Let's face it: Microsoft (NASDAQ: MSFT ) hasn't adapted very well to the age of low-cost computing. At a time when the price an OEM pays for a competitive operating system (Android) is close to $0, Microsoft is having an increasingly difficult time selling OS licenses in mobile form factors. Android OEMs still have to collaborate directly with Google (NASDAQ: GOOG ) for services support and typically pay Microsoft royalties, but that is still less than what they are accustomed to.
Microsoft has actually already been through an eerily similar situation in the past, though, one that has arguably tarnished the Windows brand forever: the netbook.
While netbooks are more or less dead nowadays, they heralded the age of low-cost computing, lowering what consumers were willing to pay for a PC. Microsoft was primarily responding to the threat of Linux, which powered early netbooks, but Microsoft had to cut the price of Windows XP to compete.
Sadly, the net result was that "netbooks did an incalculable amount of damage to the PC market," according to market researcher NPD. Even Windows enthusiast Paul Thurrott acknowledges how the netbook tarnished consumer perception of Windows, noting NPD's estimates that there was an incredible $1,000 difference between the average selling price of a Windows PC and an Apple MacBook last holiday shopping season ($420 vs. $1419).
In many ways, tablets are the new netbook, offering consumers a low-cost computing experience to satisfy casual consumption needs. A respectable Android device can be had for $199, and the iPad Mini costs $329. The low-cost tablet segment is by far the fastest growing subset of the broader computing market, and again Microsoft has no choice but to respond.
If you had to do it all over again
Again, Microsoft is facing the same risk to its Windows brand. In order to compete in this segment, reports surfaced in March that the company was cutting deals with OEMs willing to explore the small-sized tablet market with Windows 8. Microsoft would also offer discounts to bundle in Office, which remains the de facto standard in productivity software.
These reports were just confirmed this week, when Acer unveiled the first 8-inch tablet running Windows 8, the Iconia W3 -- which includes a $140 version of Office Home & Student 2013 bundled in for free. Including that discount, the Iconia W3 starts at $350.
Therein lies the rub. That price point puts the device at the high end of the market, above the iPad Mini. Removing the Office discount would put it even higher for users that want Office, making it less competitive. Keeping the discount reduces the perceived value of Office. It's a difficult balance to strike.
But it gets even more confusing: Since Microsoft's deals only include small-sized tablets, larger form factors don't get such favorable treatment, and Office costs extra. Devices running Windows RT include a version of Office RT, regardless of device size. In addition to confusion over Windows 8 vs. Windows RT, consumers will now have to navigate when Office is included and when it's not.
All the while, the longer that Microsoft maintains discounts on Office in order to remain competitive, the more it risks the brand. You could even argue that it's worse this time around, because tablets are here to stay and Microsoft is now bringing Office into the mix and also putting that brand in harm's way.
Office is already under fire from Google Apps for Business. What happens if consumers begin to expect Office for free?
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 a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunity is huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.