Will software giants Microsoft’s move to jump into the tablet segment pay off?

In June this year, Microsoft released its tablet computer called ‘Surface’ that would compete against Apple’s iPad and Samsung’s Galaxy Tab amongst others. Around the same time, Google announced the launch of Nexus 7, its tablet manufactured by Asus.

Clearly, the Redmond-based software giant is trying hard to stay relevant in the post PC world, especially in India, which has a potential market of more than 1 billion devices. A typical user from this market may have their first computing experience through a non-traditional PC. In trying to grab a slice of this lucrative pie, the company faces a host of challenges as it shifts into tablet territory.

Mixed signals

While technology fans and analysts are getting used to the ‘me too’ strategy of Microsoft – it usually launches products after other big players already have. However, there’s an interesting subtext to the main story. By announcing its own tablet, Microsoft ends up competing against the Original Equipment Makers (OEMs) of these tablets with whom it has been partnering for more than three decades on the Windows platform. Companies like Dell, HP, Acer, Lenovo, Sony and others have been bundling Windows since the time of its inception. In contrast, Google has chosen to partner with vendors like Asus.

For Microsoft, the Windows Division revenue is largely correlated to the PC market worldwide, as approximately 75 per cent of total Windows Division revenue comes from Windows operating system software purchased by OEMs, which they pre-install on the devices they sell. The remaining 25 per cent of Windows Division revenue is generated by commercial and retail sales of Windows and PC hardware products and online advertising from Windows Live.

Industry watchers feel that with Surface the relationship between Microsoft and the OEMs has entered into a territory that might see some conflict. “With Microsoft entering the tablet segment, they are sending across a signal that we are competing against you,” said a senior executive from Lenovo who did not wish to be named. Other executives from hardware vendors such as Acer and Dell had similar reservations, citing a lack of clarity from Microsoft. This situation is getting more complex as Microsoft is all set to launch the Windows 8 operating system. For years, PC manufacturers have relied on newer releases of Windows to boost their sales and with features such as touch screen computing to open doors to categories such as tablets. By launching Surface Microsoft is threatening to take away that market from the PC makers. When contacted, Microsoft India officials declined to comment on Surface and Windows 8.

“With features such as a touch-sensitive keyboard cover and kickstand along with the familiarity of Windows, Surface looks promising,” says Vishal Tripathi, Principal Analyst with Gartner.

Talking numbers

So why is Microsoft entering this space? After a decade of lost opportunities, Microsoft’s CEO, Steve Ballmer is hoping that Surface would do for Microsoft what the iPad did for Apple Inc. Microsoft’s lost opportunities has reflected on Wall Street wherein the company’s market capitalisation has come down by more than 100 per cent in the period 2000-2011 - from $510 billion to $249 billion. Compare that with Apple. For the same period, Apple’s market cap went from $4.8 billion to $541 billion.

In the recently announced quarterly results, Microsoft posted losses for the first time in 26 years, pointing increasingly to the fact that its strategy of sitting back and skimming the cream from the PC business and earning high profits from software would not be the way forward.

In a Securities and Exchange Commission (SEC) filing, Microsoft said that it faces “intense competition across all markets”, which could lead to lower revenue or pressure on its operating margin. Microsoft officials are aware of these issues and Surface is a step to take matters in their own hands. The new tablet market is simply too important for Microsoft to depend on traditional OEMs to further their interests - of selling more Windows licenses. Apart from Samsung’s Tab, no other company is giving the Apple iPad a run for its money. According to Daniel Ashdown, Research Analyst at Juniper Research, “The tablet market needs more differentiation in software. Windows might offer something a bit more different, particularly in terms of productivity, user experience, better quality and price.”

According to an Indian tablet vendor, it makes sense for Microsoft to have a better grip on the ecosystem and with Surface it can do so.

India strategy

Microsoft is aware that it has to have a stronger play in India where the market for smartphones and tablets is on the rise. Factor in the demographic dividend in India with the youth constituting 484.86 million of the overall population in 2030 and Microsoft’s strategy to grab a big chunk becomes apparent.

The India PC market shipments for January - March 2012 stood at 2.63 million units, representing a sequential gain of 7.7 per cent over the previous quarter, as per IDC. While the PC market is growing, its growth rate is reducing over the last couple of years as smartphones and tablets are increasingly finding favour.

The latest IDC data points out that India smartphone market grew at 42.1 percent year-over-year in second quarter of 2012. Vendors shipped 153.9 million smartphones in the second quarter as compared to 108.3 million units in Q2 of 2011. The tablet shipments in the January-March 2012 touched 3.5 lakh units as compared to the whole of 2011 which saw shipments of 4.75 lakh tablets, according to Cyber Media research.

What these numbers point to is that a billion users in India may be using computing devices like tablets and smartphones for the first time and without a compelling offering, they may ask, “Microsoft, who?”. “In India the first computing devices for many people may be a mobile device and many of them have experienced Android, Bada (Samsung’s mobile operating system) and Java before they experience Microsoft,” says Faisal Kawoosa, Senior Manager, Semiconductor & Electronics Practice, Cyber Media Research.

While the Surface has been launched as a regular tablet, the initial pricing points to an enterprise or high-end market product. “Surface will ensure stiff competition in the enterprise segment,” says Abhishek Chauhan, Senior Consultant, ICT Practice, Frost & Sullivan.

According reports, the Surface could be priced in the range of Rs 33,000-44,000 that puts it directly in competition with iPad and Galaxy Tab.

Also, with this pricing, it competes in the ultrabooks segment. “With Surface Microsoft is looking beyond the ‘think laptop’ feel that most companies talk about with features like detachable keyboard,” says Juniper research’s Ashdown.

While the features are important, India is a price sensitive market. “Why would somebody go for a product which is yet not proven as compared to iPad or others when the price is almost same,” poses a head of Reliance Retail in Mumbai. His logic, seen in the context of a profusion of low cost tablets, makes sense. Ask Datawind, Micromax or HCL Infosystems who have all reduced prices and are retailing low cost tablets in the range of Rs 3,000-15,000.

“Google plans to sell Nexus 7 at around Rs 11,000 in line with Amazon’s Kindle and this is a price point that will dominate in the long run ,” says Ashdown.

Interestingly, according to reports, Windows 8 and Surface might be launched around the same time (in October 2012). Considering that Microsoft has had a rough ride with Zune being a big flop and mixed success of XBox, users may hope that with Surface they can finally get over the blue screen of death.


(This article was published on August 2, 2012)
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