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The launch of Apple's (NASDAQ: AAPL ) new iPad Mini and iPad Air products now seriously calls into question Microsoft's (NASDAQ: MSFT ) tablet strategy. Indeed, while Microsoft just a few days ago launched its Surface 2 and Surface Pro 2 products -- starting at $449 and $899, respectively -- it seems that Apple just took an axe to whatever value proposition the Surface 2 had to offer, and even does some pretty serious damage to even the more expensive Surface Pro 2.
Surface 2 versus iPad Air -- is this even a contest?
Microsoft's Surface 2 is a big improvement over the original Surface RT. It sports a 1920x1080 display, a fast NVIDIA Tegra 4 processor, 2GB of RAM, and a pretty nice physical design all around. The reviewers, such as AnandTech, seemed to really like the hardware. The problem with Surface 2 is that it comes running Windows RT. This is a version of full Windows 8.1 that only runs touch-enabled applications in the Modern UI. This, right off the bat, puts it at a serious disadvantage to the other Windows 8.1 devices from Microsoft's own partners that come with full x86 software compatibility.
But beyond that, the newly announced iPad Air is simply better than the Surface 2 in almost every quantifiable way -- it is thinner, lighter, sports a richer software ecosystem, and a better display. Of course, for the privilege, consumers will have to cough up an additional $50 which, quite frankly, seems like a bargain.
Of course, some will argue that the Surface 2 offers productivity features that the iPad's more "limited" iOS doesn't offer. But this argument doesn't hold up too well. Indeed, while the Surface 2 comes with Office 2013 for Windows RT, no traditional PC applications work, so that's a big part of the Microsoft advantage wiped away. It also doesn't help Microsoft's case that Apple is including its own productivity suite, iWork, as well as its iLife software suite. Microsoft's Windows 8/RT has similar applications built in, though.
But the bottom line is that in order for Microsoft to come in with a brand new ecosystem that, again, strips away the advantages of supporting the legacy OS, it needs to deliver a much superior product for the dollar. After the iPad Air launch, it's clear that this isn't happening with a Surface 2 starting at $449.
Are the rest of the Windows 8.1 tablets done?
The big question, then, is whether the Windows 8.1 tablet venture itself is largely doomed? It's not certain yet, by any means. For example, both Lenovo and Dell announced fairly compelling 8-inch designs at the $299 price point. These run full Windows 8.1, sport Office Home & Student, and come with a good Intel Bay Trail system-on-chip. But the snag, of course, is that these tablets are slightly thicker (394 grams for the Dell against 331 grams for the iPad Mini), and come with much lower screen resolution (1280x800 for the Windows 8.1 tablets and 2048x1536 for the new iPad Mini).
To be perfectly fair, at the $299 price point, the smaller Windows 8.1 solutions offer a compelling value proposition against a $299 previous generation iPad Mini, which has a 1024x768 screen, 512MB of RAM, and a two-generation old A5 system-on-chip. But the real problem for these aren't quite the iPad Mini as much as the cheap Android tablets such as the Nexus 7.
The larger Windows 8.1 tablets such as the Dell Venue Pro 11 -- with full Windows 8.1 compatibility -- stand a chance for those looking for a notebook replacement; at $499 with a 1920x1080 screen, 2GB of RAM, and the option to buy decent keyboard accessories, it could be an attractive offering. For those looking for pure tablets without any need to use Windows' rich desktop ecosystem, Windows 8.1 tablets could still end up being a tough sell.
Foolish bottom line
Apple yet again knocks it out of the park with its latest iPad launches, and it once again proves that there's a reason that Apple, time and again, gets away with selling premium products at premium margins. Microsoft keeps eyeing these margins hoping that it can fetch a similar cut, but Apple is the exception, not the rule. Most tablets -- Android and Windows -- will be sold at low margins in a highly competitive environment. But that's the thing -- Microsoft doesn't need to play this game.
It is, first and foremost, a software company. Instead of trying to compete with its hardware partners, what it needs to do is to be the steward of its software ecosystem. It needs to make the Microsoft software ecosystem so desirable that hardware vendors are happy to sell Microsoft-based devices profitably. And, in the end, Microsoft will get a nice check for each license sold and -- if the ecosystem takes off -- recurring royalties from the sales of Windows Store applications.
Microsoft doesn't need to be Apple to be successful in mobile, but it seems management hasn't figured this one out yet. Next up, a writedown on unsold Surface 2 inventory?
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