hewlett-Packard's mobile business unit. By the end of 2004, demand should start to take off, predicts Meta Group. As the price difference shrinks, tablets "will suddenly become a lot more compelling," says Meta analyst Steve Kleynhans. He's predicting that 25% of portable PCs sold in 2006 will be tablets. The tablet may have gotten off to a slow start, he says, but it's too early to write off Bill Gates's pet project.

By Bruce Einhorn in Hong Kong, with Jay Greene in Seattle and Irene M. Kunii in Tokyo

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