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So far, Microsoft's tablet Surface, announced today, looks like an effort to play Windows defense
06/19/2012 5:00 pm EST
Nothing here like the wiz-bang punch of Apple’s Sire voice-software or the mountain of applications that run on the Google Android platform.
As a product, you’ve got the right to ask why Microsoft bothered. After all going into the tablet business will cause friction with the PC-makers such as Hewlett-Packard (HWQ) that Microsoft partners with on the Windows platform.
But as a way to push those PC-makers into developing their own tablets to compete with Apple’s iPAD and Android machines, Microsoft’s Surface makes sense. Microsoft needs to defend the Windows and Office software that make up the core of its revenue. It needs tablets using its new Windows 8 operating system to take a reasonable chunk of the tablet market. So far the efforts by PC makers to develop and market a Windows 8 tablet have been unsuccessful. Microsoft’s strategy, I think, is to produce its own tablets to drive PC producers to make better, more competitive tablets. And, if they don’t, the company now has a fall back position: It is making and marketing its own tablet and, if necessary Microsoft could try to see if it can replicate the success of its Xbox.
I think Microsoft would prefer not to go down that road—which is one reason why, so far, the Surface will be sold through a very limited channel (online and through Microsoft’s own stores) and why the scheduled roll out of the two Surface models—one for x86 chips from Intel (INTC) and one for chips from ARM Holdings (ARMH)—is so unaggressive. The ARM version is expected to launch, along with Windows 8, in the third or fourth quarter of 2012. The Intel version is due about three months later. That would, quite possibly, push the Intel tablet past the holiday shopping season.
Margins present the best argument for thinking that Microsoft would rather see the Surface serve as a goad to PC makers in developing their own tablets than as a major product inside Microsoft. Microsoft’s operating margins on its Windows software are above 60%. The operating margin at a PC maker like Dell (DELL) was 7% in the company’s most recent fiscal year.
That doesn’t mean Surface is or can be a clunker—clunkers don’t drive product innovation. The ARM version of Surface weighs less than 680 grams (versus 652 grams for the iPad 3) and is just 9.3 millimeters thick (versus 9.4 millimeters of Apple’s tablet.)
The slow growth of the PC sector meant that Microsoft had to do something to prevent competitors in the tablet sector from sidelining Windows. PC shipments are forecast to grow by just 2.7% in 2012 according to market research company Gartner. Tablet shipments, on the other hand, are forecast to just about double this year to 116 million units. And that tablet market is dominated by Apple and Android. Apple’s market share alone is projected to climb to 62.5% in 2012 from 58.2% in 2011 by market research company IDC. Partly as a consequence, sales in Microsoft’s Windows software unit have missed Wall Street estimates in four of the past six quarters, according to Bloomberg.
Microsoft didn’t announce one key product detail today—the price of the Surface tablet is still to come.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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