The Unexpected Winner in the Tablet War

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I feel like a goat in a cheap petting zoo -- I've got Apple (Nasdaq: AAPL  ) fatigue. No offense to the products, but I need something new. Yesterday, Amazon.com's (Nasdaq: AMZN  ) Jeff Bezos stood up and offered me a new Kindle Fire HD, which is excellent. I mean, it would be more excellent if there weren't already a bunch of Android tablets out there, but I'm sure it's going to do wonders for Amazon. So what do we, the new-or-nothing consumers, have to look forward to?

Getting things done
Thank goodness for some old-fashioned Microsoft (Nasdaq: MSFT  ) action. There was a time in my life when I really disliked Microsoft. I thought the company was a bunch of corporate predators that made things worse for consumers -- and that was probably true at the time. But now, Microsoft has turned over a new leaf, and the weather in the shade is very nice. Investors who are interested in game-changers should have a look and ignore all the bluster coming from Apple and Amazon.

To preface this correctly, let me be clear: The new Surface tablet is not going to substantially damage Kindle or iPad sales. It's going to succeed on its own, because it's not competing with iPads. Microsoft is pushing the fact that the Surface is a tablet that you can actually do work on. This means that while the iPad and Kindle battle it out for playtime use, the Surface can slide in and take the place of a laptop, getting used for accomplishing real work.

The pricing problem
The new iPad Mini is still a glimmer in Apple fans' eyes, but the rumors tell us that the launch will come with a low $249 to $299 price tag. That puts it in direct competition with the Kindle HD, which is going to run $299 for the full-sized version. The Kindle is going to be fighting the uphill battle, with Apple having nailed the consumer experience already, but customers have been happy to purchase the Kindle Fire and also regularly drop $499 on a full-sized iPad.

Microsoft is a bit on the back foot when it comes to pricing. On one hand, it isn't competing for the same sorts of customers, focusing on laptop replacers instead of media consumers. On the other hand, once buyers see that tablets cost around $300, they'll expect every tablet to cost around $300. So far, Microsoft hasn't announced a price, but with Amazon reportedly breaking even at best, there's going to be a danger that the Surface comes in closer to the iPad's $499 mark.

The potential solution
Microsoft could skirt the whole pricing problem if hardware sales weren't the main goal. Amazon made an interesting point its announcement when it referred to the Kindle as a service. Amazon is hoping to reap the financial rewards of customers who are locked into its product, just as console-gaming companies have been doing for a while.

The Surface could follow this pattern, selling low to get users hooked on the Windows tablet platform. Then the company could simply bow out, letting other hardware producers such as Samsung or Nokia (NYSE: NOK  ) make the next-generation tablets. All the while, Microsoft is sitting back, flush with the cash it's earning from sales of Office. That sounds like a better plan to me, and if the success of the Xbox is any indicator, Microsoft should have the wherewithal to launch a successful loss-leader tablet.

The bottom line
That's what I'm expecting, and that's what makes Microsoft a great play for tablets. I anticipate seeing the Surface as the first of a long line of Windows tablets, and the last one made by Microsoft. The company doesn't need to make the hardware to sell the software, but by creating the first version, it lays out a blueprint for other companies to follow in later iterations. By focusing on content creators, instead of content consumers, it ends up not having to compete with Apple or Amazon. That's a smart move.

I'd be worried only if the Surface came in at a substantially higher price point, or if it had a bad Christmas. I think a good anecdotal check-up is expecting to see at least one Surface per airplane flight, if you fly over the holiday season. You can also keep up to date with all these tablet producers by signing up for our company-based special reports. We've got Microsoft, Amazon, and Apple reports, just for Fool readers.

Fool contributor Andrew Marder owns none of the stocks mentioned in this article. But he will be buying a Surface, so that he can write in the park. The Motley Fool owns shares of Amazon.com, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Amazon.com, creating a bull call spread position in Apple, and creating a synthetic covered call position in Microsoft. We Fools don't 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. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 08, 2012, at 8:17 PM, aeosfool wrote:

    Holy cow..how you call it the winner when they have released so little information on it. And when are they going to actually release it..and at what price.

    It seems like a lifetime since Microsoft introduced the surface..it really faces the prospect of being totally forgotten even before it's released. People keep saying invest in Microsoft, invest in Microsoft as new products are coming. I and a lot of other people are probably going to be moved on to the next great thing by the time Microsoft gets around to releasing those products...like we all have moved on from Blackberry products waiting for their new products.

  • Report this Comment On September 08, 2012, at 8:54 PM, techy46 wrote:

    Me thinks, based on everything I've read, tthat Microsoft can price Surface RT at $299-399 and Pro at $799-1099 and sell 25m in the first 12-14 months. If Nokia can sell 25-32m Lumia 610-950, yes 950 will come out at CES 2013, then Microsoft may be right about 400m W8 and WP8 devices in 2013 with a little help from Dell, HP, Lenovo and Samsung.

  • Report this Comment On September 08, 2012, at 10:48 PM, applefan1 wrote:

    I don't see Microsoft selling the surface for anything less than what the iPad is priced at with a similar amount of storage. Microsoft has to make a profit in these things. They have to make a profit on the hardware, if they are selling these things at a lost leader and not making a profit, they'll end up dropping out. They have to set the price for these things where the company is profitable, plus their OEM mfg have to make a profit as well. Most of the components have a similar price. Microsoft can't sell these things at a low profit margin, it will affect the company's bottom line.

  • Report this Comment On September 09, 2012, at 5:21 AM, gsagi wrote:

    "I feel like a goat in a cheap petting zoo"

    yup!

    nailed it.

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