Microsoft (MSFT) is about to launch its most innovative product in years - the Microsoft Surface tablet computer - coupled with its brand new operating system, Windows 8. With the launch, Microsoft is leaning heavily on the popularity of touch-screen computing, the industry's fastest growing sector.
The Surface is a touch-screen tablet PC with an ultra-thin cover that doubles as a keyboard. Microsoft priced the new tablet at $499 for the 32 GB model and $599 with the keyboard cover. Compared to Apple's (AAPL) iPad 3, also priced starting at $499, and Amazon's (AMZN) Kindle Fire HD starting at $199, Microsoft will need both a better product and better marketing to compete.
To make matters worse, both Google (GOOG) and Apple are launching products of their own this week. Apple is going to release what many believe is an iPad mini on Tuesday, which will be priced even lower than the iPad 3, and Google is releasing the new Nexus phone on Friday before Microsoft's announcement. Additionally, Google may unveil a new 10-inch tablet by the end of the month.
The market is certainly crowded, and Microsoft's track record in business-to-consumer products and marketing is not great. Some may remember Microsoft's Zune, and fewer still remember the Kin - Microsoft's smartphone that lasted all of 48 days before it discontinued production. Microsoft's biggest success, the Xbox 360, gained popularity because it priced it competitively below the PlayStation 3 and Microsoft was able to beat Sony (SNE) to the market.
Neither of those factors that led to Microsoft's success in the video game console market currently exists in the tablet PC market. Unless Microsoft is more aggressive with their pricing and marketing strategy this time around, they are setting themselves up for failure.
The holiday season is usually the time of highest sales for tech companies. New products are coming out and the competition this year is fiercer than ever. With so many options for consumers and poor macroeconomic factors, price could be the determining factor for many.
If the Surface does fail to catch on with consumers, expect to see lower revenue for Microsoft as Android and iOS devices continue to cut into the PC market. On the other hand, good sales of the Surface will likely have the largest negative impact on desktop and laptop producers such as Dell (DELL) and Hewlett-Packard (HPQ) as the Surface is most likely to cut into their sales. Additionally, Intel (INTC) will experience lower sales because the Surface uses a mobile ARM-based processor.
In addition to the Surface, Microsoft is releasing the next iteration of the Windows operating system, Windows 8. The new OS is nearly a complete overhaul of the Windows franchise with a focus on touch-screen devices such as the Surface. Microsoft replaced the traditional start button, present since Windows 95, with a set of tiles of varying sizes all displaying different information.
Early reports show mixed reviews of Windows 8. Many users have had difficulty adapting to the new software after installing the consumer preview. Things that they were able to do quickly and easily in their previous version of Windows now mystify them. However, other users find it to be a marked improvement over the previous OS citing improved speed and performance as well as a more aesthetic interface.
Microsoft optimized Windows 8 for use on a touch-screen. The tiles are big and finger friendly and the design focuses on minimalism. Most consumers, however, do not currently own a touch-screen PC and will not experience Windows 8 as intended by the designers. Additionally, those that install Windows 8 on their traditional home computer may find it frustrating to use. These factors will lead to slow sales to consumers.
Microsoft's stronghold on the PC market allows them to package Windows 8 with nearly every home computer going forward. That means that every consumer that buys a new PC is getting Windows 8, whether they want it or not. Microsoft is touting the new OS as the savior of the PC industry - the catalyst to drive consumers back from tablets. Yet, it may be the thing that drives them further away from PCs as they search for something easier to use. I expect Windows 8 to drive innovation in the PC industry by companies such as Dell and HP.
It is interesting to note that Microsoft's product strategy is self-cannibalizing. Sales of the Surface will cut into the licensing agreements that are the cash cow of the company. Yet, without the Surface, consumers will likely fail to experience Windows 8 as intended. Strong sales of the Surface, at least in the near term, are critical to Microsoft's success.
Indications are that Microsoft has sold out pre-orders for the $499 model, but the higher margin $599 and $699 models are still in stock. There is no telling how many units Microsoft has actually sold, and it has given no indication that presales are strong. My expectation is sales will be weak because of their passive pricing and late entry into the market.
In the long-term Microsoft can expect competitors to undercut their pricing, but the competition will likely need to license Windows 8. An increase in tablet computing manufacturers will help Microsoft recover from initial slow sales. This is where the market is heading, and Microsoft is setting itself up for success in the long run.
After a bad earnings report for this last quarter, I expect more of the same from Microsoft next quarter. However, if the market has a drastic reaction to another bad earnings report, it could present a good buying opportunity as Microsoft is looking to establish itself further in the rapidly growing tablet computing industry.