By now, everyone knows that Microsoft (MSFT) has announced that they are building a Windows-8 tablet called Surface. For a running diary of the news, along with some product specifications, click here. Microsoft is entering the tablet market at an interesting time. The market appears to be getting more crowded and a number of large names are competing in this space. So who are the real winners and losers when it comes to Surface? Let's analyze a few.
The Biggest Winner - Microsoft:
It did seem logical that Microsoft would enter this space at some point. Well, now they have. Microsoft is always looking to increase revenues, and this should help that. Now, I don't know if Microsoft will be profitable on the Surface from Day 1, but I would assume that if they stay in the tablet space going forward, it will become profitable over time.
An analyst at S&P Capital IQ upgraded the stock as a result from Buy to Strong Buy, and is keeping his $37 price target on the stock. Analyst Angelo Zino noted the following:
"Features include front and rear cameras, a built-in kick-stand, and detachable keyboard/cover. While no pricing details were disclosed, we expect the ARM-based Windows RT version to be priced near comparable tablets and Windows 8 Pro version near those of upcoming ultrabooks. We positively view MSFT's more aggressive stance into the hardware space, but note possible conflict with hardware."
The launch of the product could be key as well. If Microsoft has it out for the holiday season, it could be one of this year's desired products. For now, analysts have cut their fiscal 2012 (ending this June) estimates for the company by 2 cents, but raised next year's estimates by that 2 cents. Strong tablet sales could help push Microsoft's revenues over $80 billion in fiscal 2013.
Potential Big Winner - Research in Motion (RIMM):
As many of my readers know, I am one of the most bearish out there when in comes to Research in Motion. You might think that another tablet thrown into the ring would get me excited and I could use that as another negative towards RIMM and its Playbook. Well, you would be wrong. I think it could be a positive.
Why do I feel that way? Well, I can envision two scenarios. In the first scenario, RIMM realizes that there is just too much competition out there and decides to no longer produce the Playbook. Instead, they decide to focus on the Blackberry, which when you think about it, is the main driver of this company. In the second scenario, RIMM either sells the Playbook division to one of the larger names, or potentially comes to some form of strategic alliance with one of the big boys. While Playbook sales could suffer in the short-term from Surface, it could be a long-term positive for Research in Motion.
Potential Small Loser - Apple (AAPL):
The general consensus is that Surface will not be an iPad killer, and I agree with that. The New York Times' Sam Grobert argues that Surface is more of an ultrabook competitor than an iPad competitor. Mr. Grobert believes that Surface is more for tablet buyers who crave the "added functionality of a notebook".
When it comes to pricing, we haven't yet heard what the final numbers will be. I personally don't see the price of Surface being exactly what the iPad sells for, but I also don't see it near the other tablets that retail for $199 or so.
So where does that leave Apple? Well, anything that can be referred to as a "tablet" will surely take away some iPads, but the real question is how much. If in the first year of release, Microsoft steals away say 200,000 iPad sales, I don't think Apple is really going to worry. But if Microsoft starts stealing a few million in a year, then we are going to see a response from Apple. Remember, Apple gets about $550-$600 per iPad (last few quarter's average selling prices), so they would lose a billion in revenues for every 1.7 million less iPads sold.
If Surface is really a killer of ultrabooks more than tablets, you would figure that Dell would have a bit to lose. Dell sells both ultrabooks and tablets, and has been struggling to hold its market share in this very competitive industry. Looking at the firm's 10-Q report, Dell's Q1 revenues declined 4% year over year, and net income plunged 33%. Adding another large name to the competition would only make Dell need to work harder, and they blamed poor Q1 results on execution issues. It will only get harder from here.
As for Amazon, I haven't heard much about the Kindle Fire recently. We've heard some scattered rumors of Amazon dropping the price by $50, and perhaps the newer version will come out some time later this year or early next year. We know that the iPad is killing the Fire in terms of sales, and that divide is probably going to get worse with the upcoming holiday season. If Microsoft gets Surface to market before Amazon gets the new Kindle out there, you would think Amazon should just step away from this space. But I'm guessing they won't.
Other Names to Consider:
There are plenty of other names to consider for the winners and losers battle, but they might be a little more subjective. Chip suppliers like Arm Holdings (ARMH) and Intel (INTC) could gain or lose, depending on where certain tablet sales fall (are gains from Surface sales wiped out by losses from sales of other tablets?). Corning (GLW), which supplies the Gorilla Glass, fits in a similar category. You might even think about Google (GOOG), which has the Nexus tablet coming out. Also, is there the potential for Surface to help Bing steal market share from Google's search business?
Conclusion - If on the face of it you like Surface, Buy Microsoft:
The analyst community generally views Surface as a favorable product offering for Microsoft, and the 3% rise in Microsoft shares after the announcement back that up. Surface may not be a normal tablet, but it isn't an ultrabook either. It seems to be a combo of the two. Who does that benefit and who does that hurt? I've provided some of my thoughts. Now it is time to provide yours.