Microsoft's measured gamble

Microsoft's measured gamble

New Surface tablets could bite into sales of tablets from Windows 8 and Windows RT licensees, analysts say.

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." See sidebar on next page:

Pricing seen as key to success of Microsoft's Surface tablets

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.Pricing seen as key to success of Microsoft's Surface tablets US$600 for a Windows RT tablet could have customers walk away, analysts say

By Matt Hamblen

Microsoft needs to hook customers with better pricing if it wants to capture market attention with its new Surface tablets, analysts said Tuesday.

Microsoft said it will roll out the Windows RT version of Surface with prices in line with Windows RT machines from makers such as Asustek Computer. Asus has shown a Windows RT tablet, but has not announced pricing or availability.

The Windows 8 Pro version of the Surface will be priced in line with Intel-powered ultrabooks by other vendors, Microsoft said. Those guidelines could put the Windows RT Surface at more than $600, and the Windows 8 Pro at more than $700, and possibly higher, several analysts said.

But those prices are too high to win favor with buyers who might be intrigued by the innovative Surfacetablets with their attachable keyboards that double as covers, analysts said.

Jack Gold, an analyst at J. Gold Associates, said that $600 for a Windows RT Surface tablet would be a "non-starter." Even $500 would probably be too high unless that price includes a cover/keyboard, he said.

"I think the Windows RT version needs to be in the $400 range to compete with older iPads and the new Android devices," he said. The new iPad starts at $499.

Gold said a Windows 8 Pro Surface will probably cost US$600 to $700.

Tom Mainelli, an analyst at IDC, said he assumed that the cover/keyboards will be sold separately, which could raise the costs substantially, possibly by $100 or more.

"All Microsoft said was that they will be competitive to comparable products, and I assume the covers will be separate," he said. "They spent a lot of time on the covers, so what will a $600 [Windows RT] tablet and cover cost? That will change [a buyer's] liability a lot."

If the Surface Type Cover, the one with keys that have an up and down motion, costs $150 on top of the price of the Windows RT, that "could make it a tough sell all of a sudden," Mainelli said in a separate interview.

The other new cover/keyboard is called a Touch Cover, with keys inside of a 3-mm-thick pad in multiple colors and a cloth-like feel. The Touch Cover's keys don't move up and down much when pressed, but there is still some movement as compared to no movement when touching a capacitive touchscreen keyboard, based on a Computerworld quick hands-on experience.

Both covers work for both Surface tablets and are the same height and width, although the Type Cover is thicker and has more symbols printed on its top key row for application shortcuts.

One advantage for Microsoft, as the hardware innovator in Surface tablets, is that it won't have to pay the software license fees for Windows RT or Windows 8 Pro that Microsoft charges OEMs (original equipment manufacturers).

That OS license to OEMs has been pegged at $85, at least for the Windows RT license, according to reports, which might cut out most of the cost Microsoft could charge for a cover/keyboard.

"Microsoft realized it came to market late and couldn't afford to miss [making a great product] out of the gate," Mainelli said. "They want to create a product that's competitive to Apple's iPad. They clearly believe to do that, is to make it soup to nuts ...

"And I thought what they said about Surface looked compelling," he added. "But we don't know how compelling Surface is until we find out pricing."

Microsoft hasn't said when pricing will be announced, but if the Windows 8 operating system ships on time in October, pricing for the tablets should be known well before then, certainly by the end of August, analysts said.

Another potential value that could lure customers to the Windows RT Surface is having four free Office apps included. Microsoft has dangled the included Office apps before buyers in recent weeks, which could raise the tablet's value by $100 or more.

However, If Microsoft includes the Office apps and still charges $600 without the cover, it might end up being priced too close to the cost of the Windows 8 Pro machine without the cover, starting at perhaps $700, some analysts said. (Gold disagreed, saying that a $100 difference in price between the Windows RT Surface and Windows 8 Pro Surface is a "lot.")

If pricing for the two Surface tablets is close, buyers could get confused on which Surface tablet to pick, unless they are more sophisticated enterprise buyers who are settled on the Surface tablet for Windows 8 Pro to access Windows apps.

Possible confusion over pricing and model features isn't good, given Microsoft's precarious start in tablets.

Forrester Research Sarah Rotman Epps criticized Microsoft for selling Windows 8 Pro and Windows RT Surface tablets in the same retail stores. Some buyers could get confused between the two versions sowing "discontent" with Microsoft if their expectations aren't met, she said.

Sowing discontent with customers isn't a good starting point for Microsoft and its new hardware, but finding the right price for Surface tablets could serve as a form of redemption.

Mainelli summarized Microsoft's potential dilemma this way: "Microsoft believes that Windows RT tablets should command a premium price. I keep telling them that they're playing from behind in both market share and in terms of available apps.

"I'm not sure that consumers will immediately get the Windows RT story. They will think, 'So it's Windows but it doesn't run my old Windows software?' That means Microsoft has to hook customers with a great product at a great price."

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