Microsoft's Surface tablet is a measured gamble to enter the cutthroat tablet business, but the company could be alienating longtime hardware partners that are also expected to announce Windows 8 devices starting later this year.
The Surface tablet models come with a 10.6-inch display and will be distributed directly to customers, via Microsoft stores and the company's online store. Microsoft's goal is to offer a package of hardware and software built around Windows so the company can effectively compete with Apple, which offers the iPad and iPhone devices running on the iOS platform, analysts said.
Microsoft is offering two tablets, the Surface with Windows RT for ARM processors, and the Surface Pro with Windows 8 Pro for x86 Intel processors. The Surface tablet with Windows RT is lighter and comes with Office 15, which includes widely used productivity applications such as Word and Excel. Microsoft's new tablets will come with a kickstand and a thin cover that doubles as a keyboard and trackpad.
The creation of its own tablet is a sign that Microsoft has lost faith in PC manufacturers to develop devices that can take advantage of the Windows OS, analysts said. Apple has dominated the tablet market, and Microsoft had to take hardware development into its own hands as PC makers were not generating enough excitement to drive interest in Windows 8. Companies like Dell, Hewlett-Packard, Acer, Asus and Lenovo are expected to come out with tablets running the upcoming Windows 8 and RT operating systems.
If the Surface tablets become successful, Microsoft could potentially be stealing future revenues from its partners who view the tablet segment as profitable, said Roger Kay, principal analyst at Endpoint Technologies Associates.
"I have to believe that [the partners] are fairly discontent about it," Kay said. "The tablet is the heart and soul of Windows 8, and it looks like Microsoft has reserved it."
Microsoft has licensed Windows to hardware makers for PCs since the 1980s, but that business model may be getting antiquated, Kay said. Microsoft may be seeking a new business model around tablets, but at the same time the PC market is not going anywhere and Microsoft wants to retain its Windows licensing business, Kay said. Microsoft may be experimenting with a new tablet business model, but the software company will have to strike the right balance in maintaining a relationship with the PC makers on tablets and PCs.
Shaw Wu, a financial analyst at Sterne Agee, agreed, saying Microsoft's tablets could eat into the sales of devices from Windows partners. The full impact of Microsoft's tablets on PC makers has yet to be determined, Wu said in a research note sent on Tuesday.
The Surface is crucial for Microsoft to establish a presence in the tablet market and to compete with Apple, said David Daoud, research director for personal computing at IDC. Microsoft's move to tablets came likely because PC makers failed to take the lead in making tablets good enough to compete with Apple, Daoud said.
"[Device makers] have been lagging in terms of creativity," Daoud said.
Apple's iPad dominates the market while competitors have stopped making certain tablet models or are trying to catch up. Hewlett-Packard last year discontinued the TouchPad, while Dell has discontinued Streak consumer tablets, and both companies are now planning to re-enter the consumer tablet market with devices based on Windows 8. Tablets with the Android OS offered by companies like Samsung, Asus, Acer and Lenovo have not sold as well as the iPad.
Microsoft had to take the lead in development as device makers were not willing to spend on research and development, Daoud said. Device makers are making razor-thin margins on consumer PCs and tablets, and have limited spending on innovation in tablets. Ultimately Microsoft's lead with the Surface tablets could inspire device makers to release the next-generation Windows hardware and get a better understanding of the software and hardware ecosystem, Daoud said.
"The move is somewhat predictable. What is unpredictable is Microsoft taking the lead on the hardware side," Daoud said.
At the start, Surface tablets will only be available through Microsoft Stores and online, which limits adoption potential, said Sarah Rotman Epps, an analyst at Forrester Research, in a blog entry. But a larger struggle for buyers revolves around distinguishing the Windows 8 and Windows RT tablets, she added.
"Selling x86-based tablets in the same retail channels as Windows RT tablets will confuse consumers and sow discontent if consumers buy x86 and think they're getting something like the iPad. Microsoft and its partners need to articulate a compelling strategy for how they will manage consumer expectations in the channel," Rotman Epps wrote.
But with or without the help of device makers, Microsoft is now gearing up to battle Apple.
"They have to do something, they can't just sit there and let Apple take over the world," IDC's Daoud said.
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