Bloomberg News

Microsoft Said to Debut Its Own Windows Tablet Next Week

June 15, 2012

Microsoft Aims at IPad Hold Over $79 Billion Tablet Market

The Windows 8 software on tablet devices at the Microsoft Corp. Windows 8 software consumer preview event at the Mobile World Congress in Barcelona. Photographer: Chris Ratcliffe/Bloomberg

Microsoft Corp. (MSFT:US) will announce plans to sell a tablet running the next version of the Windows operating system under its own brand, a major departure from its strategy of partnering with computer makers, according to a person familiar with the plans.

The Redmond, Washington-based company may demonstrate the device at an event in Los Angeles on June 18, said the person, who asked not to be identified because the plans haven’t been made public. The company has said it aims to release the new Windows 8 operating system in time for the holiday season.

Microsoft has been working with personal-computer makers to produce Windows 8 tablets, designed to win back consumers who have shunned Windows machines in favor of Apple Inc. (AAPL:US)’s iPad. The world’s largest software maker may be taking steps to exert more control over the hardware that runs its programs -- as Apple does -- in order to mount a more successful challenge.

“If Microsoft wants to control the entire user experience and the entire quality of their products, they have to build their own hardware,” said Michael Cherry, an analyst at Directions on Microsoft, a Kirkland, Washington-based market- research firm.

Frank Shaw, a spokesman for Microsoft, declined to comment.

Yesterday, the company invited press via e-mail to an event in Los Angeles on June 18 at 3:30 p.m., at a location to be disclosed later.

“This will be a major Microsoft announcement -- you will not want to miss it,” the invitation said.

Software Focus

Microsoft shares rose 2.3 percent to $30.02 at the close in New York. The stock has gained 16 percent this year.

Since the release of International Business Machines Corp.’s first PC in 1981, Microsoft has focused on software for the machines and left design and branding to hardware makers. While the company has in the past decade played a larger role in working with some PC makers on design, it has shied away from developing the machines and selling them under the Microsoft brand.

The shift in strategy has the potential to sour Microsoft’s relationship with some PC partners, many of which have been investing to develop Windows 8 tablets themselves and may not want to compete directly with Microsoft.

Still, PC makers may have limited recourse, said Colin Gillis, an analyst at BGC Partners LP in New York. Apple doesn’t license its software to computer makers, and Google Inc. (GOOG:US), which makes the Android operating system, will probably make its own tablets through its recent acquisition (GOOG:US) of Motorola Mobility.

Tablet Options

“If you’re a computer maker, you don’t love it,” Gillis said. “But what are you going to do? Build an Android tablet? Google is going to build its own tablet, too. Everyone is making their own hardware now. It’s like having a poodle in your purse. All the cool kids are doing it.”

The addition of a tablet would radically alter profitability (MSFT:US) in the Windows business, which now sells just software with operating margins of more than 60 percent. By comparison, computer maker Dell Inc. (DELL:US)’s operating margin for the most recent fiscal year was about 7 percent.

A move into tablets would be a similar strategy to the one Microsoft employed with its Zune music and video player. Microsoft initially provided software to partners, who failed to gain share against Apple’s iPod, forcing Microsoft to produce its own hardware. The Zune failed to dent Apple’s dominant market share, and Microsoft canceled the product last year.

Controlled Experience

For Microsoft, sticking with devices from its PC partners only may be equally risky. Sales in the Windows group have missed analysts’ estimates (MSFT:US) in four of the six most recent quarters as consumers shifted to purchasing tablets rather than lower-cost laptop PCs running Windows. Microsoft, which initially released a version of Windows for tablet machines in 2002 before scaling back, has zero share of the market now, according to researcher Gartner Inc.

Selling a branded tablet would help the company make sure the new Windows dovetails exactly with the hardware, avoiding issues that have cropped up when computer makers have added their own software that has degraded or limited the performance or design of Windows.

“The idea would be to make sure Microsoft’s vision for such a device is translated exactly into the consumer experience without a third-party interpretation,” said Michael Gartenberg, an analyst at Gartner.

Apple’s Dominance

Apple has expanded its grip on the tablet market even as companies such as Amazon.com Inc. and Samsung Electronics Co. release new tablets running Google’s Android software and PC makers work to prepare their Windows 8 tablets. Researcher IDC yesterday boosted its forecast for the tablet market on strong demand for the iPad.

Worldwide shipments of tablets this year will be 107.4 million units, up from an earlier projection of 106.1 million, Framingham, Massachusetts-based IDC said in a statement. Unit sales may reach 142.8 million next year and 222.1 million by 2016, the researcher said.

IDC predicts the iPad (AAPL:US) will account for 62.5 percent of global shipments this year, up from 58.2 percent last year. Apple’s share could rise even further if it introduces a smaller, less expensive tablet, IDC said.

Microsoft’s tablet plans were previously reported by entertainment website The Wrap and the All Things D blog.

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Kathleen Chaykowski in New York at kchaykowski@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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