Microsoft Still Doesn't Get It

| About: Microsoft Corporation (MSFT)

I am all for companies learning from their mistakes, but I believe that Microsoft's (NASDAQ:MSFT) management is becoming increasingly out of touch with reality. In particular, the company recently defended its position on Windows RT, making the outrageous claim that Windows RT's crippled functionality relative to full Windows 8 was actually a selling point. I'm sorry, Microsoft, but you can't have it both ways, and I believe that investors in your company need to have confidence that you are making rational decisions to best help deliver value for your shareholders. In this article, I plan to explain why Windows RT is not a suitable product offering for the company, and to urge investors to understand that Microsoft has a very real opportunity to succeed here...if it can simply let go of Windows RT.

Defending Windows RT - Less Is More, Right?

The Verge is a wonderful site that actually went to great lengths to test an Intel (NASDAQ:INTC) "Clover Trail" Atom tablet. Here is what they had to say about the device:

As soon as I turned on the Smart PC, I was blown away by how quick it was in comparison to Windows RT machines - Clover Trail performs far better than I had expected. Having used the Tegra-powered Surface RT and Samsung's Ativ Tab fairly extensively, the Smart PC feels like a breath of fresh air. All of Microsoft's "metro" apps load and run far faster than Windows RT tablets, and running these programs side-by-side never results in slow down.

So, for the same price as a Surface RT, I can buy a fully-featured, Intel based machine that runs all of my programs. But, hey, it's got to have lousy battery life, right, since it's Intel?

Nope. Quite the contrary - the battery life, according to The Verge, is better than either Microsoft's Surface RT based on Nvidia's (NASDAQ:NVDA) Tegra or Samsung's Ativ Tab which is based on Qualcomm's (NASDAQ:QCOM) Snapdragon S4:

While Atom performance isn't quite at the point where you could cast your ultrabook aside, the gains in battery life goes a long way to making up for it. The Smart PC didn't quite match up to Intel's ten-hour promise, but battery life is more than acceptable. I've been able to browse the web, play videos on YouTube, write this report, and listen to music for around nine hours before Windows snarkily suggests that I might want to find a power outlet. That figure dropped dramatically when I started pushing the tablet to its limits, but even while processing videos, photos, and playing the most taxing games that would run, I consistently got more than five hours from the Smart PC's 30WHr battery. That's more than I've ever managed to squeeze from either Microsoft's Surface RT or Samsung's Ativ Tab.

So, wait a minute...Intel's Atom is faster than the ARM (NASDAQ:ARMH) chips, it gives better battery life, and it even runs all of the software that people have come to know and love on Windows? So, it's pretty clear that Windows RT is no longer necessary and that the whole venture can be put to rest...right? Well, not according to Microsoft, which had the following to say:

Looking at things now like power performance and standby time and passive [fanless] form factors. When we launched windows 8, it was really competitive with a full-sized iPad. A lot of that was made possible by the ARM [chip] architecture.

Oh, really? So, the much faster Atom that also has better battery life than the ARM based chips...that's not going to help competitiveness with the iPad, right? Just the Windows RT devices that have a negligible application ecosystem and fading support from OEMs like Samsung, ASUS, Acer, and others, right?

There's more...

If you look forward a year or two and you look at the performance output of ARM chips, those are some really capable chips. I think it has a very bright future.

So Intel's "Bay Trail" and AMD's (NYSE:AMD) Temash, both of which should offer excellent performance per watt for tablets, aren't going to be capable in the future? The ARM chips still don't run the legacy Windows applications even if they eventually catch up to the speed and responsiveness of Intel's 5-year-old Atom architecture (that will be getting a huge refresh in 2H 2013). There is yet more...

People are talking about legacy desktop software not running, but they don't think about the customer benefit of only running modern apps. The only apps that you install from the Windows store are the kind, that as a customer, you can manage your rights to.

If there's a "customer benefit" to running "only modern apps", then the consumer will simply choose to run only modern apps...on their Windows 8 machines. Are you implying that full Windows 8 is useless? You might as well hang a big sign in your stores that warn people lining up to buy Windows 8 laptops and your very own Surface Pro that they will "benefit" from moving to a piece of hardware that does less and is slower.

Windows 8 still pays the bills, Microsoft, not Windows RT. And then we get to this final gem,

And on the ARM side, there is a propensity for a much higher percentage of PCs that are going to ship with mobile broadband [3G/4G], precisely because ARM PCs have even longer battery life [than Intel PCs] on connected standby

Right, so did Microsoft completely miss the "Clover Trail" launch? Again, according to the Verge (and pretty much every other review site), the Intel Atom has better battery life than the ARM based chips from Nvidia and Qualcomm...not the other way around. I don't get it.

Investment Implications

Microsoft is trying vigorously to defend its hedge against Intel and AMD's potential sluggishness in this space. It turns out that it wasn't necessary. Intel has the best Windows tablet chip available today, and later this year Intel refreshes its Atom with the 22nm "Bay Trail" and AMD comes out of the gate with its 28nm "Temash". Windows RT is completely pointless, and trying to sell lack of functionality as a feature that helps the user experience is disingenuous. Microsoft should stop with the Windows RT venture now and work closely with Intel and AMD to make Windows 8 based tablets the best that money can buy, differentiated by legacy application compatibility.

If Microsoft doesn't, it will completely lose the "tablet" wars to Apple (NASDAQ:AAPL) and the legions of Google's (NASDAQ:GOOG) Android tablet vendors. Microsoft needs the install base and "carrot" of backwards compatibility to sell devices. Without it, Windows will eventually become a distant memory to the consumer as everyone buys either Apple's iPads or tablets running Android. Device vendors would rather use Android than pay Microsoft for Windows RT. In that case, Microsoft would quickly see how much their faith in Windows RT's "bright" future will cost them and their shareholders.

Let it go, Microsoft. Kill Windows RT, admit your mistake, and push full speed ahead with the unified Windows 8 platform...before it's too late.

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.

Additional disclosure: I am short ARMH

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