Microsoft Surface Is No Apple iPad Killer

| About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) is up to its old tricks. On October 26, Microsoft will release its Surface tablet, in response to the wildly popular Apple (NASDAQ:AAPL) iPad. To coincide with the Surface launch, Microsoft will also release its latest Windows 8 operating system that very same day. Obviously, Microsoft's operating strategy is geared towards hawking Windows software updates every other year. Microsoft's software cash cow solidifies the corporation's position as an omnipresent rival for all things tech.

Today, Microsoft has largely ceded leadership over to Apple. Rather than innovate, Microsoft executives seemingly prefer to throw cash at the latest "must have" item and crank up another marketing blitz. Consumers are likely to stumble upon a familiar pattern: the Microsoft Surface is no Apple iPad killer.


Microsoft Is Beta

Microsoft has yet to recover and repair its image from Apple's devastating "I'm a Mac - I'm a PC" campaign that ran between 2006 and 2009. In the series of advertisements, Apple personifies itself as the consumer friendly, yet chic brand. Alternatively, Microsoft is a dowdy relic in a tweed suit that cannot get out of its own way. With Steve Jobs at the fore, Apple revolutionized consumer electronics. Over the past decade, Apple has created a closed circuit of blockbuster hits that include the iPod, iTunes, iPhone, iMac, and now, the iPad. Meanwhile, Microsoft has done little to change the game, as it floods the market with relatively inconsequential Zune, X-Box, and Bing offerings.

Microsoft's foray into the smartphone market, of course, has proven disastrous. In February 2011, Microsoft executives literally boarded a plane for Finland and arrived at Nokia headquarters with briefcases full of cash. One year later, Nokia launched is Windows - Lumia phone at Times Square behind rapper Nicki Minaj leading the spectacle. AT&T (NYSE:T) was definitely on board with this program, as the service provider ate hundreds of dollars in phone subsidies to offer this phone for $99 and knock Apple off its perch. A minor technical glitch further sweetened the deal, as Nokia offered $100 rebates on the Lumia for one month. Yes, after bribing consumers with $1 to garner share, Stephen Elop, CEO, describes Lumia sales as "mixed." In response to this debacle, Microsoft has thrown its Nokia partner under the bus and agreed to offer Windows software to Chinese rival Huawei Technologies.

Taking recent history as guidance, it is unlikely for Microsoft Surface to pose a significant threat to the Apple iPad. Apple products are still cool, or maintain what Wall Street banksters would describe as a "halo effect." This halo effect translates into 40% gross margins for Apple, as consumers are more than willing to pony up cash to remain part of the "in" crowd. Microsoft would profit best if it markets the Surface as a functional, utilitarian device. Rather than taking on Apple directly, Microsoft should target the Amazon (NASDAQ:AMZN) Kindle, Barnes and Noble (NYSE:BKS) Nook, and Google (NASDAQ:GOOG) Nexus as competitors. Surface specifications, however, indicate that Microsoft is going for the jugular.

Microsoft Surface Specifications

Microsoft's foray into tablet computing does throw hardware makers backs against the wall. J.T. Wang, CEO of Acer, fired an opening salvo in Financial Times. According to Wang, hardware is "not something (Microsoft) is good at." This company should therefore "think twice" about releasing the Surface. David Penn and Forbes Magazine, however, intimate that hardware makers such as Acer and Hewlett Packard (NYSE:HPQ) are playing a shell game of tough talk. Technology firms are squealing because their businesses are going obsolete. The Microsoft Surface is the latest entry into the tablet gap separating smart phones from laptop computers. Microsoft's commitment to the tablet would further decimate the PC industry that it has already commoditized.

The Microsoft Surface will run the Windows 8 operating system, which is powered by Intel's Core i5 processor. The Surface features either 64GB or 128GB of internal memory. In terms of physical dimensions, this tablet weighs 903 grams and is 13.5 millimeters thick. The 10.6-inch screen offers a 1920 X 1080 high definition display. Weighing in at 650 grams, the Apple iPad is the much smaller device. The iPad runs iOS5 software and carries 16, 32, or 64GB in built-in memory. Surface specifications indicate that Microsoft is bringing yet another functional device to market for working professionals. Alternatively, the Apple iPad is a consumer-friendly machine notable for its web-based applications.

The Apple iPad retails for $499, $599, and $699 for the 16, 32, and 64GB models, respectively. Prior to launch, Microsoft remains silent on pricing for its Surface. I would speculate that the Surface is likely to cost between $500 and $750. Microsoft is gambling that consumers want more computing power for tablets, instead of an iPad that Adam Zein dismisses as "an iPhone with a bigger screen and no phone."

The Bottom Line

Microsoft and Apple are not necessarily competing for the same customer. As such, Apple is likely to retain its grip on "cool," while Microsoft panders to the technocrat crowd. For tablets, Microsoft's bet on the Surface is likely to implode. Instead of buying a mini-laptop, consumers in this market can simply continue working upon PCs and MacBook computers. Microsoft is descending down the same path as Research in Motion (RIMM), where arrogant executives attempted to force feed technically complex products upon an unforgiving market. Rather than competing on the grounds of quirky consumer applications, Research in Motion is now fighting desperately for its own corporate life.

Microsoft, of course, is a cash cow that is far from going bankrupt. Behind its AAA rating, Microsoft carries $63 billion in cash and short-term investments on the books, over top of a mere $1 billion in short-term debt. In 2012, Microsoft posted $17 billion in net income on $74 billion revenue. Technology investors, however, are all too familiar with the fact that Microsoft's financials have grown little over the past decade. The stock market pricing mechanism discounts future growth. As such, Microsoft shares have done nothing but pay dividends for the past ten years.

The Microsoft Surface launch will not change the fortunes for shareholders within this behemoth. At $30, Microsoft trades for 15 times earnings and is a beta stock. Microsoft shares will largely track the S&P 500, which is due for a correction as recession looms. Recently, the Federal Reserve Board revised economic expectations downward in its mid-year report.

Apple, of course, is still firmly entrenched in growth mode. Today, Apple shares change hands at $615 and 15 times earnings. While Microsoft profits flat-line, Apple is posting 66-percent average annual income growth over these past four years. For Q3 2012, Apple carried $117.2 billion in cash and investment securities on its balance sheet. This cash position breaks down to $125 per share. Compared to Microsoft, Apple stock is trading at bargain bin levels.

Last quarter, Apple shipped 17 million iPads, which calculates out to be an 84-percent year-over-year increase. Next, the iPhone 5 release looms prior to Holiday Season to reclaim the Microsoft Surface spotlight and transform the Apple Store into a nightclub. For many Apple shareholders, the party is just getting started.

Disclosure: I am long AAPL.