Is Microsoft's Tablet Simply Misunderstood?

This week, research firm IDC released its latest projections for the tablet computer market, showing that for the entirety of 2013, Microsoft (NASDAQ: MSFT  ) is expected to grab nearly 5% of the market. While the thrust of the report was that for the first time Google's (NASDAQ: GOOGL  ) Android is expected to take the market share lead over Apple's (NASDAQ: AAPL  ) iOS, there was some critical information about Microsoft's position within the market. IDC projects that the overall tablet market will continue to grow at a rapid pace, and Microsoft is expected to experience the largest percentage increase among all three players. If the company is able to learn something from this report, it may be able to grow its share even more rapidly than expected.

Microsoft's role in the tablet market
Last fall, Microsoft released its first computer -- a tablet dubbed the Surface RT, to differentiate it from the Surface Pro. The former runs a light version of the Microsoft operating system, and the later runs a full version of Windows, yet both exist in the tablet form factor. These devices have received mixed reviews, with some commentators believing that the Surface Pro in particular has the chance of changing personal computing, while others see it as functioning well as neither a tablet nor a laptop.

Because each has its own operating system, IDC breaks each out separately in its report. According to projections, Windows is expected to command a 2.8% market share in 2013, and Windows RT is expected to get 1.9%. The size of the overall market is expected to swell to 190.9 million units, up from the 172.4 million that IDC had predicted at the time of its last report. Future growth is expected to bring the total size of the market to 350 million units by 2017.

Looking forward, IDC expects Microsoft to grow its Windows tablet market share to 7.4% by 2017 and its Windows RT market share to 2.7%. The combination would give Microsoft more than 10% of the tablet market and represents 35 million units by that date. When compared with the numbers for Surface and Surface Pro thus far, that represents explosive growth.

Apple and Google's relative role
If the pattern in tablets follows what we've seen in the smartphone market, Android will continue to grab market share by offering far less expensive devices that appeal to broader demographics. This phenomenon is even more pronounced in the tablet market, because so much tablet use can be accomplished through Wi-Fi networks. That means there are few subsidies available on tablets, so price is an even bigger concern. The cost spread to consumers for top smartphones is never more that $100 or so; the number is far larger in tablets. If Apple remains the premium choice at a higher price and Google appeals to the low-cost market, Microsoft will have clearly defined competition in each space and should be able to react accordingly.

Two areas of concern for Microsoft
The first area of concern for Microsoft is the split focus. Tom Mainelli, research director of tablets at IDC, said:

Microsoft's decision to push two different tablet operating systems, Windows 8 and Windows RT, has yielded poor results in the market so far. Consumers aren't buying Windows RT's value proposition, and long term we think Microsoft and its partners would be better served by focusing their attention on improving Windows 8. Such a focus could drive better share growth in the tablet category down the road.

While I agree with the sentiment, I wonder if this isn't something Microsoft already understands. I allow for the possibility that the Surface RT was a way to do a soft rollout on the product before the full Windows version launched. Microsoft has made no mention of scrapping the RT version in the immediate term, but I believe it served its purpose, perhaps exactly as envisioned. Over time, the company will need to streamline its offerings, but as that occurs, a low-cost, full-Windows version will need to be released.

The second issue facing the Surface is its size. IDC reports that roughly half of the tablets shipped so far this year are of a smaller form factor. IDC's Jitesh Ubrani explains: "Vendors are moving quickly to compete in this space as consumers realize that these small devices are often more ideal than larger tablets for their daily consumption habits." Neither of the Surface devices are currently available in a smaller size, so this may be constraining sales.

Overall, Microsoft is very well positioned to see significant growth in the segment. Even if the company only meets these estimates, this is a major uptick that warrants including the stock in your portfolio. If Microsoft can bring a successful Surface Mini to market and simultaneously turn the tablet into a productive Windows device, it may blow these numbers away. The company wasn't the focus of the news, but it may be the biggest beneficiary.

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.


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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 March 13, 2013, at 10:45 PM, H3D wrote:

    "IDC projects that the overall tablet market will continue to grow at a rapid pace, and Microsoft is expected to experience the largest percentage increase among all three players. "

    Of course Microsoft will have the largest percentage increase.

    It sold 0 tablets last year. If it sells one tablet this year then that enough to get the largest percentage increase.

  • Report this Comment On March 13, 2013, at 11:09 PM, benrhanson wrote:

    I have a Surface RT tablet. I've really enjoyed it, but I would definitely buy a Surface Mini in a heartbeat- it's amazing how a few inches of screen size changes its portability compared to 7 inch tablets.

  • Report this Comment On March 13, 2013, at 11:34 PM, techy46 wrote:

    Microsoft's tablet isn't misunderstood but Windows users are misunderstood. Windows consumers don't need a 10" tablet to replace their 14-16" notebooks. Microsoft's consumers will buy devices like Lenovo's Z400 Touch, available now, and Z500 Touch, this summer, when the prices for touch screens, SSD and Intel's 3D 22nm Atom (Bay Trail) lower the prices to those set for non touch HDD devices; $500-700. Windows consumers may buy a Surface RT for $299 or a Surface Pro for $599 when the component costs make those prices available. In the meantime, we really have everything we need until later in 2013 when the real Windows 8 devices are available.

  • Report this Comment On March 14, 2013, at 1:09 AM, NoWindows8LockIn wrote:

    This is a very strange article. Everything in it goes something like...

    1. "Microsoft's product is crappy."

    2. Microsoft is well-positioned to do extremely well in the market.

    Gee, I wish I had taken a logic course in college.

  • Report this Comment On March 14, 2013, at 1:15 AM, NoWindows8LockIn wrote:

    Microsoft bet the farm on customer lock-in, and right now, the house (we Microsoft's long-time users) is winning.

    If you are an investor, reading this comment, do yourself a favor: find a hard-core engineer who knows the Windows ecosystem inside-out, pull him/her aside,and ask him/her to explain, in plain English, Microsoft's vision. There are plenty of engineers who will do that for you for a beer.

    If you had any idea what they are trying to accomplish with Windows RT, Windows 8, cloud services, Microsoft Account, all that stuff, you would be absolutely appalled.

    It is do or die, and so far, they are dying.

    I have been "with" Microsoft since 1985, and I can tell you, 2013 is the first year that I saw real vulnerability. Utterly frightening, to say the least. Trust me on this. Go get a clue from someone in-the-know.

  • Report this Comment On March 14, 2013, at 10:30 AM, rodgerreno wrote:

    so,this nonsense about tablets is not what will be 'in vogue' in 5 years.all will be replaced by eye ware.you will probably have a belt clip-on to house most of the electronic gear.

    google glasses and other peoples glasses are not new.they have been in the r&d department for more than 20 years.the biggest problem for their release is probably safety related distractions.they represent the move of peripherals/imput/output into virtual reality

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