I have been pretty confused as to why Microsoft (NASDAQ:MSFT) made the decision to invest in developing Windows On ARM (NASDAQ:ARMH). Originally heralded as something that would put an end to the "Wintel" reign, it predictably turns out that as long as Intel (NASDAQ:INTC) and [[AMD]] can put out similarly (or better) performing products, there is simply no need to have Windows RT. As Microsoft is entering the established tablet market, it needed a value proposition to get users to want to switch to Windows tablets. I believe that compatibility with legacy applications and the ability to use the device as a full, familiar Windows PC will eventually selling point for Windows 8 tablets as the hardware improves.
As such, I believe that the 10" form factor in tablets will eventually be transformed into hybrids (ala Microsoft's Surface RT or the Samsung ATIV Smart PC) and take the place of the low end notebook and the netbook. This implies that there would be no real place for the Windows RT OS in the 10" space as long as there is full Windows 8 compatible hardware available. The market has spoken and seems to agree:
- Lenovo is ditching its $799 "Yoga 11" (powered by an Nvidia (NASDAQ:NVDA) Tegra 3) and is replacing it with a $799 "Yoga 11S" powered by a full Core i5 processor. It's faster, more compatible, and all for the same price.
- Samsung (OTC:SSNLF) has put an end to its plans to release its ATIV Tab, which is a 10" Windows RT device powered by Qualcomm's (NASDAQ:QCOM) Snapdragon S4, with a Samsung executive stating: "When we did some tests and studies on how we could go to market with a Windows RT device, we determined there was a lot of heavy lifting we still needed to do to educate the customer on what Windows RT was"
- HP (NYSE:HPQ) scrapped its plans for a Qualcomm Snapdragon S4 based Windows RT tablet
For a Windows laptop, hybrid, or 10" tablet, Windows RT makes very little sense. But how about the 7" space?
Microsoft's Lucky 7
Luckily for Microsoft, the really big sellers in the tablet space aren't the 10" devices -- they're the 7" ones! While this is certainly not a rigorous analysis, a quick look at the best-seller's list for tablets on Amazon.com (NASDAQ:AMZN) shows that the sub-10" tablets (and in particular the 7" ones) are the ones that are selling the best, with 9 out of 10 being sub 10".
This, then, screams opportunity for Microsoft to build an inexpensive, high quality 7" class tablet that runs Windows RT. Nobody is likely to try to dual purpose a 7" tablet as a workhorse laptop replacement. This would be a pure-play consumption device that runs the "Modern UI". There would be no need to throw in Office for free just to try to get people "on board" with a "crippled" version of Windows -- it could be sold as a purpose-designed, "tablet only" device.
Does this have the value proposition of the familiarity and software install base of Windows? No, but neither does a 10" Windows RT device. What it does do is get Microsoft's new "Modern UI" app ecosystem out in volume to the masses via a well designed, fairly low priced device. What does Microsoft care how expensive the device is? As long as the company is making the margin of selling a copy of Windows (and getting users hooked into the new app ecosystem) AND maybe making a bit off of the actual hardware, such a device in high volume could be a hit.
Microsoft needs to be in the 7" tablet space since that's where, I believe, the majority of the tablet volume will be over the coming years. Full Windows 8 is not necessary here, especially as users are unlikely to try to run their traditional desktop/laptop programs on such a device. In fact, Windows RT can be used as a way to promote exclusive use of the "Modern UI" interface. Trying to force users in the 10" convertible PC category was a terrible idea that was doomed to flop, but in a more limited, consumption oriented 7" device, it could truly be the smash hit that Microsoft and its shareholders are looking for.
Disclosure: I am long MSFT, NVDA, INTC, AMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.