The Surface RT Is D.O.A. — Few Consumers Will Buy Microsoft’s ARM Tablet

Oh dear: I had such high hopes of Microsoft’s Surface tablets — particularly when those rumors of an extremely aggressive price of $199 started circulating. Even the speculation around a $299 to $399 price point left some hope of success. Now that the pre-order service has gone live, it’s apparent that the price point Microsoft has chosen will restrict its sales to the usual fervent tech buyers and Microsoft staff (although they don’t get one free from the company, which is actually quite a good way to improve unit shipments).

Priced at $499 for a 32 Gb version — plus an additional $100 for arguably its best innovation, the keyboard cover — the Surface RT simply isn’t competitive. Sure, it’s a similar price to an iPad (but probably around twice the price of an iPad Mini) and may be similarly priced to the (unseen) 10-inch Nexus when released (but more than twice the price of the Nexus 7), but this ignores the installed base and apps ecosystem for the Android and iOS devices — and you don’t even get a full Windows experience on this ARM tablet. A cut-down version of Office is nice, and may be worth up to $50 for some consumers, but an Intel-based Acer Iconia W510 can be had for the same money. And arguments about differences in on-board storage make less an less sense as these devices increasing tap into iCloud, SkyDrive etc.

Microsoft is also ignoring the stage of development of the tablet market. We are now seeing third- or fourth-iteration tablets on rival platforms, and firms like Amazon are lowering costs by using differing business models. This isn’t like Xbox, where Microsoft could jump in at the start of a new generation because each generation effectively started from scratch; it’s not even like Internet Explorer, where the firm was late to market but used its sheer critical mass to drive the browser to No. 1.

It’s a depressing illustration of the position that Microsoft finds itself in – keen to be a “devices and services” company but tied to a variety of OEMs that it is desperate not to offend (at least in the short term). It has to price high and build hardware to “inspire” partners, but the trouble is that few are inspired by devices that fail to sell. Ironically, after all the efforts to port Windows to ARM architectures, Microsoft may have been better served by waiting a year or so until x86 tablets had established an ecosystem and then releasing the ARM device with better battery life and a more competitive price (as component costs fall).

As more and more OEMs release details of their Windows 8 touch devices, pricing trends are starting to become apparent: $499 to $649 for an x86 tablet (Acer, Lenovo); $500 to $800 for a touch-enabled laptop (pretty much all the OEMs); and premium pricing for large all-in-ones and innovative form factors (Asus TaiChi, Sony Vaio Duo 11, Dell XPS 12). All in all, this pricing is reasonable and demonstrates where OEMs are focusing: touch-enabling traditional form factors and sticking with x86 architectures. It will be these devices (with perhaps a couple of cheap OEM RT tablet) that businesses start to experiment with and that consumers buy as their “next PC” — not the failed attempt to jump on the ARM bandwagon that the Surface RT represents.

Don’t get me wrong: I think the Surface is a beautifully designed tablet with some excellent engineering and a novel UI — better than most of the existing competition. Doubtless, the couple of hundred consumers who buy them will love them to bits. Unfortunately, this all sounds depressingly familiar; perhaps Microsoft should have called it the Zune HD Surface.

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.

So, When Do The Tablet Wars Start?

The iPad is a true phenomenon, selling around 70 million units since launch and projected (by Gartner) to reach up to 169 million units per year by 2016. It has demonstrated the consumer (and, potentially, business) desire for a simpler device that delivers a fantastic media “consumption” experience in conjunction with simple yet compelling apps.

Android tablets and Windows 7-based tablets have also been around for some time, so you’d have thought that the tablet “war” would have started already. Not so much. There have been a couple of false starts: the Samsung Galaxy Tab, BlackBerry PlayBook, and HP TouchPad — the latter two briefly even outselling the iPad in certain segments/markets, but only after “fire sale” discounting — have all been heralded as serious challengers but have failed to make an impact. These were certainly no more than “skirmishes” rather than an all-out war.

The Amazon Fire made some inroads in Q4 2011, extending the firm’s e-reader device line, but this seemed to wither on the vine in Q1 2012. New devices like the Asus Transformer and second-generation Samsung Galaxy tablets seem to be better received, and Google’s own tablet may arrive soon. These will, doubtless, cement Android’s position (based on cumulative sales) as a significant second-place player. But the tablet war won’t really heat up until Microsoft hits the market with both Windows 8 RT and Windows 8 tablet devices.

Microsoft needs Windows 8 and Windows 8 RT to work straight out of the gate.

Windows RT on ARM architectures will provide a proper Metro-driven, Windows-like tablet — one better than those cobbled together with Windows 7 to try and keep business clients from buying iPads — and at a price point (hopefully) comparable with other tablet offerings. Meanwhile, if you need real Windows on a tablet with proper backward compatibility, Windows 8 tablets with x86 architectures should arrive at around the same time. Pricing on the latter is likely to start high and then trickle down as component prices drop; it’s also where we’ll see interesting “hybrid” devices like laptops with touch screens and tablets with slideout keyboards.

It’s a bold move and, arguably, one that Microsoft should have made last year; Windows RT will introduce a lower-cost iPad competitor with a good user interface (UI) and some legacy compatibility (for Office docs), but it may end up as just another Zune HD — superior to the iPod in terms of hardware and UI but gaining zero traction in the market. Similarly, Windows 8 tablets could be far too expensive; if they cost more than a decent laptop and iPad combined, it’s hard to envisage rational IT managers or brand-conscious consumers opting for the untried tablet.

Perhaps this is why forecasts from the likes of Gartner and DisplaySearch see iOS as the leading tablet platform all the way out to at least 2017, with Android only gaining ground slowly and Microsoft performing poorly (according to Gartner) or atrociously (according to DisplaySearch).

It’s too early to call a winner in the long term.

The truth is that with no international market for the Kindle Fire yet, only rumors of the Google tablet, and no pricing on details for either flavor of Windows 8 tablet, it’s too early to announce the winner of this war. Apple heads into the conflict with tremendous momentum and economies of scale, but the same could have been said of Sony, Kodak, or Atari in the past. The key questions will be:

  • Who will deliver a tablet that supports those neglected usage scenarios (transactions, work stuff, communications)?
  • What will be the difference in price points between Windows RT devices and entry-point x86 Windows 8 tablets? Will all Windows 8 tablets be “transformer” or hybrid models that have slideout keyboards . . . or will there be a mainstream, pure tablet offering based on x86 architecture?
  • How long will there be manufacturers with feet in both the Windows and Android camps? Will we see this breaking down, as per today’s “PC manufacturers” and “smartphone manufacturers”, with just a few firms (Samsung, Apple, Sony) being global players in both?
  • Who is going to explain to the poor consumer standing in a PC retailer the difference between and unique benefits of: 1) a traditional notebook running Windows 8; 2) an Ultrabook with a touch screen running Windows 8; 3) a tablet running Windows 8; 4) a tablet running Windows 8 RT . . . even before we factor in Apple devices, Android tablets, hybrid Android devices, and Chrome OS laptops!

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.