Anybody who has been reading my posts will know that my disclosures at the top have not included "I am long MSFT." This is because I took my profits some time ago (and admittedly missed the final leg of the run). While I fundamentally believe in the company's engineering prowess, I have a significant problem with its tablet strategy. In the most recent quarter, Microsoft (MSFT) announced that it took a $900M write-down on unsold Surface RT inventory. I warned that Surface RT and, by extension, Windows RT was a flop, and until I see Microsoft "getting" the message, the tablet strategy will still falter.
Why Windows RT Is Dangerous
As somebody who follows this space, I have noticed that despite Microsoft's asinine attempt to create a version of Windows that is fundamentally crippled for tablets in order to capitalize on ARM (ARMH) hyperbole, Microsoft's own full version of Windows 8 that runs on standard X86 processors has managed to gain significant share in the tablet space. In Q1, Intel (INTC) (the only supplier of X86 chips for this space at the moment) took 90% share of the Windows tablet market, which in turn translated into roughly 6% of the tablet market at large.
So, it seems like Windows 8 tablets are actually gaining some pretty decent traction, right? Sure, but the big problem is that while Microsoft actively pushes its Surface Pro as an expensive, productivity oriented device, it completely distorts the image of full Windows 8 tablets in general. I can't tell you how many times I've heard people say that they believe that full Windows 8 tablets are "expensive and bulky." This is completely not the case and even at Microsoft's own stores there are full Windows 8 tablets for $399 that are even thinner (and faster) than the Surface RT powered by Intel's "Clover Trail."
The problem with Windows RT is that it leverages none of the advantages that a Microsoft operating system should bring (backwards compatibility with desktop software so that it can be effectively used as a PC as well as a tablet). There is literally no reason for Windows RT to exist, and as long as customers are even slightly skeptical that the Windows 8 tablets might not run their traditional Windows applications, then they may simply opt for more established Apple (AAPL) iPads and Google (GOOG) Android based tablets.
Surface RT - Gee, Nobody Wanted a $500 Convertible That Didn't Run Windows Problems?
So Microsoft took a $900M write-down on Surface RT inventory because nobody really wanted to pay $500 for a Windows RT convertible with a last generation Nvidia (NVDA) Tegra 3 processor? Is this really a surprise to anybody? In a world where I can buy a nice iPad or Nexus 10 with a better processor, better screen, and better app ecosystem for the same price (or cheaper), why would I buy a Surface RT?
What Microsoft needs to do -- and it needs to do this as early as this year -- is to put a bullet through Windows RT's head and release a "Bay Trail" powered Surface. It needs to come with a nice 1080p or 1600p screen, be very thin, come with a decent amount of storage, and on top of that, Office 2013. And, while the company is at it, needs to sell it for cheap -- pretty much just enough to make a profit off of the Windows 8 license. I also believe that a Surface Mini, also with said "Bay Trail" chip, could do wonders for driving Windows 8 in tablets. This could compromise on the screen and sell for pretty cheaply, and would further drive adoption of Windows 8 to combat the growing Android threat.
Or, better yet, Microsoft could simply stop trying to compete with its OEM customers and stop selling its own tablets altogether and instead simply do its best to promote devices from its customers. The Microsoft store is quite good at showcasing these other designs, so why not go all-out and reserve the floor space for even more designs from its partners?
Microsoft can do this. Windows is a powerful franchise, and there is no OS more powerful for those looking to do both content creation and consumption than Windows. But Microsoft has to understand that it can't shaft its legacy user base just to try to drive everybody to buy apps from the app store. Hook everybody with the promise of a full PC in a thin and light form factor, and then the apps -- and then the royalties -- will come, and the write-offs will stop.