Size Matters: Are Tablet PCs Making Smart Phones Obsolete?

Design may have more to do with the evolution of computing than speed or memory. As more data emerge from the sale of tablets and smart phones, convergence is evident (smart phones getting bigger, tablets smaller). Just as marketers learned that consumers were comfortable shopping in Tiffany's for some goods and Target for others, so business may find that the simple text-and-voice sufficient pocket phone used in conjunction with a tablet becomes the new norm. The implication for hardware and software providers are profound; profit margins, inverse supplier-customer power relationships and cost models could be affected.

Eric Chan expounds in Business Week:

"Smartphones are the products most at risk of cannibalization in the rising tide of tablet sales—not laptops, as some industry analysts are predicting.

Current forecasts for the 'tablet effect' are shortsighted and fail to consider the long-term implications that this phenomenon will have on the mobile electronics industry. While tablets are likely to crimp laptop and netbook sales for the first year or so—until consumers fully understand what a tablet is—the long-term trend is different. Laptop sales will bounce back. Smartphone sales will drop. This long-term trend should be clear just by looking at user surveys, product evolution, the redundancy factor, and basic economics.

Consumers use smartphones primarily for media and data capabilities, not calling features. That means they're not really 'telephones,' per se; to the average person, they are portable media devices. So why stick with a three-inch screen when you can have one three times larger? And if you do buy a tablet, why continue with a smartphone? At current prices of $200 to $400, the smartphone is too expensive to win the battle against tablets at a mass-consumer level.

According to a 2008 Nielsen (NLSN) survey, consumers were already using SMS text messaging more frequently than telephone calling. The survey found users in the 13-17 age market texted 754 percent more often than they called. The same held true for the 18-24 market, which texted 298 percent more. Even the 25-34 market texted 138 percent more often. The Pew Mobile Access 2010 Data Usage Report found a steady and significant increase in data usage by smartphone users: 34 percent record videos with their smartphones (vs. 19 percent in 2009); 34 percent play games (vs. 27 percent in '09); 38 percent access the Internet (vs. 25 percent in '09); and one-third play music (vs. 21 percent in '09).

Nielsen also reported that smartphone data usage increased by 230 percent from the first quarter of 2009 to the same period in 2010; a mere 3 percent of smartphone owners use these devices for only voice communications and half use Wi-Fi on their phones to download data. At its core, the smartphone is just a smaller tablet—a precursor, in fact. Product evolution demonstrates that there is an optimal size that a mobile device wants to be. That size isn't three or four inches. It's seven-to-nine inches.

Rumors of midsize Apple screens

Consider how smartphones have grown bigger while tablets are shrinking. Smartphones began as small 2.25-inch BlackBerry (RIMM) screens, jumped to the 3.5-in. iPhone screen, and now range as high as a 4.3-in. Android (GOOG) screen. At the same time, tablet sizes are getting smaller—from the 9.7-in. iPad screen to the 7-in. screens of the Samsung (000830:KS) Galaxy Tab and RIM PlayBook. Rumors have also circulated that Apple (AAPL) is developing a smaller iPad, in the six-to-seven-in. range, or a larger iOS device with a five-in.-plus screen. Remember that when the first tablet appeared in 2010 as the iPad, the form factor was almost identical to Apple's iPhone. So, too, were the features. The only real difference was size.

Consumers use smartphones not to call their friends, but to consume data and media services. That puts smartphones in the same market space as tablets. The devices mimic each other in services and features, particularly when you consider that tablets can also make video calls via Skype and FaceTime. The only essential difference is user experience, reflecting the disparity in screen size. Given these devices' redundancy, and the costs for maintaining both, it makes sense that consumers will eventually shift away from the smaller of the two.