Did Microsoft make tablet to prod PC makers?

The company may be producing its own tablets to drive Dell and others to innovate.

By Jim J. Jubak Jun 19, 2012 6:43PM
Surface, the new Windows tablet announced by Microsoft (MSFT) Monday, won't make Apple (AAPL) or Google (GOOG) quake in their boots. The tablet has a 10.6-inch display and its cover works as a full keyboard with a track pad.

Nothing here like the whiz-bang punch of Apple's Siri voice software or the mountain of applications that run on the Google Android platform.

As a product strategy, you've got the right to ask why Microsoft bothered. After all, going into the tablet business will cause friction with the PC makers such as Hewlett-Packard (HPQ) that Microsoft partners with on the Windows platform.

But as a way to push those PC makers into developing their own tablets to compete with Apple's iPad and Android machines, Microsoft's Surface makes sense. Microsoft needs to defend the Windows and Office software that make up the core of its revenue. It needs tablets using its new Windows 8 operating system to take a reasonable chunk of the tablet market. So far, the efforts by PC makers to develop and market a Windows 8 tablet have been unsuccessful. Microsoft’s strategy, I think, is to produce its own tablets to drive PC producers to make better, more competitive tablets. And, if they don't, the company now has a fall-back position: It is making and marketing its own tablet and, if necessary, Microsoft could try to see if it can replicate the success of its Xbox.

I think Microsoft would prefer not to go down that road -- which is one reason why, so far, the Surface will be sold through a very limited channel (online and through Microsoft's own stores) and why the scheduled roll out of the two Surface models -- one for x86 chips from Intel (INTC) and one for chips from ARM Holdings (ARMH) -- is so unaggressive. The ARM version is expected to launch, along with Windows 8, in the third or fourth quarter of 2012. The Intel version is due about three months later. That would, quite possibly, push the Intel tablet past the holiday shopping season.

Margins present the best argument for thinking that Microsoft would rather see the Surface serve to goad to PC makers in developing their own tablets than as a major product inside Microsoft. Microsoft’s operating margins on its Windows software are above 60%. The operating margin at a PC maker like Dell (DELL) was 7% in the company’s most recent fiscal year.

That doesn’t mean Surface is or can be a clunker -- clunkers don't drive product innovation. The ARM version of Surface weighs less than 680 grams (versus 652 grams for the iPad 3) and is just 9.3 millimeters thick (versus 9.4 millimeters of Apple's tablet.)

The slow growth of the PC sector meant that Microsoft had to do something to prevent competitors in the tablet sector from sidelining Windows. PC shipments are forecast to grow by just 2.7% in 2012, according to market research company Gartner. Tablet shipments, on the other hand, are forecast to just about double this year to 116 million units. And that tablet market is dominated by Apple and Android. Apple's market share alone is projected to climb to 62.5% in 2012 from 58.2% in 2011 by market research company IDC. Partly as a consequence, sales in Microsoft’s Windows software unit have missed Wall Street estimates in four of the past six quarters, according to Bloomberg.

Microsoft didn't announce one key product detail Monday -- the price of the Surface tablet is still to

Jim Jubak
At the time of this writing, Jim Jubak didn't own shares of any co
mpanies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Apple as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Jun 21, 2012 4:32PM
"Nothing here like the whiz-bang punch of Apple's Siri voice software or the mountain of applications that run on the Google Android platform."
Siri is actually quite unsatisfying to even some of the most rabid Apple consumers. Pretty much everyone complains about its poor functionality and it really has not proven to be a big game changer.
"And, if they don't, the company now has a fall-back position: It is making and marketing its own tablet and, if necessary, Microsoft could try to see if it can replicate the success of its Xbox."
HP, Dell, etc really don't have a choice do they? In terms of desktops and personal pcs, windows is still the be all and end all.
Jun 20, 2012 9:52AM

Well you have to do the numbers to figure out what's going on. Microsoft currently nets 31% profit or $22b on $60b revenue representing the largest gross and net profit margins in the IT sector. Apple nets 26% on over a $100b revenue because they sell hardware + software which increases revenue 4-5 fold. Microsoft will sell a $500 Surface RT instead of a $70 Windows RT license and net $120 profit vs $30 on the software license. Their revenue goes up 7 fold while their profit goes up 4 fold. Apple fans have been knocking Microsoft for trailing Apple well now that there's now threat of DOJ or EU intervention I guess Microssoft can level the playing field with Apple and Google.

Jun 20, 2012 10:53AM
Actually Jubak, they did annouce the prices if you were listening. Surface will retail around $499.00 (like the iPad) the Surface Pro will retail around $1100.00-1200.00 (like UltraBook laptops). "It don't cost a dime to pay attention! "
Jun 20, 2012 2:24AM
With its new tablet, Microsoft continues its history of being late to enter the game.  This time, though, the results may be even more disastrous than in the past because MS may burn bridges with its key partners, HP and Dell.  Surely or at least hopefully, behind the scenes, MS is reassuring its partners.  But regardless of whether MS is sending soothing words their way, a total nightmare may loom large on the horizon.  Who knows how all this will be looked back on a year or two from now?  Hopefully, MS has thought a few steps ahead and has a backup plan -- Plan B -- if its tablet fizzles.

The biggest problem with MS appears to be that it's no longer a leader.  These days, MS is always chasing after the innovations of others rather than being the innovator that its competitors have to emulate.  This problem always seems to plague large tech corporations: They coast along profiting from their past achievements too afraid to create anything new that would rock the boat and thus jeopardize their pre-existing revenue streams.  Sooner or later, Apple will probably be facing the same dilemma.  A new company will be selling the latest thing while Apple churns out the latest versions of its dated technology.
Jun 19, 2012 9:19PM


Don't ya get it Jubak!! If there's a monopoly it means lawsuits! They play cute little games to make things look competitive. Actual I think you do get it. You're one of them.

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