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Is This Microsoft's Biggest Mistake Ever?

Microsoft (NASDAQ: MSFT  ) may not know it, but it's about to serve up a whole lot of trouble.

The software giant's decision to expand distribution of its Surface tablet to third-party retailers is bold, but it may also be incredibly stupid.

Retailers are hopping on the opportunity. Best Buy (NYSE: BBY  ) started selling Mr. Softy's tablet at its online store this afternoon, promising availability at its brick-and-mortar stores by Sunday. Other chains will follow.

However, what if Surface is a flop? What if offering the tablet through merchants already selling Windows-propelled tablets and PCs rub Microsoft's hardware partners the wrong way? What if this is the end of Windows?

Each of those questions is meaty, so let's take them one at a time.

What if Surface is a flop?
We really don't know how well the tablet's been selling since its late October debut.

Surface availability is presently limited to shoppers and the roughly 70 Microsoft stores and holiday kiosks selling them.

This was actually a brilliant strategy, because Microsoft can play itself up as a success with no one there to call it out.

"It controls the supply," I wrote at the time. "It can blur the demand."

However, expanding its reach is dangerous. If Surface isn't selling at one of its pop-up kiosks, no one knows. If consumers see the Surface and choose cheaper Android tablets or the iPad's richer ecosystem at the local Best Buy, Microsoft will be exposed. This is exactly what doomed the webOS TouchPad and the BlackBerry PlayBook, as both tablets quickly saw their selling prices cut by more than half in the clearance bin.

What if this move rubs Microsoft's partners the wrong way?
The Surface not selling would be a problem, but selling well could also be problematic.

Microsoft isn't the only company putting out tablets powered by Windows RT. It won't be the only one putting out the more functional and powerful Windows Pro gadgets next year.

How will the companies paying Microsoft for operating system licenses feel if the software giant is now a direct competitor at the retail level? One can argue that Google (NASDAQ: GOOGL  ) did the same thing with its Nexus tablet and smartphone, but keep in mind that Android is freely available as open source. Google doesn't possess a cost advantage -- and it's also using one of its partners as the hardware manufacturer. That isn't the case at all with Microsoft and Windows.

Hewlett-Packard (NYSE: HP  ) -- still stinging from its TouchPad flop -- is still the world's largest PC maker. If it has less of a reason to support Windows in either PCs or tablets, what will that mean for Microsoft?

What if this is the end of Windows?
Microsoft knows the importance of partners. It's cut big checks to Yahoo! (NASDAQ: YHOO  ) in search and Nokia (NYSE: NOK  ) in smartphones to amplify its position.

Consumers are already turning away from Windows-fueled products. You see it in the way that PC sales have stalled as smartphones and tablets -- where iOS and Android are the operating systems of choice -- are thriving.

If Microsoft's seemingly modest move of expanding Surface distribution into the real world -- and that's anywhere outside of its dozens of Microsoft Store locations -- sends the wrong message, losing hardware partners could be the end of the iconic operating system as the industry standard.

Yes, it's just one move by Microsoft, but it's so much bigger than just pulling up a delivery truck to one of the bays in the back of your neighborhood Best Buy store.

Hard times for Mr. Softy?
It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

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 December 12, 2012, at 7:47 PM, matthewluke wrote:

    "Hewlett-Packard (NYSE: HP ) -- still stinging from its TouchPad flop -- is still the world's largest PC maker."

    I thought Lenovo was the world's largest now (as of a few months ago). I could be mistaken though.

  • Report this Comment On December 12, 2012, at 8:35 PM, chilero wrote:

    The other side of the coin is ... what if they don't?

    The OEM's are notorious for pawning off junk and bloatware on consumers. That always comes back to reflect bad on MSFT and Windows instead of the OEM. Without some serious quality and beautiful designs for the consumer to choose from their tablet strategy goes nowhere.

    They have also been advertising the product so much, that now, when someone enters a Staples, Best Buy, Harvey Norman or wherever, they will know what the Surface is. 2-3 months ago nobody would have known about it and the probability of it hitting the discount bin would have been much higher.

    What if it turns out to be their best move ever? Surface starts selling really well. If consumers want a cheaper device they may choose a product from an OEM with Windows 8 instead of Android because it, sort of, resembles a Surface. Maybe it gives a boost to the whole Windows 8 ecosystem and draws more attention to ultrabooks and even desktops with Windows 8.

    Maybe people will see how they all work seamlessly together. Start your document on the ultrabook at home, continue on the desktop at work. Finish it up on the Surface at Starbucks.

    They have already invested in and taken the risky bold move of making the innovative Surface. Why not see it through and put it side by side against the iPads and Android tablets. It might pay off big.

  • Report this Comment On December 12, 2012, at 11:32 PM, Nomadder wrote:

    What are the reasons for getting a Windows tablet/device? From my view, I only see two subservient reasons that can be part of a larger reason:

    1. Office

    2. Actual, honest-to-goodness PC games on your tablet (or whatever). (or other legacy programs you may care to run)

    These lead to:

    3. Eliminating the need to travel with two devices (tablet/laptop).

    Windows RT eliminates number 2, and thus eliminates number 3 for many people.

    There is another possible reason, but the liklihood of many people buying an RT tablet for it is about as likely as people buying a Playbook:

    4. They want a tablet, for the sake of buying a tablet, and prefer an RT device to one from Apple or Android.

    Why anyone would prefer an RT device is unclear as it cuts out the biggest (only?) advantage MS had here. It's like they don't get what makes a Windows tablet (potentially) special and decided to marginalize the real thing by releasing it several months after the reduced-functionality version, and at a ridiculous price point.

    This is coming from someong who has a Lenovo Twist S230 being shipped at this very moment.

    I might have bought a Surface Pro if it were out now. Thankfully, it isn't and I ended up finding a hybrid device with better features.

    What in the world are you doing, Microsoft?

  • Report this Comment On December 13, 2012, at 10:20 AM, techy46 wrote:

    Surface RT is the bait and the switch is Surface Pro with Atom Inside, Clover Trail and i5 followed by Valley View. The I'm an Apple vs PC is really passe for the I'm an Idiot vs IT worker reality. Sure BYOD sounds catchy but who really cares.

    I was looking to buy a Asus Vivotab or Dell XPS 10 but now I'll probably get a Surface RT from staples and then a Surface Pro once the holidays lead to the traditional post year end sales.

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