Microsoft's Tablet Strategy Is a Mixed Bag

Software giant Microsoft (NASDAQ: MSFT  ) is transitioning into a devices and services company, but the "device" part of the equation hasn't been going so well. While the company's proposed acquisition of Nokia's phone operations is a smart move, Microsoft's tablet strategy has thus far been lacking. In July, the company took a $900 million inventory write-off associated with its Surface RT tablet, a product which runs the ARM-based Windows RT. Total Surface revenue through the second quarter, which includes both the Surface Pro and Surface RT, was actually smaller than the size of this write-off.

After the terrible performance of the first generation of Surface devices, Microsoft has announced new versions of both the Surface RT, now called the Surface 2, and Surface Pro. While Microsoft has made some much-needed improvements that should help sales going forward, there are still some serious flaws in the company's tablet strategy.

The good: Surface Pro 2
The Surface Pro 2 is meant to be a laptop replacement, appealing to businesses and power users. It's not a mainstream tablet, starting at a hefty $899. Instead, the Surface Pro 2 is aimed at those who do more than browse the Internet and play games. It competes more with laptops and ultrabooks than it does with the iPad.

The original Surface Pro, while more successful than Surface RT, had its share of issues. The biggest problem was battery life. Under a full load, the original surface maxed out at about 2.5 hours, somewhat negating the mobility of the device. The Surface Pro 2, by using a Haswell processor from Intel (NASDAQ: INTC  ) , has increased battery life by as much as 75%.

The other issue was Windows 8 itself. While the Surface Pro ran the full version of Windows 8, the operating system had some issues that drove people away. Windows 8.1, an update set to be released in October, looks to fix many of these issues. The start button will be brought back, although it will simply lead to the start screen, and users will be able to boot directly to the desktop. The Surface Pro 2 will ship with Windows 8.1, but whether or not the changes will be enough to win people over remains to be seen.

New, slimmer covers are launching with the tablets as well, reducing the bulk while adding backlighting to the built-in keyboards. The new Power Cover comes with both a keyboard and a built-in battery that increases the battery life of the Surface Pro 2 by about 50%. With this, the battery-life problem of the original device is effectively solved, although it does require separately purchasing the Power Cover.

The Surface Pro 2 is not a mass-market device. It doesn't really compete with the iPad or tablets running Google's (NASDAQ: GOOGL  ) Android OS, instead looking to replace the laptops of power users. The new Surface tablets include Microsoft Office, and with Windows already dominating enterprise PCs, the Surface Pro 2 may see significant enterprise sales, especially now that battery life has been improved. I think that Microsoft will sell enough of these tablets for it to make sense to continue making them, but it definitely doesn't have the mass-market appeal of less expensive options.

The bad: Surface 2
The Surface 2 is the second iteration of the Surface RT, running Windows RT and powered by a NVIDIA Tegra processor. Windows RT, also set to receive and update along with Windows 8, features only the modern tile-based interface and eschews the desktop entirely. Normal Windows applications can't be run on RT, with the Windows Store the only source of apps.

The new Surface 2 includes 25% better battery life and an upgraded screen. It sells for $449. The problem is that the Surface 2 doesn't fix the fundamental flaw: Windows RT. The Surface 2 competes directly with Android tablets and the iPad, but with an inferior app store and no support for legacy Windows applications, along with being more expensive than many other options. There doesn't seem to be a reason to choose the Surface 2 over the competition. Google's Nexus 7 costs $229, for example, and the cheapest full-size iPad from Apple is only $499.

Microsoft should have killed off Windows RT after the disastrous inventory write-off, or at least not continued to make RT-based tablets that no one wants. Investors can hope the company has made less of them this time around, recognizing that demand isn't very high.

Mobile Wintel
While the Surface Pro 2 is aimed at power users, mainstream Windows 8 tablets will need to be cheap in order to compete with the Android offerings. At the same time, Intel needs Windows 8 tablets to gain popularity in order to push its mobile processors, although Intel chips can also run Android. Intel has stated that its goal is to enable tablets in the $100 range, and its Atom processors may eventually make that a reality. The recently released Bay Trail processors, the newest Atom iteration, are impressive. The Z3770 was tested at Anandtech and shown to be faster running Android than any ARM-based processor on the market, all while using roughly the same amount of power. This should lead to some design wins in the high end for Intel.

This also means that Windows-based tablets with Intel chips will be faster than competing ARM-based Android tablets. With high-end Android tablets priced around the $500 mark, a more powerful Windows tablet at a lower price could conceivably sell very well. ARM processors have always been about low power, but now that Intel has achieved acceptable power efficiency, Intel's offerings should trounce ARM-based chips in terms of power-per-watt going forward.

The bottom line
Microsoft continues to make the same mistake with the Surface 2, a tablet which no one really wants. The Surface Pro 2 is a powerful laptop replacement, and the upgrades should compel power users to take a second look. Going forward, Intel's low-power, high-performance mobile chips are the key to getting Windows tablets at prices that are competitive with Android tablets, and the first step in that process is currently taking place. I'm optimistic about Microsoft's future in tablets, but Windows RT will likely not be part of that future.

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  • Report this Comment On September 26, 2013, at 3:57 AM, RMengineer wrote:

    I don't know what MS is thinking in buying Nokia - that's not going to fix what's wrong with Windows 8.

    One of the problems with MS is one of when the only tool in your tool box is a hammer then every problem looks like a nail. And the only tool in MS's toolbox is Windows - so MS addresses every market segment by trying to cram Windows into it.

    But to be honest, MS is in tough spot. They really only have two options: stick with being firmly entrenched in the Windows paradigm. After all, that's what those people in that camp railed against MS for: abandoning the Start Menu/desktop and lack of Office support on RT. The problem is that that space is dwindling.

    The other option is to target the other camp and take on Android/iOS. But how do they do that without just being redundant in an already satisfied market space? What would/could MS bring to the table that Android/iOS doesn't already or soon will?

    A third option would be to try to bridge the gap. And truth be told, Windows 8 is probably not a bad attempt at that. The problem is that there isn't really much interest in that. I think that the most apt characterization of that would be that for content/information creation, the desktop is still the best tool for that job - and for that, people are fine with "desktop" Windows - don't need all the "mobility-esk" stuff. And for content/information consumption, tablets, smartphones etc excel at that and you don't need Windows/desktop functionality. They are both appropriate tools in their own uses. There aren't many people that think they need some sort of hybrid to handle both. They have their desktops for "desktop" tasks (creation) and they have their tablets and smartphones for "mobile" tasks (consumption). ANd that is a perfectly good paradigm to which MS's attempted hybridization doesn't bring much to the table in attempting to be jack of all trades (both "desktop" and "mobility"), the result being master of none ("desktop" crowd displeased with watered down desktop utility, nothing brought to the table to entice the "mobility" crowd).

    And the overarching landscape being that so many people are so over having MS rammed down their throats with their de facto monopoly position that now that they no longer have that position to force themselves on consumers and now have to actually entice people to _choose_ MS, well, those people that are now so over MS simply aren't listening to anything MS has to offer anymore.

    This is why it is important to create good will with your consumer base even when you don't "need" to to secure your market share because there may come a day when you are dependent on established good will with consumers to get mind-share in that consumer base. I think a lot of the headwinds MS faces now is due in part to a failure to appreciate the importance of generating good will even when they didn't "need" to. That is, now in a competitive environment with much consumer choice they are reaping the ill-will they sowed with their abusive monopolistic practices.

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