On October 26, Microsoft (MSFT) will release its much-anticipated Windows 8 software packaged in conjunction with its new Surface tablet. Microsoft executives are staying mum regarding pricing for the Surface. In response, the rumor mill has exploded with wild claims that the Surface tablet will price out anywhere from between $199 and $1,000. According to Benzinga Editorial and Forbes Magazine, Microsoft is likely to offer its Surface for $200. At $200, Editorial intimates that the Surface would retail beneath cost. At this price point, Microsoft would be dumping product in an aggressive move to carve out share within the tablet market. A tepid market reception for the Surface launch, however, would reinforce Microsoft's image as a follower behind the likes of both Apple (AAPL) and Google (GOOG).
Microsoft is Beta
Microsoft has yet to recover from Apple's devastating "I am a Mac - I am a PC" advertising campaign. In a series of commercials, airing between 2006 and 2009, Apple personifies itself as an eager-to-please hipster. Alternatively, Microsoft is an old-fashioned company man, who cannot get out of his own way. The "I am a Mac - I am a PC" campaign defined the apex of technological warfare between the creative and functional class. Ironically, Microsoft's greatest strengths have been exposed as weaknesses. Instead of being hailed for its reliable dominance, the Microsoft brand is now dismissed as a boring corporate machine. Apple is now what is "cool." As such, it is Apple that enjoys the gaudy profit margins and what Wall Street would describe as "goodwill."
Tim Bajarin and Time Magazine describe The Apple Way as the "Gold Standard" for the technology business. The Steve Jobs halo effect is an integrated, closed-circuit loop that includes nodes of entry at the iPod, iPhone, iMac, iTunes, and iPad platforms. Because of its notorious refusal to accommodate third-party original equipment makers, the Apple brand is lauded for its uniformly chic style and seamless transitions between product lines.
Alternatively, Microsoft predominantly hawks Windows software to butter its bread. The Microsoft food chain is a string of unlikely bedfellows, which includes Hewlett Packard (HPQ), Dell (DELL), Intel (INTC), Applied Materials (AMAT), Nokia (NOK), and Barnes and Noble (BKS). As such, Microsoft is often guilty of forcing its round software pegs into a square hardware holes. With the exception of the X-Box, Microsoft shoulders a checkered past of abandoning product lines outside of its core PC software business.
For example, Microsoft's Zune and Bing rollouts serve as case studies of reactionary business models that failed to gain traction. The implosion of the Microsoft -- Nokia partnership, however, proves even more devastating to Silicon Valley morale. On February 11, 2011, Microsoft executives literally boarded a plane for Finland and deposited briefcases full of cash at Nokia headquarters. One year later, rapper Nicki Minaj danced the night away at Times Square to unveil the Nokia Windows - Lumina 900. Jeff Bradley, AT&T product chief, fueled the hype further when he described the Lumia as "a notch above anything [AT&T] has ever done." AT&T was to then offer the Lumia 900 phone for $99, when customers agreed to the terms and conditions of a two-year contract with this carrier. Shortly thereafter, a technical glitch forced Nokia's hand to offer a $100 rebate to Lumia buyers throughout the month of April. Ironically, after the pomp, bombast, and hysterical program to effectively give these things away, Stephen Elop, Nokia CEO, describes Lumia sales as "mixed."
In response, Microsoft is now in agreement to compete against its own Nokia partner. The Wall Street Journal reports that Microsoft refuses to offer Windows 8 upgrades on Lumia phones already in circulation. Concurrent with this announcement, Microsoft enters into a deal to provide its Windows software to Huawei Technologies, a Chinese handset device maker.
For original equipment makers (OEMs), a competitively priced Microsoft Surface tablet would be the final shot of a one-two knockout combination that has adversely affected confidence within the Windows food chain. J.T. Yang, Acer CEO, lays down the gauntlet and says that Microsoft should "think twice" about manufacturing hardware "that is not something [Microsoft is] good at."
Microsoft, with its deep pockets, threatens to run marginal OEM players out of business. Most likely, Redmond will take a page out of the Amazon (AMZN) Kindle, AT&T (T) phone service contract, and X-Box playbook to steal share. Microsoft can immediately dump the Surface on the market below cost. In exchange, Microsoft hopes to pocket cash from contractual service agreements and application sales over the long-term. The success of this bait and switch model, of course, depends upon market acceptance of both the Surface and Windows 8 specifications.
Microsoft Surface - Windows 8 Specifications
Dan Costa and PC Magazine argue that Microsoft is taking a "huge gamble" that consumers will clamor for Windows-based personal computer functionality within hyper-growth smart phone and tablet markets. Windows 8 software is effectively a fusion of traditional handset, tablet, and PC operating systems. For example, Microsoft will encourage its Windows 8 user base to run Excel calculations on smart phones and tablets, after manipulating PC screen commands through touch.
Weighing in at 675 grams, Microsoft promotes the Surface for its sleek profile. The 9.3 mm deep Surface opens up to include a keyboard and kickstand support. This tablet features a 10.6-inch, 16:9 high definition screen at 1280 x 720p resolution. A NVIDIA Tegra 3+ chip powers the Surface and its 64GB in built-in storage. For audio-visuals, the Surface can convert into two separate cameras. The Surface rear-facing camera is fixed to a 22-degree angle, which makes it more so ideal for framing portraits with use of the kickstand.
Technical specifications, of course, are economically irrelevant if the Microsoft Surface cannot effectively compete against the Apple iPad and garner solid share within the tablet market.
The Bottom Line
On July 25, Apple released its third quarter earnings. During the quarterly period ended June 30, Apple sold 17,042 iPad units. This 17,042 count is an 84% increase above the year-over-year period. For Q3 2012, the Apple iPad and its related products and services account for $9.2 billion in revenue, or a little more than one-fourth of Apple's $35 billion total third quarter sales. At $660 per share, Apple trades for a relatively cheap 15 times earnings, in comparison to its 66% average annual growth. As an added bonus, Apple closed out its Q3 books with $117.2 billion in cash and marketable securities on its balance sheet. This liquidity hoard breaks down to $125 in cash and investments on a per share basis.
Microsoft, of course, is angling to hone in on this tablet action and achieve hyper-growth for its own bottom line.
While Apple has performed as an alpha story stock, Microsoft shares have sputtered for one decade. In the aftermath of the Surface release, Microsoft stock will continue tracking the S&P 500 Index and making regular dividend payments as a beta investment. Similar to a utility company, Microsoft generates stable cash flow because of its near-monopoly status above a particular sector. For the last four years, Microsoft's earnings have stalled near the $17 billion mark. On a nominal basis, today's hoopla surrounding Microsoft Windows 8 and the Surface tablet will do little to move the needle and power significant growth for a $260 billion corporate behemoth.
If anything, this Microsoft Surface tablet will hamper earnings power for competing OEM investments. For both Dell and Hewlett Packard shareholders, the staggering losses and misery will continue. Both Dell and Hewlett Packard shares have lost more than 60% of their value over the past five years. Ironically, Microsoft is helping to force the devolution of a pair of its greatest historical partners into mere relics of the '90s PC Revolution.
This is survival-of-the-fittest capitalism at work.
Disclosure: I am long AAPL.