Will Microsoft Corporation's 2-in-1 Windows Tablets Crush Apple Inc.'s iPad?

Microsoft's (MSFT 0.23%) presence in the tablet market could grow dramatically over the next five years, according to research firm IDC.

This year, IDC expects sales of Windows tablets and 2-in-1 devices to soar 41% annually and account for 7% of the global tablet market. By 2019, IDC believes that Microsoft and its partners will claim 14% of that market with 38 million shipments worldwide.

By comparison, IDC expects Apple's (AAPL -1.92%) iPad shipments to slip 5% this year to 60.1 million units and rise moderately to 61.9 million units in 2019. However, investors should note that IDC's track record of predicting long-term iPad sales hasn't been top notch. Back in late 2012, it claimed that Apple could sell over 140 million iPads in 2016.

Microsoft's Surface Pro 3. Source: Microsoft.

But if Microsoft's share of the tablet market keeps rising as iPad sales remain stagnant, could it disrupt the tablet market dominated by iPads and Google (GOOG -0.21%) (GOOGL -0.30%) Android tablets?

Bridging the gap between PCs and tablets
The iPad's weakest market is the enterprise one. iPads can run mobile versions of Office and other productivity apps, but they can't run older Windows software natively.

Therefore, businesses looking to upgrade their aging laptops and desktops are more inclined to buy a Windows 2-in-1 device, like the Surface Pro 3, instead of an iPad. That's part of why Surface sales rose 24% year over year last quarter to $1.1 billion. Meanwhile, Apple's iPad revenue fell 22% year over year last quarter to $9 billion.

The iPad faces four key challenges. First, it can't match the productivity and backward compatibility of Windows 2-in-1 devices. Second, it faces a flood of cheap Android tablets designed for web browsing, media consumption, and gaming. Meanwhile, many iPad owners are holding onto "good enough" iPads and refusing to upgrade. Lastly, Apple is cannibalizing iPad Mini sales with the iPhone 6 Plus.

Apple is reportedly trying to tap into demand for productivity tablets with the long-rumored 12.9" iPad Pro, but it won't likely address the main issue of backward PC compatibility.

Shielded from the slowdown
Since Windows 2-in-1 devices "bridge the gap" between PCs and tablets, they remain insulated from the slowdowns in both markets. IDC expects PC shipments to fall 4.9% this year, while tablet shipments are only expected to rise 2.1%. By comparison, tablet sales rose 52.5% in 2013 and 4.4% in 2014. That slowdown indicates that demand for slate tablets like the iPad has peaked.

IDC analyst Jitesh Ubrani noted that Microsoft's projected double-digit growth in the tablet market will mostly come from 2-in-1 devices instead of slate tablets. Speaking to Computerworld, Ubrani acknowledged that Windows 10 on slate tablets might bring some Microsoft loyalists back from iOS and Android, but that the growth "will be almost all in 2-in-1s."

Acer's Aspire Switch 10. Source: Acer.

That growth will be fueled by Microsoft and its OEM partners, such as Acer, Asus, and Lenovo, who are all searching for ways to offset sluggish demand for traditional laptops and desktops. Those competing devices might dent Surface sales, but Microsoft still wins through license fees and ecosystem growth.

One OS to rule them all
Over the past year, Microsoft has pursued a strategy that values market growth over profit. It made Windows licenses free for phone and small tablet manufacturers, then slashed laptop license fees to help OEMs compete against Google's Chromebooks.

Microsoft also bundled free trials of Office 365 and OneDrive with those devices to grow its productivity ecosystem. It also wove together its app stores to create "universal apps" which can run across phones, tablets, PCs, and Xbox Ones.

Microsoft also launched cheaper smartphones to capture first-time smartphone buyers in emerging markets, signed a partnership with Samsung to bring Microsoft apps to its Android devices, and is experimenting with a ROM to let users install Windows Phone on Android devices.

All those decisions pave the way for the launch of Windows 10, which will be a free upgrade for non-enterprise users on phones, tablets, and PCs within the first year.

Source: Microsoft.

Why Windows tablets matter
Microsoft knows that it dropped the ball with Windows Phone, which accounts for less than 3% of the global smartphone market today, according to IDC. That's why it's now leveraging its strength in the PC market, where over 90% of devices run Windows, to launch a "universal" OS which connects its phone, tablet, and console markets.

Windows 2-in-1 devices play a key role in this strategy, since they are considered a more practical upgrade for business users who rely on legacy software. As the market for media-consuming slate tablets plateaus, that enterprise appeal could help Microsoft-powered 2-in-1 devices gain lots of ground against Apple and Google in the mobile market.