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3 Things to Watch with Microsoft Surface

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Microsoft (Nasdaq: MSFT  ) unveiled a tablet device earlier this week called Microsoft Surface, in hopes of catapulting itself into the hardware business. The news ties into the software giant’s plan of increasing its mobile market share to better compete with Apple (Nasdaq: AAPL  ) and Google in the space. Looking to the future, there are three things investors should keep an eye on, as Microsoft shifts to include hardware.

No. 1: Pricing
If the company wants its new tablet to do more than simply scratch the surface, it needs to sell the device at a competitive price point. While an exact price has yet to be announced, what we do know is that there will be two versions of the product. The first is said to be relative in price to competing tablets such as Apple’s iPad, and will feature ARM Holdings chip technology. This is new for Microsoft because, until recently, Windows predominantly ran on Intel-based processors.   

Then there’s a more expensive version of the device, which will run on Intel (Nasdaq: INTC  ) based chips. This is a big win for Intel, as the company has struggled to get its chips into mobile devices. In the past, Intel’s processors consumed too much battery for use in mobile products like smartphones and tablets.

However, I doubt consumers that will be choosing between the iPad and the Intel version of Microsoft Surface. That’s because the Intel-powered model will likely be significantly more expensive than the newest iPad, which starts at around $499. Yet, a Windows 8-based tablet, powered by an Intel processor, makes one thing clear: the line between PC and tablet is quickly fading.

Still, even with its lower-priced ARM powered tablets, Microsoft won’t win this war with aggressive pricing alone. Let’s not forget that the company follows others into the space, such as Research in Motion (Nasdaq: RIMM  ) and Hewlett-Packard (NYSE: HPQ  ) , both of which entered with attractively-priced devices of their own that ultimately failed.

RIM came to the table with the Blackberry Playbook, but without the email capabilities that Blackberry was known for and, with a limited app ecosystem, the product bombed. Meanwhile, by the time Hewlett-Packard released its HP TouchPad, there were already newer versions of competing tablets available, like the second-generation iPad. In the end, it was a tale of “TouchPad, who?”  

No. 2: Watch for a PC partner fallout
While Microsoft dabbled in hardware before with its Xbox gaming console, the company has jumped into a whole new ballgame. Microsoft needs to find a way to keep the peace between itself and its hardware partners, like Dell and HP, as it becomes more integrated. Not only do these companies still have to pay licensing fees to Microsoft for Windows 8, but their tablets will now have to compete with Microsoft Surface.

Harming longtime partnerships with OEMs could upset its software business if these tablet makers chose to go another way, say, with Google’s Android platform. However, it’s unlikely, because the Windows will be a key differentiator for these devices. Nevertheless, it’s still a risk that Microsoft is taking.

The software giant already hurt some feelings when it announced the tablet earlier this week. According to reports from Reuters, Microsoft alienated some of its vendors by keeping them in the dark about the tablet until just days before the company unveiled the device publicly. Going forward, Microsoft needs to be much more transparent if it wants to maintain balance in the business.

No. 3: Mobile execution
Microsoft’s venture into hardware proves that the company is serious about increasing its share of the fast-growing mobile market. The new Windows 8 operating system was designed to work on both tablets and smartphones. Could this mean that we’ll see Microsoft show hardware partners how it’s done in the mobile phone arena, as well?

Microsoft making its own smartphone is not in the cards, at least not yet. Hardware for the upcoming Windows Phone 8 will come from partners such as Nokia, Samsung, and HTC. With the new phones expected to ship this fall, the devices will face fierce competition from Apple’s next generation iPhone, and new Android products.

Still, this is an important step for Microsoft as it struggles to secure a spot in the crowded mobile computing market. The move proves that the tech titan is capable of business model innovation. This is critical for all companies today given the rapid pace of change, though more so in the tech industry. As a result, I think Microsoft will grab a larger piece of the mobile pie to eventually pass RIM. That’s why I’m giving the company an outperform rating on my profile in Motley Fool CAPS.

The tech sector can be both rewarding and devastating for investors. Companies like Apple and Microsoft can fall behind with even the slightest misstep, as we’ve seen recently with Nokia and RIM. Fortunately, the Motley Fools’ leading analysts have outlined the next big technology up-and-comer in a special free report. Click here to get your free copy now and discover: The Next Trillion Dollar Revolution.

Foolish contributor, Tamara Rutter owns shares of Apple and Intel. Follow her on Twitter, where she uses the handle: @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Microsoft and Intel. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Intel. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On June 23, 2012, at 11:08 AM, deemery wrote:

    I think "product quality' will be equally important as these three factors. Will Surface Windows 8 be another Vista? Will the production model have the kind of hangs and delays we saw during the demo? And will this tablet, running Windows, be subject to the kinds of chronic virus attacks that characterize Windows desktops/laptops?

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Tamara Walsh

I've been an analytical writer for The Motley Fool since 2011. I cover the sectors of Consumer Goods, Technology, and Industrials. Connect with me on Twitter using the handle, @TamaraRutter -- I'd love to hear from you!

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