Microsoft (NASDAQ: MSFT ) -- for all of the criticisms it takes -- is one of the world's most profitable technology companies, having generated a cool $22 billion in net income in its most recent fiscal year. Generally speaking, companies that generate that kind of monstrous cash flow have to be doing something right (and Microsoft does plenty right). However, one of the most controversial -- and costly -- moves Microsoft has made in recent years is try to compete directly in the tablet market with its Surface line of products.
Its first Surface, known as Surface RT, sold so poorly that Microsoft needed to take a $900 million inventory writedown on unsold Surface RT tablets. The follow on to the original Surface RT -- dubbed the Surface 2 -- didn't seem to do all that well either despite significant improvements over the prior generation model, likely hindered by the fact that it couldn't run most full Windows 8.1 applications.
However, that could all change with the next-generation Surface.
Surface Pro 3 isn't quite there
Microsoft's recently launched Surface Pro 3 contains an Intel (NASDAQ: INTC ) Core processor and runs full Windows 8.1, so -- for some users -- it lives up to Microsoft's marketing message that the Surface Pro 3 can replace a traditional laptop.
However, as a tablet, the Surface Pro 3 appears to leave a lot to be desired: It's too large, contains a fan, and is quite expensive in a tablet market that increasingly favors lower costs. However, if Microsoft were to make a Surface 2-like device that could also act as a full Windows 8.1 laptop, and if it were priced at Surface 2 levels, there could be a very real value proposition.
In short, Microsoft could finally realize its vision for Surface.
Surface 3, powered by an Intel Cherry Trail Atom, could be a game-changer
Take the Surface 2, give it the ability to run full Windows 8.1 applications with ease, price it at the $449 level that the Surface 2 comes in at today, and this actually becomes a solid value proposition for users seeking an inexpensive laptop and tablet.
How can Microsoft do this? Two words: Cherry Trail.
Intel has been very aggressive in driving its Atom processor family for tablets, and it's planning to launch its third-generation Atom for Windows tablets -- codenamed Cherry Trail -- by the end of this year for a first half of 2015 ramp. The current-generation Atom -- known as Bay Trail -- offers pretty good processor performance, but it struggles in graphically intensive workloads (i.e., games). Cherry Trail is set to be a significant step up in graphics capability, and leaks suggest a roughly four-times improvement over Bay Trail, which should make it capable of playing many modern PC games.
Add to that the ability to run all pre-existing Windows applications, including Photoshop, Office, iTunes, and countless other applications, and Microsoft begins to have a highly functional, fairly affordable offering.
Pretty neat, right?
Foolish bottom line
Microsoft really made a mistake in trying to push Windows RT as compatibility with the vast library of pre-existing Windows applications is -- as far as Microsoft's consumer presence goes -- its crown jewel. If Microsoft decides to adopt Intel's upcoming Cherry Trail Atom processor for its next-generation Surface product (assuming, of course, Microsoft even continues the line), then this would be a fundamental game-changer for Surface as the product line would finally offer the best of both worlds: functionality and affordability.
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