Microsoft (NASDAQ:MSFT) recently discontinued the Surface 2 and Nokia Lumia 2520 -- the last two Windows RT devices on the market -- effectively killing the ARM-based operating system. Its demise was not exactly surprising, since most OEM partners had largely abandoned the unpopular OS by September 2013, but it provides investors with a few hints regarding the future of Windows 10 on ARM-based devices.
Why Windows RT failed
Microsoft originally launched Windows RT in response to Intel's (NASDAQ:INTC) loss of the mobile market to ARM Holdings (NASDAQ:ARMH). Intel, which manufactures its own chips, could not compete against ARM Holdings' lightweight strategy of licensing low-power consumption designs to companies like Apple, Samsung, and Qualcomm. As a result, ARM-licensed chips now power the majority of smartphones and tablets worldwide.
Microsoft took note of this paradigm shift, as the company designed previous versions of Windows for x86 chips from Intel and AMD. Since Microsoft believed that an ARM-based OS would be easier for tablet manufacturers to build around, it launched Windows RT.
Windows RT looked identical to Windows 8, but it only ran apps downloaded from the Windows Store. This lack of backward compatibility with standard Windows software discouraged many consumers from buying early RT tablets. However, sales of the pricier Surface Pro series -- which offered the full Windows 8 experience -- were rising, indicating a need for two-in-one devices to "bridge the gap" between tablets and PCs.
Windows 10 on ARM devices
Although Microsoft promises to unify smartphones, tablets, PCs, and even Xbox One consoles with Windows 10, the new OS will face the same processor dilemma that RT did. Smartphones and tablets are still mostly ARM-powered, while laptops, desktops, and two-in-one devices are x86-powered.
The backward compatibility problem remains, but Microsoft is emphasizing faster development of "universal" Windows Store apps, which can be installed across all Windows 10 platforms, to reduce user dependence on legacy x86-only software. Microsoft recently claimed that the Windows Phone and Windows Store now has 560,000 apps -- up from 300,000 last August.
Synchronizing the devices with universal apps mutually helps each platform. For example, an app developer might ignore Windows Phone due to its unimpressive 3% market share, but when the same app will be available to PC, Xbox, and tablet users as well, they are likely to pay attention.
Microsoft previously stated that the Windows Phone version of Windows 10 will not have access to a desktop. ARM-powered Windows 10 tablets will likely be the same, confining users within a tile-based OS that encourages users to install apps from the Windows Store. On x86-powered tablets and two-in-one devices like the Surface Pro 3, users can shrink those tiles into the Start Menu, work within a traditional PC desktop environment, and install backward compatible software.
Spreading out its bets
Therefore, the end of Windows RT does not mean that Microsoft is abandoning ARM devices. Instead, Microsoft will likely abandon the idea of installing full-featured desktops on ARM-powered Windows 10 tablets, which can confuse consumers.
This unwillingness to commit to x86 or ARM indicates a lack of faith in Intel, which has been trying to buy its way back into the mobile market by giving OEMs steep discounts on Atom chips, signing co-marketing agreements, and providing financial assistance for redesigning logic boards.
Those subsidies resulted in a $4.2 billion operating loss for the Intel mobile division last year -- down from a loss of $3.1 billion a year earlier. However, Intel has managed to take baby steps back into the smartphone and tablet markets with x86 partners like Asus, Lenovo, and Dell, but those costly gains against ARM could quickly fade if it phases out the current subsidies.
Valuable lessons learned
The failure of Windows RT taught Microsoft several valuable lessons.
First and foremost, users did not like the idea of a Windows desktop which was incompatible with their standard Windows software. Recognizing that there was demand for cheap, full-powered Windows devices, Microsoft eliminated the Windows license fee for phones and smaller tablets last year, which helped OEMs launch $99 Windows 8.1 tablets. The decline of RT also helped Microsoft focus on making the Surface Pro 3 into the exact opposite -- a capable productivity tablet which can be converted into a full desktop PC.
Lastly, the end of RT showed Microsoft that a clear line between mobile and desktop UIs needed to be drawn with Windows 10, but a richly populated Windows Store can still connect all the dots.