Tablet Landscape Evolution Window(s) of Opportunity

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1 MORGAN STANLEY BLUE PAPER MORGAN STANLEY RESEARCH Global Kathryn Huberty, CFA 1 Adam Holt 1 Joseph Moore 1 Sanjay Devgan 1 Francois Meunier 2 Ehud Gelblum, PhD 1 Scott Devitt 1 Jasmine Lu 3 Grace Chen 4 Sharon Shih 4 Shawn Kim 5 Kazuo Yoshikawa, CFA 6 Window(s) of Opportunity The tablet is the fastest ramping mobile device in history. To measure the rapid rate of change in this important but still nascent market, we revisit our initial Blue Paper published in February 2011 and update our list of global stocks best-positioned and challenged in the tablet market. Below are our three key takeaways. 1. The market is even bigger and growing faster than we initially forecast. Tablet shipments in the last two years were over 20% higher than we estimated in the last Blue Paper, and purchase intentions in our new survey indicate shipments of 133 million and 216 million in 2012 and 2013, or 57% and 112% larger than our initial estimates. 2. Microsoft shifts from a challenged to a best-positioned company in the tablet market, as Windows 8 with Office has the potential to drive market growth and share gains. Our survey suggests 25% of users expect to buy Windows 8 tablet and Office is a key feature, especially for those considering their first tablet purchase. 3. Pricing is the key variable that will determine the success of Microsoft and its partners. We believe Microsoft will bundle Office with Windows 8 at a discount to bring OEMs on board and drive user adoption. Our analysis suggests Microsoft could charge $ for Windows and Office before OEMs would lose money on tablets. Global Technology Team See page 2 for all contributors to this report 1 Morgan Stanley & Co. LLC 2 Morgan Stanley & Co. International plc+ 3 Morgan Stanley Asia Limited+ 4 Morgan Stanley Taiwan Limited+ 5 Morgan Stanley & Co. International plc, Seoul Branch+ 6 Morgan Stanley MUFG Securities Co., Ltd.+ Please see Tablet Demand and Disruption: Mobile Users Come of Age, February 14, 2011 Morgan Stanley Blue Papers focus on critical investment themes that require coordinated perspectives across industry sectors, regions, or asset classes. AlphaWise conducts evidence-based investment research to help validate key investment debates on behalf of Morgan Stanley Research analysts worldwide. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. * = This Research Report has been partially prepared by analysts employed by non-u.s. affiliates of the member. Please see page 2 for the name of each non-u.s. affiliate contributing to this Research Report and the names of the analysts employed by each contributing affiliate. += Analysts employed by non-u.s. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

2 Global Technology Team Contributors to this Report US Hardware Kathryn Huberty, CFA 1 +1 (212) Scott Schmitz 1 +1 (617) Dan Dolev 1 +1 (212) Jerry Liu 1 +1 (212) US Software Adam Holt 1 +1 (415) Jennifer Swanson Lowe, CFA 1 +1 (212) Keith Weiss, CFA 1 +1 (212) Melissa Gorham 1 +1 (212) US Semiconductors Joseph Moore 1 +1 (212) Sanjay Devgan 1 +1 (415) Europe Semiconductors Francois Meunier Andrew Humphrey US Communications Equipment Ehud Gelblum, PhD 1 +1 (212) Jeremy David 1 +1 (212) US Internet Scott Devitt 1 +1 (212) Jordan Monahan 1 +1 (212) Andrew Ruud 1 +1 (212) Asia Technology Jasmine Lu Grace Chen Sharon Shih Shawn Kim Kazuo Yoshikawa, CFA Po-Ling Chen Brad Lin Morgan Stanley & Co. LLC 2 Morgan Stanley & Co. International plc 3 Morgan Stanley Asia Limited 4 Morgan Stanley Taiwan Limited 5 Morgan Stanley & Co. International plc, Seoul Branch 6 Morgan Stanley MUFG Securities Co., Ltd. See page 30 for recent Blue Paper reports. 2

3 Table of Contents MORGAN STANLEY BLUE PAPER Executive Summary... 4 There are three key findings in this Blue Paper: (1) tablet market is even bigger than we initially forecast; (2) Microsoft has the potential to drive tablet market growth and take share; and (3) pricing is the key variable that will determine the success of Microsoft and its partners. Investment conclusions: best-positioned and challenged stocks. Survey data on market size, penetration and usage of popular computing devices. Hardware Apple continues to dominate the tablet market, though several other traditional PC vendors are poised to gain share. Tablet cannibalization of PC and printing demand are more severe than we initially thought. Best-positioned: Apple, Lenovo Challenged: Lexmark, HP, Dell, Seagate, Western Digital Software and Internet Microsoft will be more competitive in the tablet market in late 2012 and in 2013 with the new release of Windows 8 and Office 15, which will include versions on ARM processor architecture. Best-positioned: Microsoft Challenged: Google, Amazon.com Semiconductors and Communications Equipment ARM and its vendors continue to dominate the application processor market. Leading NAND flash vendors benefit from tablet proliferation. Baseband, connectivity and related suppliers benefit from tablet proliferation and adoption of multi-device carrier data plans. Best-positioned: ARM, NVIDIA, Texas Instruments, Samsung, Toshiba, SanDisk, Qualcomm, Broadcom, Avago, Skyworks Challenged: Intel, AMD Components and Assembly Supply Chain Suppliers and assemblers with exposure to Apple will benefit from its dominant position in the market. The survey suggests touchscreen quality and large display size are important tablet features, which should benefit TPK. Best-positioned: Hon Hai, AAC, TPK and Foxconn Tech Appendices: Tablet and PC Models

4 Executive Summary The tablet is the fastest ramping mobile device in history. Apple, the market leader, just shipped more ipads in the December 2011 quarter than any single PC vendor shipped PCs, a remarkable feat considering the company only established the category in early Cumulative tablet shipments in 2010 and 2011 were more than double the cumulative shipments of any other mobile device in its first two years. Exhibit 1 Tablets Are the Fastest Ramping Mobile Device Cumulative Shipments of Mobile Devices in First Five Years Source: Gartner, IDC, Company Data, Morgan Stanley Research Tablets Smartphones Feature Phones Netbooks Gaming Devices MP3 Players Notebooks E-Readers There are three key findings in our second global tablet survey. To measure the rapid rate of change in this important but still nascent market, we revisited our initial survey and Blue Paper published in February 2011 in this follow-up. Exhibit 2 The Tablet Market Will Be 57% and 112% Larger Than We Initially Forecast by 2012 and e 2013e 2014e 2015e Shipments (Millions) Original Estimates New Estimates Difference 21% 26% 57% 112% 147% 188% Y/Y Growth Original Estimates 245% 54% 20% 12% 7% New Estimates 258% 92% 62% 30% 25% Source: IDC, Morgan Stanley Research 2. Microsoft Windows 8 with Office has the potential to drive tablet market growth and take share. In the last two years, Apple ipad has dominated the market with 62% unit share, while Google Android-based tablets have had mixed results. However, Microsoft has made a lot of progress since our last survey with its Metro user interface, first introduced in Windows Phone 7 and included in the upcoming Windows 8 release. Consumers, especially those considering their first tablet purchase, believe Microsoft Office is a key feature, suggesting Windows 8 with Office could overtake Android as the second largest platform in the tablet market. Exhibit 3 Microsoft Windows 8 with Office Could Become the Second-Largest Tablet Platform Tablet Purchase Intentions by Platform Other, 7% 1. The market is even bigger and growing faster than we initially forecast. We conducted a second tablet survey in May 2012, reaching 7,500 respondents in the US, UK, Germany, France and Japan. Purchase intentions indicate tablet shipments will increase to 133 million and 216 million in 2012 and 2013, or 57% and 112% larger than our initial estimates. In 2010 and 2011, the tablet market was already more than 20% larger than we first forecast in the last Blue Paper. Google Android, 22% Microsoft Windows 8, 25% Note: Other includes Amazon.com and Barnes & Noble Apple ios, 46% 3. Pricing is the key variable that will determine the success of Microsoft and its partners. The maximum price respondents said they would be willing to pay for Windows 8 tablets with Office is $469, or a 6% discount to Apple s ipad. It is unclear how much Microsoft will charge OEMs for Windows 8 and Office, but we conduct a scenario analysis assuming a Windows tablet s cost of goods is roughly 0-10% more 4

5 expensive than an ipad s due to lower volume discounting, while R&D and SG&A expenses are lower than for an ipad. Our analysis shows the maximum Microsoft could charge is $114 before OEMs would lose money on a Windows tablet, assuming similar component costs relative to an ipad. If Microsoft OEMs component costs are 10% higher than Apple s, Microsoft could charge a maximum $82 for Windows and Office. We expect Windows 8 tablet license pricing to be similar to PC license pricing of ~$50. This suggests a $32-$64 license price for Office, which may be lower than what Microsoft currently charges. However, the bundled version of Office with Windows RT (the ARM version) will likely be a light version, so it is entirely reasonable to assume Microsoft will price it at a discount to normal editions. If Microsoft only charged $50 for software, OEMs would earn a reasonable margin of ~7%, assuming 10% more expensive component prices for a Windows tablet relative to an ipad. In the near term, multiple partners could launch products and try to establish a foothold in the tablet market. While tablets with modest or flat margins are not entirely compelling, OEMs are already seeing high cannibalization rates in the PC market and a better foothold in the tablet market than Android could provide is a win. Other variables that could help OEMs price Windows 8 tablets at a discount to the ipad and still at least breakeven include lower retailer margins and/or OEMs willing to accept low- to mid-single digit margins long-term, like the PC market, vs. smartphone margins. Exhibit 4 Microsoft Windows 8 and Office License Fees Key Variables for a Successful Second Tablet Platform Tablet with Wi-Fi and 16GB Scenario 1 Scenario 2 Scenario 3 ipad 3 Windows 8 Windows 8 Windows 8 Price Component Cost vs. ipad +0% +5% +10% Components Microsoft Licenses Manufacturing Total COGS Gross Profit GM 37% 8% 8% 8% R&D SG&A Total OPEX Operating Profit OPM 28% 0% 0% 0% Source: isuppli, Company Data, Morgan Stanley Research 5

6 Key Investment Conclusions We have higher conviction and an increased number of stock ideas to play the tablet proliferation thesis, compared to our original tablet Blue Paper. This report applies the thesis to the four main segments of the tablet value chain: (1) hardware, (2) software and Internet, (3) semiconductors and communications equipment, and (4) components and assembly supply chain. Below is a summary of our investment ideas in each segment. Exhibit 5 Best Ways to Play Tablet Proliferation Best-Positioned Challenged Hardware Apple Tablet vendor Lexmark Printing vendor Lenovo Tablet vendor Seagate Hard drive supplier Western Digital Hard drive supplier HP PC and printing vendor Dell PC vendor Software and Internet Microsoft Operating system vendor Google Operating system vendor Amazon.com Tablet vendor and e-commerce Semiconductors and Comm. Equipment ARM Processor designer Intel Processor supplier NVIDIA Processor supplier AMD Processor supplier Texas Instruments Processor supplier Samsung NAND supplier Toshiba NAND supplier SanDisk NAND supplier Qualcomm Processor and baseband supplier Broadcom Baseband and connectivity supplier Avago Filter and power amplifier supplier Skyworks Power amplifier supplier Components and Assembly Supply Chain Hon Hai Tablet assembly AAC Acoustics supplier TPK Touch panel lamination Foxconn Tech Metal casing supplier Source: Morgan Stanley Research Hardware The most direct way to play tablet proliferation is through Apple, which has dominated the market with 62% unit share with its integrated software and hardware ecosystem. Lenovo moves from challenged to best-positioned, as it has executed well in Asia and Europe since launching its products just a year ago. Although Samsung is second with 6% unit share, we believe the company will continue to focus on smartphones instead of tablets due to the former s favorable margin profile. We are starting to see a longer list of challenged hardware companies. We are still in the early stages of PC and print cannibalization, and expect HP, Dell and Lexmark to remain challenged. As a derivative of the PC headwinds, we see long-term impact to Seagate and Western Digital despite recent consolidation in that industry. Software and Internet The big change in software is Microsoft, moving from challenged to best-positioned. A year ago, we put Microsoft on the challenged list because Windows 7 could not truly address key tablet requirements, such as low power and touch interface, and Windows Phone 7 specifications did not fit the tablet form factor. A lot has changed since then, as Microsoft previewed Windows 8 with the Metro interface optimized for touch and announced support for ARM-based devices, which is the processor architecture the vast majority of tablets use today. Survey responses suggest Windows 8 tablets with Office have the potential to expand the market and take share if offered at the right price although with additional features, such as pre-bundled Office, Microsoft may not need to necessarily compete on price. In contrast, Google is in a more challenged position compared to a year ago. Android-based vendors have had mixed results since Google launched Honeycomb, a tabletoriented Android release in February 2011, while Apple ipad s market share has been steady. Our survey suggests Microsoft is poised to take share from both Android-based tablets and ipad. We are not counting Google out, as it took Android about two years after the iphone launched to gain traction in the smartphone market, and the company recently acquired Motorola Mobility. However, Microsoft could be a credible alternative platform for hardware OEMs in tablets, which was not the case a few years ago in the smartphones. Amazon.com was not in our Blue Paper a year ago. After a rapid Kindle Fire ramp in 4Q11, its long-term share looks uncertain. The company gained 17 points of tablet market share in 4Q11 after launching the Kindle Fire in mid- November. Just as quickly, the product lost steam and fell to 4% share in 1Q12. While the company looks to be committed to the tablet market long-term, it is not a preferred way to play tablet proliferation given the current uncertainty in our view. Semiconductors and Communications Equipment ARM and its vendors continue to dominate the application processor market, led by Apple and Samsung s proprietary solutions. Survey respondents indicated battery life and price as the top two criteria when purchasing a tablet, which plays to ARM s strengths. We suggest two new groups of suppliers as derivative plays on tablet proliferation: NAND and connectivity. Tablets could consume about 12% of NAND flash demand in 2012 and more over time, and we believe the leading NAND suppliers are best-positioned in this market. We also believe Qualcomm, Broadcom, Avago and Skyworks will benefit as baseband, connectivity and related suppliers given their 6

7 exposure to the right tablet vendors and increasing 3G/4G penetration in tablets. Similar to the last Blue Paper, we view Intel and AMD as challenged. The survey revealed higher-than-expected PC cannibalization rate, and a bigger and faster growing tablet market. Even if tablet application processors become meaningful for Intel beyond 2013, the company would be trading $120 notebook microprocessors for $20 tablet application processors. Therefore, we estimate tablet processors would still account for less than 1% of Intel s total revenue in an Intel success case. Components and Assembly Supply Chain We believe suppliers and assemblers with high exposure to Apple will benefit from the latter s dominant position in the market. In this context, Hon Hai, AAC and Foxconn Tech are best-positioned. We also see TPK as the major beneficiary of a design shift to thin and light touch solutions. Our survey suggests touchscreen quality and large screen as important features when choosing a tablet. 7

8 AlphaWise Survey Findings Market Sizing Tablet penetration and purchase intentions are higher now compared to a year ago. In our new survey, 25% of respondents said they plan to purchase tablets in the next 12 months, compared to 19% that have them today. Exhibit Survey Indicates 25% Plan to Purchase Tablets in the Next 12 Months vs. 19% That Have Tablets Today Tablet Ownership and Purchase Intentions in 2011 vs (%) Evidence Core Questions for Evidence Research What platform(s) will gain relevance and address the tablet market beyond Apple? What are consumer s tablet purchase intentions? How will tablet purchases impact spending on other devices? How are consumers using PCs and tablets? Do tablets change consumers printing behavior? What Gives Us Confidence We surveyed 7,500 consumers across the US, UK, France, Germany, and Japan in May 2012 Sample is representative of the online adult population in terms of age, gender, and income of each country Conclusions based on the total sample have a maximum margin of error of 3.2% at 90% confidence level 2011 Survey 2012 Survey Penetration Plan to Buy Note: 2011 and 2012 Blue Paper surveys conducted in October 2010 and April to May 2012 respectively. We expect tablet shipments to exceed notebook shipments in 2013 and almost match total PC shipments by The survey results suggest 25% of respondents plan to purchase tablets in the next 12 months while 19% of respondents have tablets today, which implies shipments from 2Q12 to 1Q13 will be 32% higher than the current tablet installed base. In our model, we discount the 32% growth rate by 20% in order to be conservative. Therefore, in the developed markets, we apply a 27% growth rate to the 84 million unit installed base (1Q10 to 1Q12) and forecast 107 million unit shipments from 2Q12 to 1Q13. In addition, we forecast shipments in Asia-Pacific, excluding Japan, will grow 77% over the installed base over the same period. The region accounted for one-quarter of shipments in 1Q12. We believe this is also reasonably conservative because the region grew over 400% in 2011 and Windows 8 will be a new catalyst in late Exhibit 7 Updated Tablet and PC Model e 2013e 2014e 2015e Shipments (Millions) Desktops Notebooks Subtotal Tablets Total Y/Y Growth Desktops -1% 1% 0% -1% -1% Notebooks 4% 1% 3% 1% 0% Subtotal 2% 1% 1% 0% 0% Tablets 258% 92% 62% 30% 25% Total 15% 15% 18% 11% 11% Unit Mix Desktops 42% 36% 31% 26% 24% 21% Notebooks 53% 48% 42% 37% 33% 30% Tablets 5% 16% 27% 37% 43% 49% Source: IDC, Morgan Stanley Research Tablet Penetration Smartphone and tablet penetration increased the most over the last year. Somewhat surprisingly, increase in gaming console penetration was a close third despite starting with a larger installed base. As expected, desktop was the only product where penetration decreased as consumers continue their multi-year migration towards a variety of 8

9 devices that are more mobile. The low penetration of tablets relative to other devices gives us further conviction that our tablet market growth rates are achievable. Exhibit 8 Tablets Saw the Second Highest Increase in Penetration but Absolute Penetration Remains Low (%) pts +5 pts Computing Device Penetration +6 pts +14 pts +10 pts +23 pts +12 pts Desktop Notebook Netbook Tablet E-Reader Smartphone Gaming Console 2011 Survey 2012 Survey Computing Device Usage Tablets are the third-best device, just behind desktops, for content consumption. Notebooks and desktops are still the most used devices for both content consumption and creation. However, respondents use tablets much less for content creation. While this may be partly due to the ease and speed of using the keyboard and mouse compared to the touch screen for power users, it is likely also due to a much lower penetration of tablets in the enterprise and fewer enterprise applications compared to the PC ecosystem so far. E-readers and gaming consoles, along with tablets, are the only devices that respondents use more for content consumption than creation, which is not a surprise. The ability to take pictures greatly boosted the smartphone as a content creation device. Exhibit 10 Notebooks and Desktops Lead in Content Creation, but Tablets a Close Third for Content Consumption 60% 50% % of Owners that Use Their Devices at Least Once a Week (Average % Across Content Consumption vs. Creation Tasks) Respondents rank notebooks and desktops as the most useful and enjoyable devices, followed by tablets and smartphones. Not surprisingly, netbooks rank last among multi-purpose computing devices. While Ultrabooks rank relatively low today, we believe the category could improve as OEMs introduce products with higher quality hardware and lower prices in late 2012 or Exhibit 9 Notebooks and Desktops Most Used Useful and Enjoyable Devices, Followed by Tablets and Smartphones 40% 30% 20% 10% 0% Notebook Desktop Tablet Smartphone Content Consumption Ultrabook Netbook E-Reader Gaming Console Content Creation 8 Devices Ranked by How Useful and Enjoyable They Are (Higher Score = Most Useful and Enjoyable) Notebook Desktop Tablet Smartphone Ultrabook Netbook E-Reader Gaming Console 9

10 Hardware US Tech Hardware Asia Technology US Internet Katy Huberty Grace Chen Scott Devitt Scott Schmitz Shawn Kim Jordan Monahan Dan Dolev Andrew Ruud Jerry Liu Which hardware vendors are best-positioned to benefit from tablet proliferation? Apple continues to be the dominant leader, though several other traditional PC vendors are poised to gain share, potentially with Windows 8 tablets. There is decreasing interest in Amazon.com s Kindle Fire and little interest in platforms outside of Apple ios, Microsoft Windows 8, and Google Android. What is the impact to the legacy PC market and the printing market? Tablet cannibalization of PC and printing demand are more severe than we initially thought due to a combination of higher cannibalization rates and a larger tablet market. Best positioned: Apple, Lenovo Challenged: Lexmark, HP, Dell, Seagate, Western Digital Tablet Vendors We increase our Apple ipad estimates 8% in 2012 and 18% in 2013 on strong demand highlighted by our survey. Apple remains the dominant tablet leader. While the survey indicates it stands to lose eight points of unit share, that is more than offset by higher tablet market growth. We believe our new estimates are likely conservative as Apple s actual market share was nine points higher than the last survey predicted from 4Q10 to 3Q11, while we only model market share to be four points higher than the new survey predicts for the next 12 months. Furthermore, while the survey shows a share shift toward PC vendors, we believe this is unlikely to be meaningful before Windows 8 ships in volume sometime in 4Q12. In 2013, our Apple model implies 45% tablet share, which is actually below our survey result of 46% share. Exhibit 11 Apple to Lose Unit Share but Remain the Dominant Leader, while Most Other PC Vendors Gain Share Tablet Ownership vs. Purchase Intentions by Vendor (%) Apple Samsung Acer Sony Dell HP Toshiba Asus Amazon.com RIM HTC Lenovo Other Current Installed Base Purchase Intentions Exhibit 12 Our Apple Tablet Forecast May Be Conservative as Actual Share Exceeded Last Survey by Nine Points Apple Market Share: Survey Results vs. Tablet Model 80% 60% 40% 20% 0% +9 pts 4Q10-3Q11 Survey Results Source: IDC, AlphaWise, Morgan Stanley Research +4 pts 2Q12e-1Q13e IDC Historical / MS Estimate 54 10

11 Amazon.com is the other vendor we expect to lose unit share. The Kindle Fire saw strong initial demand heading into the holiday season after launching in November 2011, allowing Amazon.com to garner 17% tablet unit share in 4Q11. However, the product quickly lost momentum in 1Q12, ending with 4% market share. We think Amazon.com has a unique offering long-term for consumers cheaper product, and better content and e-commerce offerings and we would not count them out yet given their ability to improve with each iteration, as they did with the Kindle in the e-reader market. However, our survey suggests lower purchase intentions at least in the near term. Several PC vendors are poised to gain tablet share, though they start from a small base and are dependent on Windows 8 gaining traction. Acer, Sony, Dell, HP and Toshiba could gain 2-4 points of share according to purchase intentions. Although Samsung remains second in terms of purchase intentions, we believe the company will focus on developing and marketing smartphones, such as Galaxy S III and Note, instead of tablets given the favorable margin profile in smartphones and a lack of traction with Android in tablets. PC brands potential traction in tablets could become a long-term advantage for Microsoft against Google. Interestingly, consumers are also willing to pay more for tablets from historically PC-oriented brands than smartphoneoriented brands. Microsoft s design principle with Windows 8 is to provide an uncompromised operating system for both PCs and tablets, as opposed to Apple s belief that tablets should share an operating system with smartphones but not PCs. Microsoft and its long-term PC partners have an opportunity to capitalize on this consumer preference with Windows 8. So far, there is little interest in tablets from nontraditional players, such as Chinese Internet service providers Baidu and Alibaba. Excluding Apple ios, Microsoft Windows 8 and Google Android, all other operating systems totaled only 7% share in purchase intentions. Similarly, there does not seem to be materially higher demand for the Asus Transformer form factor, which is an Androidbased tablet that has a keyboard dock, as purchase intentions for Asus is in line with most other Android vendors. Enterprise Adoption One of the biggest surprises versus a year ago is the significant tablet adoption in the enterprise. Six percent of employers either purchased or subsidized survey respondents tablet for work use and another 10% are allowed to access their corporate network with a tablet purchased on their own. This is consistent with the recent uptick in enterprise tablet adoption, as noted in Morgan Stanley s April CIO Survey. Sixty-five percent of companies currently purchase tablets for some employees while nearly 50% allow employee-owned tablets on their network; both numbers increased steadily over the past three quarters. Tying the CIO survey data directly back to our consumer tablet survey, the 6% of respondents that have a company purchased or subsidized tablet (7% in the US) compares closely to the 9% of employees that CIOs say they purchase tablets for currently. Exhibit 14 Employers Fund Tablet Purchases for 6% of Respondents Enterprise Adoption of Tablets 71% Exhibit 13 Consumers Willing to Pay More for Tablets from PC Vendors (Blue) than Smartphone Vendors (Yellow) Maximum Respondents Willing to Pay for Next Tablet Average = $ Apple Asus Lenovo Dell Samsung HTC HP Acer Toshiba BlackBerry Sony Motorola Google Amazon.com 2% 4% Employer subsidizes tablet Employer provides tablet 10% 12% Employer allows own tablet to access company s network Employer does not allow own tablets on company s network Employer has no rules / not applicable 11

12 Exhibit 15 which Matches Closely with CIO Feedback % of Respondents 15% 12% 9% 6% 3% 0% Percent of Employees for Which Corporate Tablets Are Currently or Planned to Be Purchased 5% Oct 11 Survey 5% Jan 12 Survey Currently Note: n = 75 (US and EU data) Source: Morgan Stanley CIO Survey 9% 9% Apr 12 Survey Oct 11 Survey 10% Jan 12 Survey In 1 Year 14% Apr 12 Survey Exhibit 16 Growing Number of Companies with Tablet Strategy % of Respondents 70% 60% 50% 40% 30% 20% 10% 0% CIOs Currently Purchasing Corporate Tablets or Allowing Employee-Owned Tablets on Corporate Network 53% 57% 65% Purchase for Employees Note: n = 75 (US and EU data) Source: Morgan Stanley CIO Survey 39% 45% 49% Allow Employee-Owned Tablets on Network Oct 11 Survey Jan 12 Survey Apr 12 Survey Enterprise tablets begin to replace notebooks. Morgan Stanley s April CIO Survey points to a 26% tablet cannibalization rate in the enterprise, based on 9% employee tablet penetration divided by the 2.3% of the PC installed base in which tablets replace PCs today. Anecdotal evidence from our conference calls with CIOs and commentary from vendors like Dell suggest the early adopters of tablets as replacements for notebooks are sales people, healthcare professionals and K-12 schools. Higher tablet adoption and notebook replacement rate in the enterprise is a key factor in our lower global PC unit forecast. Exhibit 17 Tablet Cannibalization Weighing on Corporate PCs % of PC Installed Base 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% Percentage of PC Installed Base That Could Shift to Tablet Form Factor 1.7% Today 2.3% Jan 2012 Survey Note: n = 75 (US and EU data) Source: Morgan Stanley CIO Survey Tablet Cannibalization of PCs 2.9% In 3 Years Apr 2012 Survey 4.0% We lower our PC shipment forecast for 2012 and 2013 from 2% and 5% respectively to 1% due to a combination of higher-than-expected PC cannibalization rate, increase in tablet shipment forecast, and anemic PC demand until at least fall 2012 when Microsoft launches Windows 8. Exhibit 18 Lowering 2012 and 2013 PC Unit Growth to 1% e 2013e 2014e 2015e Shipments (Millions) Previous Estimates NA NA New Estimates Difference 3% 3% 2% -1% NA NA Y/Y Growth Previous Estimates 2% 2% 5% NA NA New Estimates 2% 1% 1% 0% 0% Source: IDC, Morgan Stanley Research Our new survey suggests 41% of tablet shipments in 2012 will delay or eliminate PC purchases. The 37% cannibalization rate in 2011, according to the new survey, was also higher than the 29% we estimated based on our original tablet survey. In fact, consumer PC shipments to developed regions have declined Y/Y every quarter since 3Q10 when the Apple ipad launched. Given the fast adoption of enterprise purchases and bring-your-own-device programs, we now expect both enterprise and consumer tablet purchases to cannibalize PC shipments, as opposed to just consumer purchases previously. 12

13 Exhibit 19 Tablet Cannibalization of PC Shipments Higher Than Expected in 2011 and Likely Even Higher in 2012 Estimated vs. Actual PC Cannibalization (% of Tablet Shipments that Delay or Eliminate PC Shipments) 29% 37% 41% 2011 Estimate 2011 Actual 2012 Estimate While tablet cannibalization is a headwind to all PC vendors, we are incrementally more negative on HP and Dell. Both vendors have large legacy PC exposures, with the industry accounting for about 30% and 18% of Dell and HP s operating profits this year. In the last quarter, both companies also noted pricing pressure and Y/Y share loss, compounding the issue of tablet cannibalization. HP and Dell plan to attack the tablet market again with Windows 8 tablets despite their inability to gain traction with webos and Android software last year. While they have scale and distribution advantages in some regions and the survey suggests a potential increase in their tablet market share, we believe HP and Dell will find it challenging to reconcile their stated intentions to improve margins and focus on opportunities in enterprise data centers long term with their plans to participate in Windows 8 tablets. See the software section for further analysis of Windows 8 tablet margins. Among PC vendors, Apple is best-positioned and Lenovo moves from challenged in our last Blue Paper to bestpositioned. Apple iphone and ipad should account for over 80% of the company s operating profits while Macs should account for less than 10% this year, in part because the former two having much higher margins. Apple also stands to gain share as consumers shift away from PCs, as it has 20% and 59% smartphone and tablet unit share (much higher in profit share) but only 5% PC unit share in the last 12 months. Lenovo moves from our challenged list in the last Blue Paper to best-positioned in this one. While it only had 3% tablet unit share in 1Q12 according to IDC, Lenovo has executed well since launching its products just a year ago, and has a unique opportunity to capitalize on the Chinese tablet market given its strong branding, higher market share and initiatives to develop special applications and localized content. (Our survey shows a lower tablet share than IDC as about twothirds of its shipments are to Asia-Pacific.) On the PC front, Lenovo should see less PC cannibalization impact than HP and Dell as it continues to gain PC share in the commercial market and has higher exposure to faster-growing emerging markets (i.e., lower tier cities in China), where tablet cannibalization of PCs is smaller. We continue to believe tablet cannibalization of PCs is an incremental challenge for Seagate and Western Digital, in addition to several other long-term challenges, including solidstate drive adoption in servers, storage and PCs and the potential for desktop virtualization and cloud computing to drive higher utilization rates and a mix shift to lower priced hard disk drives. Tablet Cannibalization of Printing Tablets are also having a bigger than anticipated impact on printing. In our survey, 57% of potential tablet purchasers expect no change to their printing habits while 36% expect to decrease printing. However, the actual impact on printing is bigger than expected. Among current tablet users, only 51% report no change to printing while 39% report a decrease. Exhibit 20 Tablet Users Cut Printing by More Than They Expect 60% 50% 40% 30% 20% 10% 0% Significantly decreased Change in Printing Behavior Due to Tablet Usage Moderately decreased Slightly decreased No change Slightly increased Current Tablet Users Potential Tablet Purchasers Moderately increased Significantly increased Our current survey echoes key findings from our February 2012 survey of 700 tablet users in the enterprise. Respondents in our February survey said they planned to cut their printing by up to 16% as tablets ramp and companies move to curtail printing, the high end of our previous 8-15% estimate. Respondents who own tablets expect to print even less a year from now. Our February survey showed that 57% of respondents say they will print less in one year, up from 46% 13

14 currently. This is not surprising given that 41% view printing less as a key benefit of the tablet. The attempts of many companies to curb printing (e.g. by eliminating individual printers) may also play a role in the decline of print volume. Exhibit 21 Tablet s Adverse Impact on Printing Will Likely Strengthen in the Future 13% Expected Impact on Printing Today vs. in 1 Year 32% 54% 15% 42% 43% Now In 1 Year Will print significantly less Will print somewhat less Will not change Exhibit 22 Companies Implementing Page-Reduction Measures Attempts to Curtail Printing for Participants Who Reported Printing Significantly Less None of these No more individual printers Printer in the pantry/central location with a password Requires password for printing documents Printer in the pantry/central location without a password 21% 20% 23% 34% 36% 0% 5% 10% 15% 20% 25% 30% 35% 40% Across our coverage, Lexmark is the most exposed to a decline in enterprise printing. Our analysis shows that a 15% decline in enterprise print volumes combined with a 15% decline in personal print volumes translate into a 3% decline in 2013 supplies demand in the developed markets. Assuming roughly 60% gross margin, this would translate into an 8% hit to Lexmark s 2013 EPS (~43% of sales impacted) and 1% hit to HP s 2013 EPS (~6% of sales impacted). Exhibit 23 Tablets Could Cut Printer Supply Revenue by 3% in Office Printing Decline % 0% 3% 5% 8% 10% 13% 15% 18% 20% 23% 0% 0% 0% 1% 1% 2% 2% 3% 3% 4% 4% 5% 0% 1% 1% 1% 2% 2% 3% 3% 4% 4% 10% 0% 1% 1% 2% 2% 2% 3% 3% 4% 4% 15% 0% 1% 1% 2% 2% 3% 3% 3% 4% 4% 20% 0% 1% 1% 2% 2% 3% 3% 4% 4% 4% 25% 0% 1% 1% 2% 2% 3% 3% 4% 4% 5% 30% 0% 1% 1% 2% 2% 3% 3% 4% 4% 5% 35% 1% 1% 1% 2% 2% 3% 3% 4% 4% 5% 40% 1% 1% 2% 2% 3% 3% 3% 4% 4% 5% 45% 1% 1% 2% 2% 3% 3% 4% 4% 4% 5% Home Printing Decline % Source: IDC, Morgan Stanley Research Our April CIO survey also showed that printing and supplies spending outlook continues to deteriorate as tablet adoption increases. Only 11% of CIOs are planning to increase printing and supplies spending in the next 12 months, while 27% plan to decrease spending. As noted above, an increase in enterprises tablet adoption should further pressure printer and supplies spending. In the April survey, 44% of CIOs said they plan to decrease supplies spending due to tablet adoption, while only 3% plan to increase spending. Exhibit 24 Printing and Supplies Spend Remains Weak % of Respondents Increase Spend Decrease Spend 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% Printing and Supplies Spending Plans Over Next 12 Months (across recent surveys) 8% 9% 11% -27% -29% -27% Oct 11 Survey Jan 12 Survey Apr 12 Survey Note: n = 75 (US and EU data) Source: April 2012 CIO Survey, Morgan Stanley Research 14

15 Exhibit 25 Tablet Cannibalization of Supplies Spend Impact of Tablets on Supplies Spending Over Next 12 Months Increase Supplies Spend, 3% Decrease Supplies Spend, 44% Flat Supplies Spend, 54% Note: n = 75 (US and EU data) Source: April 2012 CIO Survey, Morgan Stanley Research 15

16 Software and Internet US Software Adam Holt Jennifer Swanson Lowe, CFA Melissa Gorham How will tablet adoption impact Microsoft? US Internet Scott Devitt Jordan Monahan Andrew Ruud While Microsoft has more than 90% share of the PC market, we believe that tablet cannibalization will have only a modest impact on Microsoft s revenue and earnings in 2012/2013 as Microsoft begins to ramp tablet share with Win 8. If we assume a tablet cannibalization rate of 41% on PC sales vs. our Microsoft model which already assumes cannibalization of ~30% while Windows captures ~22% of the tablet market in CY13, we estimate that tablets would add $0.10 to Microsoft s earnings in 2013, or approximately 3%, from incremental Windows revenue alone. We do not currently have tablets in our model, given the lack of pricing and availability detail to date, but we do reflect the impact of some cannibalization in our model with 4% and 6% PC growth in CY12 and CY13, respectively despite stronger expected corporate growth. What is Microsoft s tablet strategy and can Windows 8 help it increase tablet share? We think that Microsoft will be more competitive in the tablet market in late 2012/2013 with the new release of Windows 8, which will include Windows RT, the likely dominant tablet platform for Microsoft while Office on ARM will help Microsoft challenge the ipad and Android-based tablets, and gives Microsoft a better chance of unit upside in 2H12. Our survey supports this data as 25% of respondents indicate they plan to buy a Win 8 tablet vs. 46% that plan to buy an ipad and 22% a Google Android tablet. Medium term, as tablets become more prominent in the enterprise, Microsoft has significant advantages in security, application compatibility, and management that will likely enable Microsoft to garner a prominent role in the enterprise segment. If x86 chips can become a more important influence in the tablet market or if more Ultrabooks and hybrid devices emerge, Microsoft will likely benefit. Best positioned: Microsoft Challenged: Google, Amazon.com Apple is the clear tablet operating system leader today and will likely remain so for the foreseeable future, but we are cautiously optimistic that Windows 8 will allow Microsoft to grow share and establish itself as a viable second player. Microsoft will be releasing two separate versions of Windows Windows 8 (x86-based) and Windows RT (ARMbased) and in the near-term, we expect ARM-based devices to be Microsoft s dominant tablet platform while Office on ARM should help Microsoft challenge the ipad, giving it a better chance of unit upside in 2H12. Buy-side expectations are very low for Microsoft s tablet release, and we currently have zero tablet units in our above-consensus estimates for CY13. Additionally, while Microsoft has more than 90% share of the PC market, we believe that tablet cannibalization will have only a modest impact on Microsoft s revenue and earnings in 2012/2013 while better than expected traction would offset any EPS downside. If we assume a tablet cannibalization rate of ~41% on PC sales vs. our Microsoft model at ~30%, and Windows captures ~22% of the tablet market in CY13, we estimate that tablets would impact Microsoft s earnings by +$0.10 in 2013, or approximately 3%. Win 8 should also help Microsoft s relative positioning in the tablet market, which has weighed on the multiple. At the same time, there are myriad other product catalysts from Windows 8 to SQL 2012 that are not fully in consensus, margins are too low for CY13, and we look for Microsoft to raise the dividend later this summer. At 7x EPS net cash, the risk-reward remains compelling and the above catalysts should drive the stock. Microsoft well-positioned to grow the market and take share with the release of Win 8 by end of Our survey showed that Apple is the dominant tablet vendor, with 54% of the current installed base and 46% of prospective tablet buyers plan to purchase an ipad which shows that Apple may cede a modest amount of share. Conversely, some of Microsoft s key OEM partners, including Acer, Dell, and HP, could gain tablet market share albeit off a small base. While Windows 8 tablets are not yet on the market, our survey data points are more bullish than we expected. Of the respondents that intend to purchase a tablet, 25% plan to purchase a Win 8 tablet vs. 46% an ipad and 22% an Android tablet (with Win tablets at any price). Of those respondents that are planning on buying a tablet not from Apple, Amazon.com, Barnes & Noble, Blackberry, Google or Motorola, 54% said they plan on purchasing a device with Windows 8 vs. 42% who plan on purchasing an Android device. This suggests that Microsoft may be well-positioned to take share from Android and increase adoption from minimal share today to mid-teens of the tablet installed base. Additionally, when asked what tablet respondents would prefer if similarly priced, 34% of respondents chose an ipad and 30% a Win 8 tablet vs. 13% a Google Android tablet. However, given that Win 8 is not yet released and likely will 16

17 not be until Q4 consumer demand will be shaped by the early feedback and reviews, and there could be upside to this estimate if Win 8 is better than expected. Exhibit 26 25% of Respondents Plan on Purchasing a Win 8 Tablet vs. 46% for an ipad and 22% for Android Tablet Purchase Intentions by Platform Other, 7% Google Android, 22% Microsoft Windows 8, 25% Apple ios, 46% Android-based vendors have had mixed results since Google launched Honeycomb, a tablet-oriented Android release in February We are not counting Google out, as it took Android about two years after the iphone launched to gain traction in the smartphone market, and the company just acquired Motorola Mobility. However, Microsoft could be a credible alternative platform for hardware OEMs in tablets, which was not the case a few years ago in the smartphones. Amazon.com s Kindle Fire is also seeing less interest with only 4% of the current tablet installed base and with only 3% of prospective tablet owners planning to purchase an Amazon.com tablet. However, we believe Amazon.com may refresh the Kindle Fire in Q3, with an update to the current 7- inch product and potentially a new 10-inch Kindle Fire. Amazon.com has been elusive about any upcoming product releases and consumers have not seen any prototype, so potential demand for a refreshed 7-inch Fire and a new 10- inch Fire tablet are likely not fully captured in this survey. While the company looks to be committed to the tablet market long-term, it is not a preferred way to play tablet proliferation given the current uncertainty in our view. Exhibit 27 Key Windows Partners Acer, Sony, Dell, HP, Toshiba and Asus Are Poised to Gain Share Tablet Ownership vs. Purchase Intentions by Vendor (%) Apple Samsung Acer Sony Dell HP Toshiba Asus Amazon.com RIM HTC Lenovo Other Current Installed Base Purchase Intentions Our survey indicated Microsoft Office is the most important software feature to consider when purchasing a tablet, especially for first-time purchasers. Today, tablets are used mainly for content consumption activities, such as reading, web browsing, and watching videos. However, tablets are evolving from their main use of content consumption towards content creation, and consumers along with enterprises are requiring more fully featured productivity applications. Sixty-one percent of prospective tablet purchasers indicated that Office was the most important software feature vs. 44% for current tablet owners which suggests there may be pent up demand for a tablet offering with a prepackaged Office bundle. Microsoft is creating two versions of Office and will release Office 15 with Win 8 on ARM processor architecture (WOA), which is key for Microsoft in the tablet market, while Office 15 for x86 processors may be released separately. The Office 15 beta should be out this summer, which means Office 15 for WOA should be out this Fall, with x86 shortly after. While WOA Office 15 applications will be included with the WOA launch, it is unclear if Microsoft will be offering the Office applications pre-installed for free or for an additional cost

18 However, we do expect Microsoft to bundle a version of Office with its ARM based tablets. Given that Microsoft seeks to gain tablet market share, Microsoft may offer some form of Office 15 for free or as a trial on the initial WOA devices to incent consumer adoption. Exhibit 28 Windows Office Is a Key Software Feature for Future Tablet Purchasers Most Important Software Features when Considering a Tablet Purchase Ability to use MS Office Synch purchases across devices Amount media content for purchase Quality of third-party apps Number of third-party apps Access to previous itunes purchases Voice recognition All Potential Purchasers 21% 27% 33% 39% 30% 34% 44% 52% 45% 47% 50% Current Tablet Owners 61% 57% 61% The quality of third-party applications is more important than quantity. The availability of applications is key to tablet adoption, but our survey suggests that the quality of available applications is more important to consumers than the quantity as 47% of prospective tablet purchasers highlight the quality of applications as a top-three software feature vs. 33% that note the number of applications as a top-three feature. Both ios and Android currently lead Microsoft in terms of tabletfriendly content, with Google Play (Android) citing ~500K applications as of May 2012 and ios with >725,700 applications (>90K specifically for the ipad) as of February However, Microsoft has the opportunity to catch up in quality applications given the breadth of its developer base. Windows 8 will include the Windows Store, which will offer Metro-style applications accessible via Win 8 or the more tablet-friendly ARM-based Win RT. This means that legacy x86 applications will not be available via the Windows Store and application vendors or third parties will be responsible for the development of new Win 8 applications, which will likely take some time. However, we expect a number of important partners to announce Metro-friendly applications concurrent with the Win 8 / Win RT release, while Office 15 will be released concurrently with Win RT which will be key to consumer adoption. Additionally, over time, we believe Microsoft can differentiate its app store from ios and Android, and attract developers through better economics and features. Microsoft will also offer a dashboard to developers to provide insight into application usage, while Microsoft will offer a tiered revenue sharing model with Microsoft taking a 20-30% cut of the app rev, depending on scale, compared to 30% for ios and Android, and the economics accrue to the developer as usage scales. With 1.25 billion PCs today, according to Gartner, a developer can reach more than $1 million in revenue by targeting less than 1% of the Win base a more compelling value proposition for the developer community than other platforms. Pricing will be key for Windows. While we do not yet have any details on pricing of Win 8 tablets, our survey shows that customers want to pay less for a Microsoft tablet with Office than an Apple ipad. The maximum price consumers would be willing to pay for a Win 8 tablet with Office is $469, a 6% discount to an ipad at $500. However, we do not know what the actual bundling will look like with Office, Skype and other features. Pricing preferences may shift and Microsoft may not necessarily compete on price. Consumers are willing to pay a slight premium for a Windows versus Android device, which illustrates the potential for Windows to gain share in the mid-priced tablet market, whereas Android devices and particularly Amazon.com Kindle Fire may be more successful in the mid to low-end of the market. Additionally, Android devices are likely to capture more share in China, where a number of Chinese OEMs are coming out with modestly priced Android devices. Exhibit 29 Price Consumers on Average Are Willing to Pay for a Windows Tablet Is at a 6% Discount to the ipad Maximum Price Willing to Pay for Each Offering vs. the Apple ipad 500 Apple ipad Discount vs. ipad: 469 Microsoft Windows Google Android 446-6% -9% -11% 422 Asus Eee Amazon.com Pad Kindle Fire Transformer -16% 18

19 Exhibit 30 Hypothetical Tablet Platforms and Offerings Used in the Above Survey Question Windows 8 Tablet Google Android Tablet Asus Eee Pad Transformer Amazon.com Kindle Fire Operating System Windows 8 Android Android Android Communications Skype Google Voice, Google+ Hangout (Video) Skype Cloud Service SkyDrive Google Drive Asus MyCloud and Webstorage Online Store Special Features Windows Store and Xbox Live Prepackaged Office Suite Skype Amazon.com Cloud and Whispersync Google Play Google Play Amazon.com Appstore Google+ account settings, bookmarks, etc integration Full QWERTY keyboard and 16 hours of battery life when docked, and prepackaged with Polaris Office software Amazon.com Silk browser, and one month free subscription to Prime Microsoft license pricing is a variable that will determine the success of Microsoft and its partners. It is unclear how much Microsoft will charge OEMs for Windows 8 and Office, but we conduct a scenario analysis assuming a Windows tablet s cost of goods is roughly 0-10% more expensive than an ipad s due to lower volume discounting, while R&D and SG&A expenses are lower than for an ipad. Our analysis shows the maximum Microsoft could charge is $114 before OEMs would lose money on a Windows tablet, assuming similar component costs relative to an ipad. If Microsoft OEMs component costs are 10% higher than Apple, Microsoft could charge a maximum $82 for Windows and Office. We expect Windows 8 license pricing to be similar to PC pricing of ~$50, which suggests a $32-$64 price for Office, which may be lower than what Microsoft currently charges. However, the bundled version of Office with Windows RT will likely be a light version, so it is entirely reasonable to assume Microsoft will price it at a discount to normal editions. If Microsoft charged $50 for software, OEMs would earn a reasonable margin of ~7%, assuming 10% more expensive component prices for a Windows tablet relative to an ipad. In the near term, multiple partners could launch products and try to establish a foothold in the tablet market. While tablets with modest or flat margins are not entirely compelling, OEMs are already seeing high cannibalization rates in the PC market and a better foothold in the tablet market than Android could provide is a win. Other variables that could help OEMs price Windows 8 tablets at a discount to the ipad and still at least breakeven include lower retailer margins and/or OEMs willing to accept low- to mid-single digit margins long-term, like the PC market, vs. smartphone margins. Exhibit 31 Microsoft Windows 8 and Office License Fees Could Drive a Successful Second Tablet Platform Tablet with Wi-Fi and 16GB Scenario 1 Scenario 2 Scenario 3 ipad 3 Windows 8 Windows 8 Windows 8 Price Component Cost vs. ipad +0% +5% +10% Components Microsoft Licenses Manufacturing Total COGS Gross Profit GM 37% 8% 8% 8% R&D SG&A Total OPEX Operating Profit OPM 28% 0% 0% 0% Source: isuppli, Company Data, Morgan Stanley Research To better illustrate potential outcomes over the next two years, we present a scenario analysis of tablet OS market share. Apple is likely to maintain market share leadership in the near term, but we also expect increasing fragmentation over time, similar to that of the smartphone market. To calculate the impact to Microsoft s EPS, we analyze several scenarios that calculate potential revenue from Windows share gains in the tablet market versus incremental tablet cannibalization based on our survey results. Our current Microsoft model assumes 4% and 6% PC unit growth in CY12 and CY13, respectively, which implies ~30% cannibalization to PCs from tablets. However, our survey shows ~41% PC cannibalization, which will yield 1% PC growth in both CY12 and CY13. Using the new assumptions on PC cannibalization and growth, Microsoft may see an incremental 6 million and 17.5 million in cannibalized PCs in CY12 and CY13, respectively. However, this could be offset by incremental share gains in the tablet market. We base our assumptions on our base case forecast of 22% Windows market share in new tablet shipments, which is below the 25-30% expected purchases implied by the survey. We also assume that the Windows OS on a tablet will garner approximately the same price point as it does on a cannibalized unit, but that assumption may be conservative, given that we expect netbooks to be the most affected by cannibalization, and Windows on a netbook has a 30-40% lower ASP than on a traditional notebook. Scenario A Microsoft breaks even in CY13. ios, 55% share; Android, 25% share; Windows, 8% share. Scenario B Windows becomes third market leader. ios, 45% share; Android, 22% share; Windows, 22% share. Scenario C Windows overtakes Android. ios, 42% share; Android, 20% share; Windows, 30% share. 19

20 Exhibit 32 Windows Likely to Suffer Some Additional Cannibalization Relative to our Model but Total EPS Impact Should Be Offset by Incremental Share Gains in 2013 Incremental Scenario A Scenario B Scenario C Cannibalized Units Incremental Tablets Incremental Tablets Incremental Tablets Total Windows Tablet OS Market Share Windows 5% 8% 15% 22% 15% 30% ios 60% 55% 54% 45% 54% 40% Android 25% 25% 21% 22% 21% 20% Other 10% 12% 10% 11% 10% 10% Total 100% 100% 100% 100% 100% 100% Units Windows Apple Android Other Total MSFT Revenue Impact Cannibalized Units Scenario A Incremental Tablets Scenario B Incremental Tablets Scenario C Incremental Tablets Total Windows Market Share 5% 8% 15% 22% 15% 30% Windows Units Windows ASPs $50 $50 $50 $50 $50 $50 $50 $50 $50 MSFT Rev. Impa , , ,370 MSFT EPS Impact Source: AlphaWise, Company Data, Morgan Stanley Research 20

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