How Microsoft Can Win The Tablets War

Aug.30.11 | About: Microsoft Corporation (MSFT)

Over the last 10 years, Apple (NASDAQ:AAPL) stock has gone from $7.75 to $383.50. Microsoft (NASDAQ:MSFT), on the other hand, is now at $25 and change, the same level at which it was 10 years ago. Apple’s success is not the result of just Steve Jobs' effort, but he was the one who picked key players and built the team. It may be a fair and interesting question to ask what Jobs would do if he was running Microsoft.

The iPad tablet has been a big success for Apple. Popularity of tablets is seen as partly reducing the demand for Windows laptops. As more people use non-Windows tablets, and tablets become more powerful, they could in fact become a threat to the dominance of Windows and Office Suite. Each one generates about 40% of Microsoft’s operating income, and it is important for Microsoft to defend these extremely profitable and currently dominant core businesses from the shift in user preference towards tablets. Since Jobs really created the space, how would he compete if he was at Microsoft? It is an easy conclusion that he would create a new Windows-based tablet that would become a must-have for everyone, but what would that tablet look like?

iPads and similar tablets are great for reading, browsing the web, etc. What could be the next step up from there? Imagine if you could also write on the tablet screen with a stylus? That would be a true advance – a game changer. If you are an executive, you could not only read business documents, but also take notes in meetings just by writing on the screen. Or, if you are a student, you could not only read your text books, but also take notes in the class on the tablet – no need to carry heavy text books and paper notebooks. If you wanted to use a program like Word or Excel or a database, you could just run it. Wouldn’t that be a great device to have? You wouldn’t need to carry a separate laptop anymore. One device will do the work of both.

The good news is that such a device exists and is available for purchase today. It is called Windows Tablet, has been available for a long time, and works very well. I say that from personal experience; I bought my first tablet eight years ago, seven years before iPads came on the scene. I got my current one, a Lenovo ThinkPad tablet, almost four years ago. It’s a laptop with full keyboard, but I can flip the screen over the keyboard and it becomes a tablet. Though it is bigger than iPad and Android (NASDAQ:GOOG) tablets, it provides a bigger screen, a much bigger hard drive, a full keyboard and lets me run all Windows applications including Excel, Word, and Powerpoint. I can use a stylus to write or draw on the screen just as I would on a piece of paper, something that one cannot do in iPad and other tablets. It even has handwriting recognition built in that can convert handwriting to text. I can read documents just as I would a paper document, can highlight or underline words or sentences, make notes in my handwriting on the side, etc. and then save it for referring to it again in future. No longer do I need to print or save paper copies of all the market research and documents I read. When I review deal documents, instead of printing those thick documents, marking comments, and faxing it back to lawyers, I am able to simply write on the screen, save the pdf file, and email it back, saving a lot of time and trees. In meetings, I take handwritten notes on the tablet with a pen-like stylus with the screen lying flat on the table and not blocking the view or acting like a barrier.

Apple’s iPad was a huge success as soon as it came out. Windows tablets are great and have been available for some time, but have never caught on. There are two reasons for that. First, very few people seem to know about them, as they have never been advertised or promoted seriously. Second, they were priced too high. Expectation was that the cost will come down as sales volume increased. But high price has also been a deterrent to higher sales.

Windows tablets are not the only unpromoted product from Microsoft. It has another product that I think is easily one of the best software products ever created by the company, the Microsoft OneNote. It is part of the Office suite, yet very few people know about it. OneNote is like having a bunch of virtual spiral paper notebooks that allow you to organize and collect all kinds of information on your computer. Each notebook has tabbed sections which contain pages. You can put almost any kind of data – hand-written notes, typed text, tables, pictures, audio, video, screen clippings, other files – on the pages. The user interface is simple and elegant and the program takes very little memory to run. You can search even in hand-written notes and text in pictures and screen clippings. From some of the posts on the web, I suspect it might have been an almost accidental product developed by a very small group of people rather than something that was planned.

A combination of OneNote and tablet is the killer application for a Windows platform that can be a game changer if it is priced and marketed appropriately. I have seen no serious attempts to promote it from Microsoft, but in the hands of someone like Jobs, the combination would be golden.

Low prices for iPads and Andriod tablets have resulted in huge sales numbers. That has led PC manufacturers to try to compete by creating lower-priced smaller screen windows tablets. However, Windows systems need more memory, bigger hard-drive, more powerful processors, and bigger screens. That makes them more expensive. An ability to write on screen also adds to the cost. So, Windows tablets can’t really compete on price. Luckily for Microsoft, it doesn't have to. What it needs for its core businesses of Windows and Office suite, which generate about 80% of its operating income, is that people who use Windows today do not move to other platforms running on tablets, as tablets become more powerful. This goal can be achieved by focusing on the segment that needs or wants both a laptop and a tablet, like business professionals and students. This can be done by taking steps to promote availability of a Windows device that provides functionality of both in one device. The price for this device does not need to be as low as iPad – it just has to be same or lower than the total price for the two devices purchased separately to have a huge demand from people who will be looking to upgrade their old PCs and laptops. Clearly, that should be achievable. Intel has a lot to gain from this too and could be a partner in this effort.

Better design and marketing of existing products would be one focus for Jobs. Pricing would be another one. Apple had the guts to design a product and negotiate contracts for large scale production without knowing how much demand there would be. From some of the reports, Apple had bought a lot of flash memory (some were worried about enough supplies for others) for iPods, even before the product was announced and there was no way to predict demand for that new product. He created products that no one asked for, but marketed brilliantly, and sold products at prices where there was likely to be significant demand.

Jobs' genius would be to realize the potential, design and negotiate aggressively with suppliers to reduce costs, and promote it like a new game changing technology that everyone needs to have, the way he did it at Apple, and sell it at a price that would attract lots of buyers. However, at Apple, he did have an advantage over Microsoft since Apple controls both hardware and software in its products. In the Windows world, the software comes from Microsoft, processors from Intel, and the computers from a bunch of different manufacturers. That leaves the Windows tablet without a clear champion. It is not a big revenue generator for any of the parties involved. So it does not get focus, and there is no one with enough volume to drive prices lower.

To compensate for lack of control over hardware, Microsoft can create reference design specs to guide PC makers, in the same way as Intel does when it releases entire designs for motherboards that are based on its microprocessors, which are used by PC manufacturers to build computers (that is why motherboards from different manufacturers look very similar). Microsoft does not have to go as far as to create designs – it could just create design specs. It could also negotiate volume discounts for some parts for manufacturers who choose to build computers meeting those specs.

Jobs would go further – for example, working with textbook publishers to make books available on the tablets, creating programs making it easier for professors to distribute class handouts and collect papers to grade, etc. -- and almost make it necessary and fashionable for every student and every executive to have one.

New ideas and better marketing can only help a stock, which despite all the potential, a healthy 2.5% yield, tons of cash, and a stellar balance sheet, trades at close to its lowest historical multiple at a PE of 9.6.

In the end, only Jobs knows what he would do if he were running Microsoft. The above is just my view, and the tablet described is the one I want to buy. But Steve Ballmer and team can only benefit by asking themselves the question: What would Jobs do if he was running Microsoft?

What is my point? Simply that it is possible for Microsoft to make significant gains in its stock price by using the assets it already has by thinking more like Jobs, but if Apple, Google or someone else comes up with a non-Windows device that is able to replace both a laptop and a tablet, that may be the start of the end of Windows dominance. People could move to an Apple OS and still have Office applications, but over time a move away from Windows could also lead to move away from Office applications. Watch out for MSFT stock in that scenario. Also, check out Windows tablets and OneNote – if you work with information, you might be able to get immediate dividends in form of saved time and increased productivity.

Note: A version of this article was published in Thoughts on Markets & Economy.

Disclosure: I am long MSFT, INTC.