Tickers in this Article: AAPL, RIMM, MMI, GOOG, BRCM, NVDA, BBY
When Apple (Nasdaq:AAPL) launched the iPhone in 2007, it ushered in a wave of smartphone development, and customers responded by buying millions of the things from Apple, Motorola Mobility (NYSE:MMI), Research In Motion (Nasdaq:RIMM), Samsung, HTC and other vendors. When Apple introduced the iPad in 2010 there was a similar expectation that tablet computers would quickly sweep up similar retail sales.

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Curiously, there has been a rather sizable pothole on the way to tablet prosperity. While Apple has indeed seen good demand for the iPad platform, rivals running on Google's (Nasdaq:GOOG) Android platform have not fared nearly so well. The question is, then, whether the tablet market can still live up to initial expectations or whether it will prove to be a step too far for the mass retail segment. (For related reading, see The 4 R's Of Investing In Retail.)

Few Successes, Ample Disappointments
Apart from Apple and Samsung, few tablet manufacturers have seen demand meet their expectations. RIM shipped just 500,000 units in the first quarter, decided to delay a 4G version until the fall, and supposedly cut internal sales expectations for the PlayBook in the second quarter to one-third of the initial level (800,000 to 900,000 units versus 2.4 million).

Motorola's Xoom has likewise found only middling demand (supposedly 100,000 to 200,000 a month), and Motorola, RIM, Acer and Asustek combined are selling maybe one-third of the units that Apple is moving in a month. Even Apple hasn't been immune to disappointing sales numbers, though much of the "disappointment" here seems to have been from a lag in demand due to the switch to iPad 2.

Weak Tablets Not Helping Chip Makers
It would be aggressive (if not silly) to lay all of the chip sector's current problems at the feet of disappointing tablet sales, but it clearly is not helping matters. Companies like Broadcom (Nasdaq:BRCM), Texas Instruments (NYSE:TXN), Qualcomm (Nasdaq:QCOM), and Nvidia (Nasdaq:NVDA) all traded up on the enthusiasm investors had for their slots in tablets like the iPad, Xoom and PlayBook.

Unfortunately, the results are not validating that initial enthusiasm. In fact, some chip companies (like Elpida, to name one) and assemblers are rearranging their capacity as a result and deprioritizing capacity for tablet-related chips. These are not decisions that companies undertake lightly, and it would seem that companies are not expecting a massive increase in demand, even with launches from Hewlett-Packard (NYSE:HPQ), Dell (Nasdaq:DELL) and Huawei. (For related reading, see Sorting Out Cult Stocks.)

What's Wrong With Tablets?
There are plenty of credible reasons that tablet sales have disappointed. For starters, it is not hard to find elaborate and long-winded diatribes on the deficiencies of the Android operating system and the resulting bugs in particular tablets. So it may well be the case that the Apple iPad is just better than the competition.

It may also be the case that the apparent utility of these tablets is not what people expected. While I admit to being something of a Luddite, I just don't see the point of a tablet. That is a problem if Motorola or Research In Motion expect me to go into a Best Buy (NYSE:BBY) and buy one. With Apple and its Apple Store, though, the company arguably has more ability to control the sales message and explain the benefits of the product to potential customers.

On the other hand, the actual utility of the devices may be lacking. Nvidia's CEO has gone on record decrying the relatively high prices, lack of apps, and poor configuration of many Android-based tablets as probable causes in the sales shortfalls. (For related reading, see CEO Savvy And Stock's Success Go Hand In Hand.)

The Bottom Line
If that past year has made anything clear it is that Apple's would-be rivals cannot simply throw their own me-too products into the market and have consumers battering down the doors to buy them. At this point, it is too soon to tell whether the tablet is a niche product with a limited market (likely to be dominated by Apple) or a mass-retail opportunity simply waiting for better mousetraps.

At a minimum, though, investors need to revisit their expectations for chip companies and would-be tablet players. While Samsung seems to have the right formula worked out, Motorola, RIM, and the rest still have their work cut out, and their chip suppliers can only hope that sales pick up. While disappointing tablet sales will not cripple any of these companies, investors looking to that particular product category to drive outperformance likely need to reexamine that thesis. (For related reading, see Investigating The Stock Premium Puzzle.)

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