Mobile Tech: What Do $99 Windows 8.1 Tablets Mean For Microsoft?

A flood of cheap Microsoft (MSFT 1.82%) Windows 8.1 tablets recently hit the market, just in time for the holiday shopping season. Several of these low-end devices will cost as little as $99 during Black Friday, matching the prices of the cheapest Google (GOOG 9.96%) (GOOGL 10.22%) Android tablets.

Notable $99 devices include Hewlett-Packard's (HPQ -0.46%) HP Stream 7, Toshiba's Encore Mini, and E FUN's Nextbook. These budget tablets are spartan devices which will never be confused with Apple's (AAPL -0.35%) iPad Mini 3, but they might be good enough for casual users. Will these budget tablets help Microsoft and its partners strike back against Google and Apple during the cutthroat holiday quarter?

Here come the budget challengers
The first thing shoppers will notice that these three $99 Windows tablets are similar in specs and design. 

L to R: The HP Stream 7, Toshiba Encore Mini, and E FUN Nextbook. Source: Company websites.

Source: Company and industry websites.

The HP Stream 7 notably has twice as more internal storage than the Encore Mini or Nextbook, but it lacks a front-facing camera. Meanwhile, the Nextbook offers a bigger screen with an extra 16GB card as a holiday bonus. So what do these low-end devices mean for Microsoft and its hardware partners?

What $99 tablets mean for Microsoft's partners
Android tablets accounted for 72% of the global tablets market in the third quarter, compared to 22.3% for Apple's iPads and 5.7% for Windows tablets, according to Strategy Analytics.

Android's massive market share, and the fact that it is free to license and modify, convinced many of Microsoft's PC allies to launch Android tablets. But they soon discovered that there was only room at the top for one premium Android tablet maker, Samsung (NASDAQOTH: SSNLF) (which now controls 17.6% of the global tablet market), while other competitors raced to the bottom with cheaper tablets.

Microsoft originally imposed license fees, ranging from $25 to $90, on Windows Phone and 8/RT tablet makers. Realizing that fees were counterproductive, Microsoft made all versions of Windows free for devices under 9 inches in April. This cut costs considerably for companies like HP, Toshiba, and E FUN. Ironically, Microsoft was already making around $1 per device from Android tablet makers via patent royalties, so eliminating the license fee actually made Windows a cheaper mobile OS than Android. Microsoft is also basically subsidizing these $99 tablets by bundling free one-year memberships for Office 365 Personal and 1TB of storage on OneDrive (a $70 value).

That's an appealing package for companies like Hewlett-Packard, Dell, and Toshiba, which have struggled to dent the saturated Android tablet market. Although these companies will still be fighting over the low end market, it's a less crowded space than the Android market, which has been flooded by cheap devices.

What $99 tablets mean for Microsoft
Cheap Windows 8.1 will help Microsoft finally phase out Windows RT, which confused consumers with its lack of backward compatibility with older Windows software. Most programs from previous versions of Windows can be installed on Windows 8.1 tablets.

Windows 8.1 tablets can also be upgraded to Windows 10 next year. According to a statement from Microsoft's Indonesia president, Windows 10 will be a free upgrade for Windows 8.1 users. By turning Windows 8.1 tablets into Windows 10 ones, Microsoft will make considerable progress toward realizing its vision of spreading "One Windows" across smartphones, tablets, and PCs.

Source: Microsoft.

Microsoft's bundled Office 365/OneDrive and its "universal apps" on cheap tablets will tether more users into its mobile ecosystem, which could complement sales of Windows PCs and Windows Phones. If users don't want to buy Windows Phones, the Office 365/OneDrive ecosystem still extends into Android and iOS apps.

This more cohesive hardware and software ecosystem will help Microsoft counter Google's army of cheap Android tablet makers. Since Windows still runs on over 90% of the world's PCs, the ability to run older Windows software on a tablet could make $99 Windows tablets a compelling purchase compared to low-end Android tablets.

Microsoft is leveraging its dominance of PCs to expand into mobile, just as Google is spreading from mobile devices to PCs via Chromebooks. But the key takeaway is that Microsoft is now willing to sacrifice profits to gain market share (and more cloud users) against Google.

The holiday season awaits
Looking ahead, the holiday season will be the first major test for the $99 Windows tablets strategy.

On one hand, overall tablet sales are slowing down. Gartner estimates that the global tablet market will only grow 11% year-over-year in 2014, compared to 55% growth in 2013, due to longer upgrade cycles, market saturation, and a preference for 2-in-1 devices. On the other hand, Microsoft has revealed that Surface sales more than doubled sequentially and year-over-year last quarter as Apple's iPad sales fell, hinting at strong demand for 2-in-1 Windows devices. This means that there could be an untapped market for low-end Windows 8 tablets -- paired with Bluetooth keyboards -- as cheap laptop replacements.

To see if this holiday blitz pays off, investors should see if Gartner and IDC report an uptick in Windows tablet market share over the next few quarters. If that happens, it's a good indication that Microsoft is finally learning how to beat Google at its own game by tethering cheap devices to the cloud.