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It's been a whirlwind couple of weeks for Microsoft (NASDAQ:MSFT) as they continue to add pieces to their overall strategy to build their mobile ecosystem to compete with both Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). It began a few weeks ago at E3 and the announcement of the SmartGlass app which created a seamless connection between someone's Xbox, their Windows Phone and, presumably their PC running Windows 8.

The big bombshell, however, was the announcement of the Surface series of tablets that will set the aspiration bar for Windows 8 tablet. Of course it is obvious that Surface is a direct competitor to the iPad. Microsoft is not aiming low in its attack on the tablet market, i.e. Android tablets. That market is nearly non-existent at the 10" level with only the Asus transformer having any real market share. What Microsoft is attempting with Surface is to redefine the tablet away from being a recreational device, which it is very good at. Even the worst Android tablets are still brilliant pieces of technology.

The gamble that Microsoft is taking with all of this has been talked to death for sure, so what's the angle to the story that matters the most? It is simply this. Microsoft has admitted that Apple is right, controlling the whole user experience is more important than the raw specs of the devices. By leaping forward with their OS integration with putting the Metro UI up front for everyone across all devices they are trying to outflank Apple in the place where Apple is strongest, apps.

They have to do this. Windows Phone has 100,000 apps currently, many of those paid for by Microsoft to get developed in time for this cross platform roll out. They are being ruthless in ensuring that Windows Phone 8 (and Windows RT for ARM processors) is installed on hardware capable of running it well. There should be no bad hardware running Windows phone 8 unless the OEM drops the ball on battery life. This is why Nokia's (NYSE:NOK) Lumias could not be upgraded to Windows Phone 8 and why the Lumias will quickly become entry level Windows Phones.

Apple has cache with developers at this point, but iOS has the highest app development cost, $27,463, according to a recent report from Vision Mobile. Android is next at $22,637. Windows Phone is significantly cheaper at $17,750. At this point Android is seeing the lion's share of the emerging market app development attention. For Microsoft to catch up they are going to have to continue engaging the low end of the market to increase the user base to attract more app development.

And this is exactly what they are doing by segregating the Windows Phone market along hardware lines. Windows Phone 7 apps will run on Windows Phone 8 but not vice versa. The latest data also suggests that while Windows Phone lags behind seriously in revenue generated per app per month, $1235 versus $2735 for Android and $3693 for iOS, when one considers the installed base of each OS in raw numbers, Windows Phone is generating a lot more revenue per user.

So, the potential is there. This is why, however, Research in Motion (RIMM) is in such trouble. Their user base is dropping even though apps for their OS are lucrative. Developers looking to make money selling apps for Windows 8 or Windows RT will have an easy re-write on their hands to develop for the Windows Phone 7.8. What else does RIMM have going for it? One can ask that same question of Google as well.

Yes the PC is flailing but the laptop is not. We haven't moved completely away from the PC/Laptop paradigm to the Smartphone/Tablet paradigm. Sales of notebooks, according to Digitimes are on the rise again as the current generation of tablets are just not yet productivity tools. They will be and solutions like Surface and a number of the Windows 8 models that were shown off at Computex are glimpses into where the tablet will go next. The new MacBook Air and Ultrabook sales will continue to be strong. If the Surface Pro can come in at a price point at or near the low end of the Ultrabook line then Microsoft will have supply chain problems that the company has never dealt with before.

And that leads to the big question: whether Microsoft can actually make any money like this. They haven't so far. As a portion of their total revenue this is all miniscule when compared to Office and Windows. For their strategy to work it will likely have to become bigger than one of them and Microsoft will have to learn how to make money on selling hardware, something they have never demonstrated the ability to do in any market that matters, keyboards and mice notwithstanding.

Source: Microsoft: Tension On The Surface