Microsoft previews Surface – plus ça change, plus c’est la même chose

Microsoft Surface Highlights

• Announces 2 Surface platforms – based on ARM and Intel chips
• Includes a keyboard, making this a ‘convertible’
• Will challenge Apple’s 94% share of the smart tablet market
• Will compete directly with its PC OEMs in client devices for the first time and will need to balance its activities carefully
• Signifies the most important move today away from the horizontal PC market

Microsoft unveiled its up-coming Surface Tablet PC today, so we thought you would enjoy having a first look at the implications and how it is likely to change the market. For a discussion of how we define tablets, see our earlier article. We have also updated our forecast of the PC and smart phone markets recently – please click on these links to view.

What is Microsoft introducing?

There will be 2 versions of Surface – the first an ARM-based tablet akin to the iPad, but with a number of different features, and the second Intel-based ‘Pro’ version shipping with the introduction of Windows 8 in the autumn. There are a number of important issues to consider with this introduction. In particular:

• Technically Microsoft will be able to use some of the features it has developed in the gaming market (Kinect for instance for motion control)
• The heavily integrated nature of Tablets will be challenged by the inclusion of a keyboard in the cover, making the Surface a ‘convertible’ rather than true tablet
• In choosing to produce both ‘smart’ and ‘PC’ versions Microsoft is hedging its bets and it is unlikely to push the latter too strongly to compete head on with its PC OEMs
• The launch of Windows 8 in the Autumn will be unlike any other update of its operating systems and it will find itself having to balance generic and integrated messages
• The introduction of the Surface will see touch screens (always a feature of smart tablets, but rarely seen on PCs) become standard on all client devices.

Touch screen versions of Microsoft operating systems necessitated a close design partnership with its OEMs in the past. For the first time with Windows 8 it will be competing with them and obviously has a head start. We note that in the past Intel has launched its own products in advance of signing OEMs, but this is different.

The $359 billion client device market is dominated by Apple

Worldwide the market for client devices was worth $359 billion in the year to the end of March 2012, accounting for 599 million shipments (see Figure and Table 1). The smallest in shipments – but strongest growing – has been smart tablets, where Apple has a 94% market share. Apple’s complete dominance of this market has been based on a vertically integrated model, designing heavily integrated systems based on ARM chips and iOS, relying on its Apple store for app downloads and taking advantage of the work it did in securing digital rights in the music industry. We were proved wrong when questioning the iPad when it was first introduced, since within a few quarters it managed to out-ship all historic PC Tablet sales, despite their importance  in specific industry sectors, such as health.

Laptop computers (including PC Tablets and convertibles) make up the majority of PC shipments – a comparatively open market with big players such as HP, Dell and Lenovo sharing a market worth $200 billion in the last year. Microsoft is of course the dominant supplier of operating systems here, although Apple now has a significant share of the PC market too with its Mac OS. PCs form part of a horizontal market in which layers are left to suppliers who are largely absent from the others – Microsoft, for instance, makes mice and keyboards as part of its $2.2 billion hardware business: however it has not been a direct competitor in PCs up until now. Today’s announcement changes that and coming to terms with the implications is important for all PC suppliers.

The Smart Phone market itself is also huge – worth $116 billion in the last year and is also dominated by Apple, whose iPhone accounted for a 61% share. It is akin to the smart tablet area, especially in its reliance on app stores: it is more dependent on mobile telecommunications suppliers as part of the ecosystem. Smart phone processors are almost all based on ARM chips, unlike the x86 processors from Intel and AMD used in PCs.

There are a number of operating systems in play here, although Google’s Android is the next most important to Apple’s, as it is in the smart tablet area. Microsoft operating systems account for only a tiny proportion of smart phone market today, due in part to constant incompatibility from one version to the other – a hangover from the feature phone era.

The gaming console market has just 3 suppliers of which Microsoft is one – highly relevant in assessing how it might proceed with Surface. Although currently going through difficult times, it uses a vertically integrated model in which software is written exclusively for long-serving platforms. The Surface will be available in two versions – the first running on an ARM processor and the second Pro version with Windows 8 operating system: it will be easier to make the first a vertically integrated platform, although we note that Microsoft has been targeting software developers of both at launch.

Table 1

Client Device Market Shares ($US Billion) By Type And Supplier – Q2 2011- Q1 2012

Notes: *insignificant

Source: ITCandor, 2012

The implications of Microsoft as a hardware player

Microsoft is already a hardware vendor, as we note above. However it has seldom had to deal with the massive logistics of mass-market channel supply. Here it should learn from Apple, which has managed to grow its revenues by 60%-70% in many quarters. It will be a major task to engage with the best partners for manufacturing, supporting and shipping Surface – especially if demand is high. It’s even possible that Microsoft will leverage the special partnership it has with Nokia to push the new machine. Google is also a player in smart tablets and phones and has entered the hardware market by buying Motorola Mobile Solutions. The 2 companies both have to face the change is status from software to solutions supplier: in this Microsoft has a stronger challenge, given its decade’s long activity as a horizontal player.

Beyond hardware building social communities will be key

Microsoft already has a major presence on the Internet through browser, Office 365 SaaS, gaming and Bing activities, but lacks the ‘app’ approach of Apple and Google. It is important to build a stronger approach to social networking in the coming months, encouraging its users to comment and help design its approach. The success of Surface will depend in part on its ability to propose and maintain a positive user experience and handle the balance of its existing business in the process.

Some Conclusions – the more things change…

To quote French novelist Alphonse Karr – ‘the more things change, the more they remain the same’ – so we expect with Surface. Apple’s success with the iPhone and iPad came after it successfully negotiated new digital rights issues with the music industry needed for its iPod business. We don’t see the same preparation at Microsoft, whose business has been the epitome of the horizontal market. It is unlikely to drive the Surface business to the extremes Apple went to with the iPad, because most of its revenues today come from being associated with the leading PC brands. Nevertheless it has a great opportunity to join the smart tablet party in which Apple has been the only guest of note to date.