Microsoft could alienate hardware partners with new tablets

News Analysis

By Agam Shah

June 19, 2012 03:11 PM ET

IDG News Service - Microsoft's Surface tablet is a measured gamble to enter the cutthroat tablet business, but the company could be alienating longtime hardware partners that are also expected to announce Windows 8 devices starting later this year.

The Surface tablet models come with a 10.6-inch display and will be distributed directly to customers, via Microsoft stores and the company's online store. Microsoft's goal is to offer a package of hardware and software built around Windows so the company can effectively compete with Apple, which offers the iPad and iPhone devices running on the iOS platform, analysts said.

Microsoft is offering two tablets, the Surface with Windows RT for ARM processors, and the Surface Pro with Windows 8 Pro for x86 Intel processors. The Surface tablet with Windows RT is lighter and comes with Office 15, which includes widely used productivity applications such as Word and Excel. Microsoft's new tablets will come with a kickstand and a thin cover that doubles as a keyboard and trackpad.

The creation of its own tablet is a sign that Microsoft has lost faith in PC manufacturers to develop devices that can take advantage of the Windows OS, analysts said. Apple has dominated the tablet market, and Microsoft had to take hardware development into its own hands as PC makers were not generating enough excitement to drive interest in Windows 8. Companies like Dell, Hewlett-Packard, Acer, Asus and Lenovo are expected to come out with tablets running the upcoming Windows 8 and RT operating systems.

If the Surface tablets become successful, Microsoft could potentially be stealing future revenues from its partners who view the tablet segment as profitable, said Roger Kay, principal analyst at Endpoint Technologies Associates.

"I have to believe that [the partners] are fairly discontent about it," Kay said. "The tablet is the heart and soul of Windows 8, and it looks like Microsoft has reserved it."

Microsoft has licensed Windows to hardware makers for PCs since the 1980s, but that business model may be getting antiquated, Kay said. Microsoft may be seeking a new business model around tablets, but at the same time the PC market is not going anywhere and Microsoft wants to retain its Windows licensing business, Kay said. Microsoft may be experimenting with a new tablet business model, but the software company will have to strike the right balance in maintaining a relationship with the PC makers on tablets and PCs.

Shaw Wu, a financial analyst at Sterne Agee, agreed, saying Microsoft's tablets could eat into the sales of devices from Windows partners. The full impact of Microsoft's tablets on PC makers has yet to be determined, Wu said in a research note sent on Tuesday.

Reprinted with permission from IDG.net. Story copyright 2012 International Data Group. All rights reserved.

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