It is important to understand that Microsoft (NASDAQ:MSFT) is truly a world-class software house. When it comes to sheer technical prowess, free cash flow generation, and even business diversity, it is truly difficult to beat Microsoft. While Microsoft continues to try to play itself up as a devices company, the reality is that the 75% of Microsoft's business not tied to Windows is actually faring quite well. Even Windows, which saw a slump due to weakening PC sales and poor adoption of Windows 8, is still likely to continue doing well in the long term as the PC evolves and Windows finds a home in tablets.
However, Windows tablets still continue to face one fatal flaw -- apps. This isn't a problem for Windows 8.1-based notebooks and desktops since the "legacy" desktop mode still offers a broad, rich ecosystem of applications. The 2-in-1 and convertible devices get the goodness of traditional Windows with a touch-oriented OS added for free. The problem, arises with smaller tablets.
Something Microsoft and Intel did right -- hardware and OS
In the interest of balance, it is important to point out that both Microsoft and Intel (NASDAQ:INTC) did a superb job on the suite of 8" and 10" Windows 8.1 tablets that have begun to roll out. The operating system itself is quite efficient compared to Google's (NASDAQ:GOOGL) Android, and has a similar level of "slickness" that an Apple (NASDAQ:AAPL) device might provide. Intel also did a superb job with its Atom Z3000 chips, finally clearing the name "Atom" from its woefully underpowered past.
In addition, while this is less applicable for 8" devices, the 10" Windows 8.1 with Atom Z3000 devices (like the ASUS Transformer T100) have also been given truly competitive price points. Can a $350 10" tablet coupled with a real, hard detachable keyboard, a fast quad-core CPU, and a full copy of Microsoft Office Home and Student really be beaten in value for somebody who needs both a lightweight productivity device as well as a consumption device?
The big issue -- 8" tablets
While the value proposition for 10" Windows 8.1 convertibles is clear, the same can't really be said for 8" devices. While 8" devices like the Dell Venue 8 Pro are still silky smooth, and much of the core functionality works very well, Microsoft's touch-only ecosystem lacks apps.
While a 10" convertible with Windows 8.1 has a distinct advantage because it can run full legacy Windows applications, that advantage is muted on an 8" device. When paired with a Bluetooth keyboard and mouse, it becomes a compelling mini productivity device. However, at the end of the day this form factor must be "tablet first," which requires a beefier touch-centric software ecosystem.
This is an area in which Apple has excelled. Not only is the iOS ecosystem rich by virtue of the popularity of the iPhone, but the actual iPad-optimized ecosystem is also very robust. Instead of trying to build its own Surface devices in a bid to earn hardware margin, Microsoft should be diverting every last Surface dollar to the stimulation of its software ecosystem. Microsoft has already done a good job with first-party apps, but the third-party app ecosystem still needs plenty of work, particularly in gaming.
Microsoft can fix this
Application ecosystems take time to build. While the ubiquity of Android devices makes it a natural target for application developers, the same can't be said for touch-enabled Windows 8.1 devices. Everybody buying a new PC will be forced to have Windows 8.1, but it will be some time before the majority of notebooks at every price point are touch-enabled. Even then, many consumers buy notebooks to use them as traditional PCs, so the touch capability may not be fully exploited by users. App developers may not see the right return on investment, especially if they develop touch-enabled applications that go unsold.
That's why Microsoft needs to step in and, as a good steward of its ecosystem, spur growth in the ecosystem. The case becomes stronger for developers now that fairly low-priced 8" Windows 8.1 tablets have begun to roll out, but Microsoft still needs to get the ball rolling. By giving app developers a reason to want to spend the time and money to port to Windows 8.1, and then once the ecosystem grows, it will become more attractive, setting the virtuous cycle in motion.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple, Google, and Intel. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.