This is a rather contrarian view, but it seems that with the impending rollout of an army of Windows 8.1 based tablets paired with Intel's (INTC 3.00%) Atom Z3000 ("Bay Trail"), Microsoft (MSFT +1.65%) is poised to gain a non-trivial share in the tablet market. If it plays out as expected, then the long-term implications for Microsoft are actually quite compelling and the investment case starts to look even better than it currently does.
Why Windows 8 tablets didn't do well last year
When the very first Windows 8 tablets launched last year, the actual lineup wasn't particularly compelling. The Surface Pro was a super bulky, Intel Core i5 based tablet that – despite its excellent performance – offered less-than-ideal battery life and an uncomfortably large size. In addition, Microsoft's own Surface RT, a machine that purported to be an excellent "convertible" solution, could not run traditional Windows applications thanks to the use of an NVIDIA (NVDA +1.80%) Tegra 3 processor based on ARM processor cores.
Interestingly enough, there did exist designs from many OEMs such as Acer, ASUS, and Samsung that featured Intel's low-power Atom Z2760. It offered better performance than any of the Windows RT compatible ARM chips at the time, while at the same time allowing for a thin and light form-factor (since this Atom was in the same power league as the ARM chips). The Achilles' heel to this chip, however, was that the performance still wasn't quite there for a real "two-in-one" experience. Sure, it could run traditional PC programs (something that, again, the ARM chips couldn't), but was the chip even fast enough to matter? No, it doesn't seem so.
Why Windows 8.1 tablets should do much better this year
A lot is different this year. For starters, the Windows application ecosystem has been built out significantly, with Microsoft touting over 100,000 applications in the Windows store. But more importantly, the hardware is much improved. On the chip side of things, Intel's Z3000 chips offer nearly an order of magnitude more graphics performance (putting it right up there with the iPad 4's graphics) and over twice the CPU performance. This means that not only will touch-oriented tablet applications run really well, but the "two-in-one promise" can finally be fulfilled as traditional Windows applications can finally run well.
But what's more important is what this new hardware enables. The designs coming from ASUS, Lenovo, Dell, HP, and many others are, quite frankly, a world away from the lackluster designs from last year. For heaven's sake, even Dell's Venue Pro 8 – and note that this is not a name that's particularly well known for beautiful industrial designs – is turning heads and garnering significant interest. After all, who wouldn't want a full Windows 8 PC that fits in the palm of their hand for under $300?
Of course, the competition is still stiff, and it seems that the real high growth in the tablet space is happening at the sub-$200 level. Will Microsoft and its partners be able to gain traction? It seems likely that – at the very least in the enterprise space – a tablet with full Windows 8 compatibility (which means that the devices are much easier to integrate into the IT infrastructure) would be more desirable than even an Apple iPad or any Android devices. Further, with these tablets coming from well-established IT names, it's not inconceivable that these tablets could be bundled at compelling prices with the purchases of new computers by IT departments around the world.
But the real question is consumer adoption. While only time will tell, it doesn't seem crazy to think that well designed, stylish Windows 8.1 tablets at reasonable price points would sell. After all, even though Android has taken over the world as the most ubiquitous consumer OS, people are still buying plenty of PCs (even if it's not as many as before) and could find using a Windows-based tablet more desirable.
Microsoft should ultimately benefit
It's not a stretch to assume that as far as initial upfront OS licenses go, Microsoft isn't making a killing in the tablet space – the price sensitivity of the market just can't support too large a license. But what is exciting is that most tablet purchases are still most likely to be incremental (meaning that Microsoft still sees additional revenue), but at the same time, Microsoft can get a cut from any of the Modern UI applications sold. Assuming the higher-end PC space can stabilize, Microsoft should ultimately benefit, which should translate into great things for Microsoft's share price longer term.
But what about the other players? Intel is a clear beneficiary from this trend as the vast majority of Windows-based tablets will be powered by Intel silicon. This, unfortunately for NVIDIA, means that its investors shouldn't get too excited by its Surface RT win, although NVIDIA's management has already tempered expectations for Windows RT on its most recent earnings calls, so it shouldn't be too much of a shock. This, in addition, means that ARM bulls expecting that its partners would be able to make meaningful headway in the Windows/traditional PC space may be sorely disappointed.
