Microsoft Surface Tablets: A Core Strategic Change For Microsoft.

Yesterday, in a much-hyped announcement, Microsoft unveiled its future tablet offerings — both an ARM and an Intel-based 10.6-inch tablet running their respective flavours of Windows 8.

While no pricing details have been announced, these aren’t budget devices: they are likely to be on par with premium Android tablets ($500) and the iPad ($650) for the ARM-based device and approaching Ultrabook prices ($700 to $1000) for the Intel-based tablet. I’ve written previously about how the tablet war wouldn’t really kick off until Microsoft arrived, so what can we draw from these initial announcements?

  • The Intel tablet will clearly be targeted at business, at least initially. Microsoft has been running interference over the past two years around businesses adopting iPads as core employee devices. When the Intel-based Surface ships (probably early 2013), it will at last have a proper solution for its big enterprise customers — and one that it can supply directly rather than relying on the vagaries of OEM support. Given a reasonable price point, proven compatibility with legacy Windows applications, and robust security and remote management abilities, I would envisage high levels of interest in the product.
  • Ouch! Talk about kicking OEMs when they are down. Dell, HP, and Acer are all reporting poor financials, mainly thanks to the lacklustre PC market (Lenovo is an exception here, doing rather well, thank you very much). Imagine you are in their position; suddenly, the biggest software supplier you work with has decided to build hardware — and not just any hardware, but the new premium form factor you were planning to use to relaunch your business. Sure, this might “prime the pump” for Windows 8 tablets from other OEMs (as Ballmer hopes) or it could be like partnering with Nokia on phones — instantly alienating other manufacturers like HTC, Samsung, etc.
  • The Windows RT Surface — hmm. Windows RT on ARM seemed like a great idea when announced last year, but in the subsequent months, Intel has pulled a rabbit out of its hat and got x86 architectures performing almost as well as ARM while not being power hogs. So, you’ll now have the choice of a premium ARM tablet running Windows RT (admittedly with free MS Office) but doing little else that people would recognize as Windows — or an x86 tablet running “proper” Windows 8 with full (or nearly full) backward compatibility for more or less the same price. This is not a difficult choice. Admittedly, given that Microsoft is targeting businesses initially with the x86 tablet, its version will be more expensive, but expect one of the OEMs to have a cost-comparable 10-inch tablet running full Windows 8 at or just after launch.
  • It’s time for Android to step up. Android tablets have represented the only really viable alternative to the iPad to date, and yet most have failed to make a mark with buyers. We’re finally getting some good devices (like the ASUS Transformer and Samsung Galaxy Tab), and the Google Nexus tablet is — allegedly — just around the corner. If manufacturers (and Google, of course) want to stay in competition, they need to up their game and produce more stable, aggressively priced devices that can either undercut the Windows/iOS devices (like the Amazon Fire) or offer something better.
  • Are apps the be all and end all? Much discussion is already centring on whether the Surface tablets will have a sufficiently developed apps marketplace to thrive. Certainly, the iPad has been driven by the legacy success of the iPhone apps marketplace; certain categories of applications, such as games, social media clients, and photo manipulation, figure highly in terms of what people use their tablets for. Given that this is effectively a new platform, the ARM Surface will need apps to survive, but the x86 Surface may be able to flourish (at least initially) without this. Why? Windows 8 (on x86) will be the first OS designed for a tablet with backward compatibility (and no — backward compatibility with a phone doesn’t count); on day one, it will already have access to more apps than all the other platforms (although, admittedly, many of these won’t work well with the Metro UI out of the gate).

Overall, while we’re still awaiting vital details, the Surface announcements do at least show that Microsoft is prepared to make a major strategic shift into hardware to protect its position. I have high hopes for the x86 Surface (and the competing OEM that it might spur), but I see the ARM Surface device as falling between multiple stools — a tiny apps market, not as polished as an iPad, not as cheap as an Android device, and not as practical as its own stablemate.

The Consumer PC Market: Likely Outcomes In The Next 1-2 years

Taking where we are today as a baseline and applying consumer usage scenarios and vendor strategies, let’s make a few predictions (after all, you can take the analyst out of the major analyst house . . . ). Note: I’ve excluded things that are guaranteed to happen, such as the iPad 3 (probably announced within the hour).

  1. Windows 8 dominates new PC sales by the end of 2012 . . . A fairly easy one; all indications are that Windows 8 will be in the market by the end of Q3 2012 or early Q4 2012. There is no reason to believe that the OEMs won’t just switch to selling consumer PCs with the new version on it (as they did with Vista and Windows 7). Even in a diminished PC market, this means that a significant number of consumers will be running ultrabooks (at the high end), mainstream laptops, and even netbooks with Windows 8 by the end of the year. One interesting question: will Microsoft bow to early feedback on the consumer preview and allow non-touchscreen laptops and desktops to have the Metro UI turned off?
  2. .  . . .but will have a slow start on tablets. However, Windows 8 x86 tablets are likely to be pricey initially (even compared to an iPad) and targeted at business; they do offer that full compatibility, after all. Consumers will be waiting until 2013 for reasonably priced x86 tablets. ARM-based tablets, however, will likely target consumers straight out of the gate (probably around the same date as the Windows 8 release), but OEMs will be cautious here; they were burned by their enthusiasm over Android tablets. Again, these devices are likely to be expensive compared to the rival devices available by this point (see below).
  3. Motorola/Google bring out an ‘optimized’ Android tablet. While still in the final stages of regulatory approval, all signs are that the Google purchase of Motorola will go through soon. While primarily being about ‘litigation replacing innovation’ (i.e., buying a bucket-load of defensible patents), this also gives Google its first foothold in the hardware space. Motorola’s Xoom tablets were already some of the best Android tablets — not a very crowded field, admittedly — and with extra resource and on-tap Google engineer access, they should improve even further. The real question is the extent to which Google is prepared to single out these devices and risk alienating other Android device manufacturers.
  4. Amazon intensifies its efforts with new devices and more geographies. The Kindle Fire is red hot (!) in the US, but hasn’t made it beyond that country’s borders. This is largely thanks to Amazon making efforts to create a more holistic ecosystem for the device — as Apple does; the tablet itself is no great shakes, being low-powered, lacking cameras, and having that love-it-or-hate-it 7-inch form factor. (Of course, if Apple does bring out a 7-inch iPad, then people will definitely love it.) Expect the Kindle Fire 2 by mid-year, potentially sold alongside the (even more) discounted original device, just as Amazon has done with its e-reader ranges. Geographic expansion is somewhat more problematic given that much of the device experience is based on Amazon’s back-end cloud services; these would have to be localized and comply with regional privacy and copyright law — far more tricky than turning out 10 million new devices from a factory in China!
  5. Intel drives the ultrabook message. Having been taken somewhat by surprise by the rise of ARM architectures in computing devices rather than just phones, Intel will continue to push the envelope in terms of performance, power usage, and form factor for its x86 family. Front and center will be the drive to create the ultrabook category as a viable alternative to the MacBook Air; while the Apple Macs use Intel chips, Intel stands to sell far more if the other OEMs can up their game with premium laptops (and premium Intel components). These premium products are hitting the market at a bad time for consumer spending though, so it will take some time for ultrabooks to reach critical mass.
  6.  Apple “merges” iOS and OS X. This is contentious — and not just because you’re looking at different architectures, UIs, and usage scenarios today. Could ARM architectures run OS X? Yes, apparently. Would it make sense to have iOS on a Mac? Probably not. Regardless of the underlying OS — and a full merge is still a long way off — Apple will certainly merge the look and feel of its two OS offerings and increase interoperability. Adding touchscreens to Macs will be the first step here.
  7. PC retail doesn’t get any easier . . . Consumer PC retail on the high street, like many non-essential retail markets, has been a difficult business since the recession. The increasing strength of Apple’s own retail channel is creaming off some of the more profitable transactions, leaving retailers to second-guess the next hit product. (Hint: it wasn’t Android tablets, and it won’t be ultrabooks for some time.)  They can’t even rely on software revenues because . . .
  8. . . . app stores continue to gain in importance. As more devices ship without physical media drives (e.g., tablets, ultrabooks), the emphasis on getting new software will automatically shift to downloading. App stores offer a great one-stop shop for this. Google, Apple, Intel, Valve, and EA (in gaming) already run these, and Microsoft is placing a lot of emphasis on this with Windows 8. Developers, particularly small ones, will face the difficult choice of switching to an app store (from their own digital distribution model) and putting up with a vetting process and someone taking a cut — or risk being sidelined.
  9. Consumers’ cloud adoption alters the dynamics of local devices and local storage. More on this in another post, but this is the situation in brief: more services streaming media or offering cloud storage combined with rock-solid connectivity move the needle on what components devices need to have built in. A smaller, faster SSD storage component should be adequate if all your music, photos, and video live in the cloud; similarly, you don’t need to install gigabytes of Microsoft Office on your PC if you can manage with something like Office 365.