Editor’s note: Ezra Gottheil is an analyst with Computer Business Quarterly, Software Business Quarterly and Technology Business Research. This strategy note is reprinted with permission.

HAMPTON, N.H. – TBR believes Apple will announce an inexpensive mobile device that will make web access and computing easier and safer. This device, which will be a closed system similar to the iPhone as opposed to a less expensive Mac, will leverage Apple’s unique strengths in design, software and online delivery systems, challenge “netbooks” and fit the needs of a recessionary market. By controlling the software that can be loaded and the hardware that can be attached, Apple’s device will be simpler, easier to use and more reliable than a PC, and will excel at the functions most required by users.

TBR believes that Apple will announce the new product at MacWorld in January 2009, to become available around mid-year. It will come in two sizes, one much like the MacBook Air and one similar to a netbook, with the smaller unit priced at $599.

For users, the device will offer several benefits:

• It will provide web access, e-mail, media playing, and essential applications at a single low price.
• Computer beginners will be able to start using it quickly and easily. Users will have fewer questions, problems, conflicts and security breaches, as the device will be less intimidating than both PCs and Macs.
• As with the iPhone, iTunes and the App Store will offer an array of content, applications and games.
• As with the iPhone, the software can be rebuilt from the App Store. With an optional online backup service, the entire device can be restored. Under a more expensive support plan, Apple will be able to send the customer a replacement functional device if theirs is stolen or physically damaged.

The device will also benefit Apple:

• It will open up new markets, including emerging economies, price-sensitive consumers, and those for whom all PCs, including Macs, are too complicated.
• Because all applications are delivered through the iTunes App Store, Apple will maintain sustained relationships with users, making it easier to upsell and cross-sell to existing customers. TBR believes Apple will make online services like MobileMe increasingly attractive to all customers, but purchasers of the new Apple device may find its simplicity especially appealing.
• The device will provide yet another entry point into the Apple digital hub family of products.
• Apple will be able to sell the captive peripherals that work with the device.

The device will solve several problems facing Apple:

• By maintaining price levels for the lowest-priced Macs while the PC industry lowered entry prices, Apple gradually moved out of the most price-sensitive markets, including the fastest growing emerging economies. This problem is exacerbated by the recession.
• CEO Steve Jobs has held up the iPhone as a web access and e-mail solution for more price sensitive market segments. TBR concurs that this is a solution that will work for some customers, but others will require a keyboard.
• While Apple could profitably produce a less-expensive Mac, it would cannibalize the market for the lower-priced Macs. Performance and design compromises might also affect the Mac brand.
• TBR believes that Macs are somewhat easier for beginners to use than Windows-based PCs, but Macs are still computers; their flexibility makes them complex and intimidating to new users.

Apple faces some challenges with the new device:

• TBR believes the device will cannibalize some MacBook sales.
• At $599, Apple’s price is still twice that of the lowest-priced netbooks, and with compatible peripherals, the total price increases.
• Some purchasers will be confused and expect full Mac functionality.

Apple CEO Steve Jobs suggested the $599 price by stating that Apple didn’t know how to make a $500 computer that was not junk. The price also supports Apple’s pricing strategy; it is higher than competitors’ but not so much higher as to be uncompetitive. TBR believes Apple can produce a strong product at that price while maintaining its margins.

Conclusion

The idea of a simple device for e-mail and web browsing is not new; it is the inspiration for the netbook. Many netbook vendors have introduced Linux-based netbooks with simplified interfaces. TBR believes these devices were unsuccessful because the vendors did not set user expectations or create ecosystems for their products. Without substantial marketing efforts, purchasers expected these Linux netbooks to be PCs, run PC software and connect to PC devices. At the same time, the vendors did not provide a simple way of obtaining compatible software and hardware.

The attempts at Linux netbooks shows that vendors understand many customers want a simple limited inexpensive device that “just works.” TBR believes the vendors did not invest in everything necessary to deliver that device, including software development, partnerships with other hardware vendors and online services. When Apple confirms the concept and the market, we expect other PC vendors to try again.

To succeed, a simplified netbook needs strong software, an online software delivery system and enforced limits on supported peripherals, with Google the most likely provider of software and online services. TBR believes Google will eagerly partner with hardware vendors, and base the new operating system on Android, its mobile telephony platform. We believe Hewlett-Packard, with its breadth of peripherals and increasingly strong consumer presence, is the strongest potential hardware partner.

After Apple announces this new product, we believe other vendors will hurry to provide competitive devices, software and services. Eventually, the simplified netbook device will be established as an important web access and basic computing platform in both consumer and business markets. As with PCs, Apple will maintain itself in a premium niche, and TBR believes the company will maintain a larger market share in this new category.