Windows 8: The Next Insanely Great Thing?

| About: Microsoft Corporation (MSFT)
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Steve Jobs, in an interview with Gary Wolf for Wired magazine in February 1996, while Jobs was still with NeXT computer, stated:

The desktop computer industry is dead. Innovation has virtually ceased. Microsoft dominates with very little innovation. That's over. Apple lost. The desktop market has entered the dark ages, and it's going to be the dark ages for the next 10 years, or certainly for the rest of this decade.

When that article was published, Jobs was talking up WebObjects, which was probably to be expected, but he also saw great promise in the Web. Jobs again: "There are three parts to the Web. One is the client, the second is the pipes, and the third is the servers." He didn't expect anyone to make money off the browser side, though this was in the days before Google (NASDAQ:GOOG). He did imagine that companies could develop interesting Web terminals and "sell some hardware."

Where Apple (NASDAQ:AAPL) was able to leap into a plethora of devices called smartphones, hints at the design ideas of Steve Jobs:

Some people think design means how it looks. But of course, if you dig deeper, it's really how it works.

The user interface defined the rise of smartphones, and arguably it started with the first iPhone, despite that it was somewhat limited when launched, and not the first smartphone.

As Jobs and others have pointed out, we live in an information age. While we are often saturated with more information than we can process as individuals, many of us have an insatiable desire for more information. The desktop is still the dominant way to reach the internet, though the evolution of the internet shows that we are changing from a fixed interaction to a mobile interaction, and in the process becoming a huge part of the global economy. The next growth phase will surround the capabilities of the mobile internet.

Smartphone design has shifted towards touchscreen slabs with icon-driven user interfaces (UIs), quite likely based upon the success of the iPhone. While Jobs pointed out that the UI was as important as the look and feel of a device, unfortunately there has been little to differentiate one company's smartphone from another. There is little to no way to further innovate the hardware. Screens can change in size, devices could be more responsive, and battery life could improve, but these are all expected, evolutionary changes. The UI will likely be the way one company distinguishes themselves from each other in the near future.

Apple was not the first company with tablet computers, though the few on the market before the iPad were mostly niche products, or small handhelds running Palm OS, WindowsCE, or other software. In the same way that Apple launched the rise of the smartphone market towards consumers, the iPad launched the tablet market. However, one look at sales volumes will show that we now have an iPad market, and not really a diverse tablet market. While there are Android tablets on the market, their UI is not much different than the system of the iPad. Amazon (NASDAQ:AMZN) has been the most successful of other tablet makers so far, but with only a fraction of the sales volume of Apple.

Some may think that with Apple defining the standard, all other companies are destined to follow, but one dinosaur that won the desktop battle is set to change the way we interact with our smartphones, and tablets. Microsoft (NASDAQ:MSFT) has been working on Windows 8 and showcasing some of their UI ideas for many months, though the official release is a ways off. The new UI concept is tiles, instead of icons, which is very different than iOS or Android. It's easy to dismiss Microsoft as a company that lost its way and became complacent. But Microsoft is still one of the biggest and most recognizable brands in the world.

Arguments against Windows 8 tablets succeeding, or future Windows phones gaining traction in the market, might be that the interface is too different than icons, which most computers users now expect. Microsoft may lag in attracting app developers, though they do provide the Windows 8 App Store. Another argument against the platform might be Internet Explorer, which is not that popular amongst some users, though Mozilla is already developing for Windows 8, and Google will likely develop a version of their Chrome browser.

Recent reports indicate that Microsoft gave $250 million to Nokia (NYSE:NOK), and are expected to invest more in the future. The other risk I see in this is that Microsoft tries to accomplish too much with Windows 8, as we can see at the end of this video, in which the desktop doesn't seem appropriate to include in a tablet. Adding the extra desktop and capabilities to a laptop or desktop may make sense, though on a tablet it may be reaching too far, and there remains the question of how the extra features may affect battery life.

Beyond the UI direction, Windows 8 will be able to offer Microsoft Office and Skype as "must-have" apps, and those may attract some new users. There are over 650million users of Skype around the world, though it is available on Android and iOS too. Microsoft also has a wealth of Xbox game developers they may be able to entice to Windows 8.

It is worth mentioning other platforms, though I expect they will not have the marketing power and depth of available unique content to grow at the pace of smartphone and tablet growth. Some would argue that the BlackBerry was the first successful smartphone, and it is true that they paved a path for other companies, but the emphasis has been more on messaging and business use. Research In Motion (RIMM) in this sector might be considered a mature technology, in that e-mail is ubiquitous, much like the internet.

It's an important distinction how a BlackBerry handles information, but their User Interface is not attracting as many new users as other platforms. The company hopes to modernize their UI at the end of 2012, and their BlackBerry PlayBook tablet is an effective preview of the direction they are taking in UI. Again, the design is largely a slab, as we might expect of all tablets, so the User Interface becomes the most important and noticeable design aspect.

While it is icon-based like iOS and Android, the use of gestures and swipes attempts to innovate in a different direction. It's not immediately intuitive, though it quickly becomes easy to use. The BlackBerry brand is still in the top 100 global brands, but the company has much work to do to attract new users to the platform. Growth in business and enterprise will likely lag consumer adoption of smartphones, so RIMM will need to attract new consumers.

Google Android-powered smartphones and tablets have a different problem, mainly that of fragmentation. Their are many different flavors of Android, a few custom interfaces, and lots of hardware choices, though the basic slab with icon driven UI is somewhat familiar to each end user. There is a family of various Google software offerings, and a wide open realm of apps available. Android has grown quickly as a platform, though so far it seems Samsung (OTC:SSNLF) and HTC are the most successful companies. Other than price, there is little to differentiate one choice from another, though the brand reputation and recognition of Samsung might keep them at the top of the Android choices.

At the moment, and likely for the very near future, smartphones and tablets are dependent upon apps for customized content. Exclusive apps, or roll-outs on one platform before another, could influence hardware purchase decisions. Microsoft is providing incentives to developers to get on Windows 8. However, the greater use of HTML5 tools may allow many developers and content publishers to escape various app stores, and become as open as websites.

The Financial Times was the first major newspaper to move beyond the Apple App Store, late in 2011, and the move appears to have worked quite well for them. I expect some content to move beyond the need for apps, though unique content will continue to remain important contained and packaged as apps. Eventually HTML5 will provide a way around app stores for more content providers.

Steve Jobs in that 1996 interview:

Big companies spend hundreds of millions of dollars building their distribution channels. And the Web is going to completely neutralize that advantage.

The risk remains outside of iOS and Android that app developers may not make the move to support other platforms, which in the near term could prove damaging enough to hobble a platform like Windows 8 or BlackBerry BB10.

Argus Market Research noted recently:

Research firm IDC expects the global smartphone market to grow by 34% in 2012 to 660 million units versus 494 million units shipped in 2011. Smartphone shipments grew by 63% in 2011 from 303 million units in 2010. IDC predicts that shipments will grow at a CAGR of 18.6% through 2016.

These figures and projections closely match Gartner Group and others. So we can anticipate continued growth in tablets, but at a slower rate. The important thing for hardware makers is to get in on growth and new adoption. Much of this may be in WiFi systems, more than 4G systems, since the rollout of 4G will be slow. The same will be true of the tablet market, though I think overall the smartphone market will mature more quickly.

Current iPad sales indicate most purchases are WiFi-only tablets. Unless carriers provide price incentives, as they do with smartphones under contract, adoption of 3G and 4G tablets and dedicated data plans may be slow, though each hardware company will need to offer those options to be viewed as competitive.

I did an informal check of an Apple Store and a Microsoft Store. The initial instant gratification behind the New iPad has died down a bit, so there was no line to buy one, though iPads still garnered the greatest interest of devices in the store. Contrast that with the Microsoft Store, where many manufacturers' laptops and desktops got fleeting interest, and the gaming area got the second greatest attention.

Due to a recent Windows Phone speed challenge, there was a line of people with Android phones and iPhones waiting to test their smartphones against Windows Phone, in the hopes of winning $100. Oddly enough, Windows Phone has struggled to gain traction in smartphones, though as we near the launch of Windows 8, that may improve.

I've held MSFT shares indirectly through funds in the past, but only now am I considering a direct investment in Microsoft. My choice of Microsoft, rather than a hardware vendor, is that Windows 8 revenues will not depend upon the success of one or two hardware producers, but instead will be distributed across several. As Steve Jobs stated years ago, the desktop is indeed dead, but this year may provide an opportunity to invest in Microsoft as they make their mark in the growing smartphone and tablet markets.

I still expect Apple to end up with the largest single share of the tablet and smartphone market through 2013, mainly because there will be several companies using Windows 8, and even more using Android. If Windows 8 is successful with their new UI idea, then we may see a shift in Android and iOS in the future to adopt some of the concepts.

Remember that since smartphones and tablets are growth markets, attracting new users is more important in the near term, than retaining previous users. Once we reach stable growth after 2016, then customer retention will become more important. I hope I have outlined some of the potential, identified the competition, and pointed out the risks.

Disclosure: I am long RIMM. I may initiate a long position in MSFT prior to the launch of Windows 8, though I prefer an entry point under $29 a share.