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Thursday, April 14, 2011, 06:20 pm PT (09:20 pm ET)

Palm, Facebook investor changes tune on Apple over iPad, apps

In a marked shift from his former belief that sales of the iPhone would dry up after two years, Roger McNamee, a prominent venture capitalist who has invested heavily in Palm and Facebook, said in an interview that Apple will likely lead a 10-year technology growth cycle with the continued success of the iPad and its App Store ecosystem.

McNamee, a founding partner in venture capital firm Elevation Partners, gained notoriety in 2009 after making overstated claims about Palm and disparaging remarks about the iPhone.

At the time, McNamee claimed that “not one” person who bought the original iPhone “will still be using an iPhone a month” after the end of their two-year contract, suggesting they would all defect to Palm's webOS platform.

McNamee's comment was later retracted for being "an exaggerated prediction of consumer behavior pattern," according to Palm and Elevation lawyers.

Two years later, McNamee has changed his mind about Apple and now believes that the company will lead a post-PC technology boom, even as rivals Google and Microsoft may stumble, as revealed by a recent interview with CNBC.

Windows down, Apple up

"This is the cycle where [Microsoft Windows] stops growing," said McNamee. "I think the availability of iPads and smartphones is allowing corporations to trade down and eliminate the $1000 expense per year of supporting a Windows desktop.

"This is the year where Microsoft has fallen below 50 percent of internet-connected devices, down from 97 percent 10 years ago. So what you're looking at is we're going to free up over $100 billion of revenue over the next few years per year in that category."

McNamee sees much of that revenue going toward tablets, especially Apple's iPad. "At the same time, you've got the rise of tablets, which I think will replace them to a certain extent.

"Think of this as Windows goes down and Apple rises, and maybe other people do too, but that's a big thing," he said.




Web vs. Apps

According to McNamee, Apple is currently winning a battle with Google for control of the Internet. One on hand, Apple is pushing an 'app model,' while on the other, Google leads with traditional index search.

"If you think of Google as the leader of the World Wide Web group, their problem is that the underlying software for the Web, what's called HTML hasn't changed for a decade. And as a result, we haven't been able to have a bull market. There hasn't been enough opportunity for innovation. The only things that have slid through are Google and then the social companies," said McNamee, adding that he has invested heavily in Facebook and Yelp.

"The thing that I think is so powerful here is that right now Apple is just killing the World Wide Web. Peope are adapting iPads and iPhones at a rate: Apple will do almost 100 million units this year. I mean, the numbers are staggering."

"Google is still a great company and still growing but it's losing influence because the success of index search essentially has caused pollution to go into it." McNamee pointed out that index search has dropped from being 95 percent of searches a few years ago to just 50 percent of searches, as more specific searches on Wikipedia, Facebook, Twitter and Yelp have taken off.

However, though Apple is winning now, McNamee did note that HTML5 will be a major upgrade to the World Wide Web infrastructure and should give a boost to content producers.

McNamee said the new growth cycle, driven apps, HTML5 and tablets such as the iPad "will start slowly, but I think this is literally one of those mega-cycles like the Internet cycle that began in 1994 that goes on for 10, 12, 15 years."

When asked whether investors should simply short Microsoft, Dell, Intel and go long on Apple and Facebook, McNamee replied, "It's much more complicated than that, but it's directionally right."

According to McNamee, Microsoft is "going to be fine" because it can leverage its monopoly on corporate email to raise prices on Exchange. But, for Dell, Intel and other partners in the Windows ecosystem, "it's going to be brutal on them."

McNamee's recommendation for a "perfect hedge" is long Apple and short Google, which "would give you a positive return in almost every period from here on out."

The rise of tablets

When asked to comment on players other than Apple in the tablet market, McNamee remarked that HP has a chance, if it can move fast enough, while expressing skepticism about the Google Android tablet opportunity.

"We were a big investor in Palm and HP bought the Palm technology, which was really designed to do tablets as well as phones. They could have a compelling product if they get it out soon enough and if they can promote it. And HP's a very very strong player in consumer electronics and I think they are very credible," he said.

Beginning in 2007, Elevation Partners invested over $400 million in Palm as the company struggled to turn itself around. The influx of cash, however, wasn't enough, and in April 2010, HP acquired Palm for $1.2 billion.

Earlier this year, HP revealed its plans to release a webOS-based tablet, dubbed the TouchPad, later this summer.
Palm 1


As for the Android market, McNamee expressed a lack of excitement. "The problem is nobody makes any money from it. You know, Google doesn't protect the hardware guys. There's no anti-virus protection on it.

"I'm just really worried about the day if you own an Android tablet when some 16 year old kid in the Eastern Bloc presses a button and erases everybody's hard drive. Seriously."

McNamee also referenced a number of Android apps that had been removed for stealing credit card numbers, calling the Android ecosystem "too Wild West" for him.

Ultimately, McNamee sees Apple continuing to lead the tablet market, with a bull case scenario of as much as 70 percent market share.

"Everybody says Apple's going to end up with 10 or 15 percent market share in tablets and that may be the most likely case, but what if they wind up with 60 or 70 percent, what if it's closer to iPods. Then Apple's going to be the biggest hardware company by a mile."