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Don't Write Off Microsoft Corporation Tablets

By Tim Brugger – Mar 29, 2014 at 2:00PM

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Making a dent in tablets remains an uphill battle for the folks in Redmond, but there may be some light at the end of the tunnel.

New Microsoft (MSFT -2.58%) CEO Satya Nadella seemed to enjoy his recent day in the spotlight, nailing his recent presentation of the new Office for iOS app. Beyond the obvious revenue potential for one of its core offerings, Nadella succeeded in ushering in a new era at Microsoft, an era in which even longtime competitors need to find ways to work together.

Yes, such an important working partnership involving Microsoft and Apple (AAPL 1.55%) feels a little like cats and dogs sleeping together, but its representative of the world we live in today. Microsoft deserves kudos, and its recent stock price appreciation, for taking the leap. However, some analysts believe that bringing Office to iPads will have a positive impact near-term, but destroy what little momentum Microsoft Surface tablets have enjoyed. The naysayers may be right, but let's not write off Microsoft's tablet ambitions quite yet.

A few specs
According to research firm Gartner, of the various device types -- PCs, tablets, mobile phones, and "other" which includes devices like clamshells -- tablets are expected to see the highest rate of sales growth in 2014. With an expected jump in tablets sold of 38.6% compared to 2013, there are opportunities for upstart tablet makers like Microsoft to make some headway.

Gartner's research also suggests 2014 will be the year that tablet sales nearly catch up to PCs, 270.7 million to 277.7 million, respectively. By 2015, the war between PCs and tablets will officially be over, with tablets rising out of the ashes to emerge as the clear-cut winner.

The critical question for Microsoft's tablet ambitions is what can it do to grab a piece of the market's fast growing pie? The data from Gartner offers up some intriguing ideas for Nadella and his devices and services team to consider.

A few considerations
Like most things, Microsoft's recent tablet sales success should be put in context. Though Microsoft ended 2013 with more than double the previous year's tablet market share and nearly four times the number of tablets sold, there's a bit more to the story. For one thing, Microsoft's tablet market share as measured by OS sales of 2.1%, compared with Apple's 36% is paltry. Microsoft's 4 million tablets sold doesn't exactly stack up well to Apple's 70.4 million units, either.

But here's where Gartner's research comes into play. The growth in tablets, as with most mobile devices including smartphones, will come from markets outside North America. Domestically, Apple dominates the tablet market, but as Gartner stated, "iOS tablet growth has slowed in North America and Apple will need to reinvigorate its replacement cycle."

If Gartner's right, emerging markets are where the opportunities lie to grow tablet share, and Microsoft has a couple of things going for it in that regard. When its deal to bring Nokia's devices and services unit in-house is (finally) completed, Microsoft will also gain Nokia's strong presence in several key, growth markets. Nokia is a well-known quantity in Asia, Africa, and other emerging regions, and that should give Microsoft a foot in the door as it makes the transition.

Also, Microsoft is in the enviable position -- as its Office for iOS and recent cloud deal in China will attest -- of having time to grow tablet market share. Microsoft's strong financial position could give it the room it needs to shave margins a bit to better position Surface as a legitimate, lower cost alternative for financially strapped emerging market consumers. For folks like Apple that rely so heavily on product sales and steadfastly refuse to change, a saturated high-end tablet market with no entry-level or mid-level alternatives will become a problem.

Final Foolish thoughts
Microsoft's recent accomplishments: namely, rapid growth in cloud revenues, the boost from making Office available to iOS users, and optimism surrounding its new CEO, are just a few reasons Microsoft stock has been on such a nice run of late. But let's not entirely give up on Surface yet. It's an uphill climb, to be sure, but Nadella and Microsoft might just pleasantly surprise us -- again.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends, Apple, and Gartner and owns shares of, Apple, and Microsoft. We Fools don't 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.

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