Microsoft Surface and Windows 8 Change the Game

Microsoft (NASDAQ:MSFT) treated consumers to a double-barreled product launch last week with Windows 8 and the Surface tablet. Let’s take a quick look at the reception — and how these products could change the landscape in the computer world.

Let’s face it, Microsoft faces an uphill battle. PC sales are in a prolonged slump even as Apple’s (NASDAQ:AAPL) computers buck the trend with increased sales and growing market share. At the same time, the profitability of Microsoft’s operating system is under pressure. Where it used to be able to charge $200 to upgrade to its latest OS, $40 is the going rate for Windows 8 Pro. And even at that bargain-basement price, Microsoft is charging double what Apple does for OSX, making that slashed price look like a premium.

While it had been speculated Microsoft was spending $1.8 billion to promote Windows 8, Business Insider says it’s more like $1 billion. Still, that’s double the company’s typical new product marketing budget, and Microsoft will have to move 25 million copies just to make up the advertising outlay — never mind the three years of development.

Then there are the new Surface tablets. Microsoft is betting the farm on the Windows 8 and Surface combination. Should Apple, Amazon (NASDAQ:AMZN) or Google (NASDAQ:GOOG) be worried?

Probably not.

On the Windows RT side — the consumer Surface tablet — I suspect Microsoft’s prospects of becoming a serious contender are slim. Review themes for the Surface RT are eerily familiar to those who watched the PlayBook crash and burn: nice hardware, OS needs some work, lack of apps. Research In Motion’s (NASDAQ:RIMM) PlayBook tablet also received regular kudos for its design, performance and premium quality on release, while being criticized for OS issues and an underwhelming app selection. We know how that translated to sales and market share.

With the Surface RT, Microsoft is going up against market leader Apple with a tablet that offers no real price advantage. The base 32GB Surface RT is $499, the same as Apple’s 16GB iPad with Retina display. Yes, moving to 32GB on the iPad boosts its price to $599, but the 16GB iPad 2 goes for just $399. The full-sized Kindle Fire HD is only $299 ($369 for 32GB), while a 16GB Nexus 10 can be had for $399 ($499 for 32GB).

Opting not to compete on price could be surmountable if the Surface RT made a compelling case elsewhere, but that’s not the case. The Windows 8 App Store is currently at around 10,000 apps compared to Apple’s App Store, which has at least a quarter of a million apps optimized for the iPad; Google Play has over 600,000 Android apps (it doesn’t break out how many are tablet-friendly) and Amazon’s Appstore for Android recently topped 50,000 apps for Kindle tablets. Consumers flock to apps, and lack of compelling titles and choice is one of the key reasons for RIM’s PlayBook failure. Microsoft isn’t exactly boosting its odds here by setting the minimum price for paid apps at $1.49 — way over the 99 cent standard on other platforms.

After the long buildup to launch, Microsoft sold out of the base model Surface RT and the 32GB and 64GB models with Touch Covers were reportedly backordered (although the latter two do seem to now be available on Microsoft’s website). Microsoft hasn’t released numbers, but it’s likely to be considered a successful launch. I don’t expect the boisterous sales volume to continue for long.

Windows 8 reviews have been generally positive, but there is concern that the new default interface is confusing to legacy users. Getting the most out of the new OS requires a steep learning curve, and while the consensus is that Windows 8 is a solid improvement over Windows 7, the concerted effort to appeal to mobile “touchscreen” users may alienate some customers.

That’s not to say that Windows 8 or the Surface are destined for failure. Despite the doom and gloom around personal computers and Apple’s increasing piece of the pie, PCs aren’t going anywhere anytime soon. And even as it outperforms other PC makers, Apple still has just a small slice of the overall PC market — Wikimedia, a web traffic analysis organization, shows Apple computers holding an 8.45% share compared to Windows at nearly 70%.

With legacy PC hardware waiting to upgrade, new PC sales and that big promotional campaign, Microsoft should move a lot of Windows 8 boxes. It reportedly sold 4 million copies in the first three days after launch. It’s not going to make its usual profit margin on Windows 8, but there’s always Office, right?

The Surface Pro is where I think Microsoft stands its best chance of pulling off something big (and boosting Windows 8 adoption along with it). Yes, this will be a bigger and more expensive tablet than people have become accustomed to (Microsoft’s not talking cost yet, but expectations are for the $750-to-$1,000 range when it’s released in 2013), but this is not a consumer tablet. The Surface Pro runs full-blown Windows 8 and users can install existing Windows software applications on it (instead of apps) — it’s aimed directly at the business and professional market.

Ultrabooks were expected to take off and help PC sales recover, but that hasn’t happened. With many models priced at $1,000 or over and some businesses considering Macs or iPads, these streamlined portables haven’t caught on the way Microsoft, Intel (NASDAQ:INTC) and manufacturers had hoped.

The Surface Pro could be the device that comes to the rescue. With support for Windows applications and a competitive (to laptop and Ultrabook) price, it’s IT-friendly — a big plus for enterprise adoption. It’s a tablet, which will appeal to the businesses that feel a tablet form factor is the way of the future, yet it should be capable of being used with little compromise as a laptop, which — as someone who often uses an iPad to work will tell you — is a big win over offerings from Apple or Google.

To wrap up, I doubt Google, Amazon and Apple have much to fear from Microsoft’s Surface RT tablet. Apple, however, may see the Surface Pro and Windows 8 combo put a dent on its iPad and Mac enterprise adoption aspirations. And the companies that may have the most to lose — at least if the Tablet Pro lives up to expectations — are those that manufacture Ultrabooks.

Article printed from InvestorPlace Media,

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