In 2013, any company that depends on computer software and operating systems for revenue but doesn’t have a solid tablet presence is in trouble.
PCs are increasingly being supplanted by tablets, especially at the consumer level where the devices have proved incredibly popular for casual use (web browsing, e-mail, social media and gaming). While Microsoft (MSFT) caught us off guard when it introduced its own Windows tablets last year, we knew that Windows tablets had to make an appearance — we just weren’t expecting Microsoft to make them itself.
Although professional level Windows 8 tablets have made a decent showing, consumer-level RT tablets aren’t moving. Microsoft cannot cede that market to Android and Apple’s (AAPL) iPad, yet it’s had little luck convincing hardware partners to release their own RT tablets and a smaller, cheaper version is likely months away. Thus the decision to slash Surface RT prices by 30%.
Microsoft’s dual-platform tablet strategy has proved both a blessing and a curse. Its Surface Pro tablets have done well, going from zero to 3.3% of the world tablet market in Q1 2013. That’s pretty impressive for a tablet that costs $900, weighs 1.5 pounds and has a mere four-hour battery life. But the Surface Pro uses an Intel (INTC) desktop CPU and runs Windows 8 Professional. For enterprise customers, this means being able to install and run their existing PC software on a tablet, with no fussing around with apps. Obviously there were many enterprise customers that jumped on the Surface Pro … but they don’t like the Surface RT.
Consumers, on the other hand, do not want a heavyweight tablet with crappy battery life and they will not pay $900 for one when they could spend that money on a 7-inch Android tablet for everyone in the family. That means they aren’t buying Surface Pros, nor the Surface RT, which is too expensive and lacking in apps. The result? According to IDC, Surface RT made up just 0.4% of tablet sales in Q1 2013.
Even Samsung (SSNLF) — a company with a reputation for trying just about anything — left Microsoft hanging by backing out of plans for its own RT tablet. However, the company has since released a version of this tablet that runs Windows 8.
Education has been one of the hot spots for tablets. Get your tablet in students’ hands and it will find its way home and establish a beach head for more devices running the same operating system (and connecting to the same app store). Apple knows this and aggressively pursues school boards hoping for iPad adoption, while promoting its iBooks digital textbook publishing and distribution platform.
Microsoft attempted to crash this market, first giving away 10,000 free Surface RT tablets to teachers, then offering educational institutions Surface RTs at $199 a pop. However, giving away a tablet at a deep loss (especially when you’re not recovering that loss through platform content purchases) is not a viable long term strategy. Just ask BlackBerry (BBRY).
Microsoft is in trouble in the tablet space and it knows it. The big reorganization is the first step toward doing something about its tablet strategy. Having one person (Julie Larson-Green) take responsibility for all hardware and one person (Terry Myerson) own all operating systems is a step in the right direction.
While two operating systems might be a necessary evil at the moment, the company has to be hoping the re-org will break down some barriers and result in a better design and user experience across all its tablets. Ultimately, once hardware barriers are removed (i.e., Microsoft figures out how to get Windows 8 running on a mobile processor), I suspect Windows RT’s days are numbered.
But in the meantime, Microsoft cannot allow its competitors to solidify their hold on the consumer tablet market, so drastic measures are called for.
The company is reportedly hard at work on a 7-inch Surface RT tablet. Across all tablet manufacturers, smaller has become the best seller. A 7-inch Surface RT may not address complaints about app shortages, but the resulting cheaper price might allow Microsoft to sell a few more without worrying investors about discounting.
Before those tables can hit shelves, though, something has to be done to try to spur sales. With few other options, Microsoft had to choose price cuts. The 30% price drop may be enough to generate some sales, but it avoids fire-sale level pricing that might have the opposite effect by scaring off consumers who are wary of buying a device that might be discontinued.
Microsoft has to do something to become a player in the tablet space. Windows 8 is the logical path, and would continue to generate sales of its profitable Office Suite, even as PC sales continue to slide. The newly reorganized company has to be working toward platform unification that is likely to eventually orphan Windows RT users, but that’s a problem that can be dealt with later.
At the moment, pushing cheaper RT tablets is the only real choice Microsoft has if it’s going to be any kind of a presence come back-to-school and holiday shopping season.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.