Bloomberg News

Microsoft Tablet Must Shed Office Image to Challenge IPad

June 18, 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) needs to shed its image as the world’s biggest purveyor of workplace software and draw on its success selling the Xbox gaming console if it wants a shot at introducing a tablet to challenge Apple Inc. (AAPL:US)’s iPad.

Microsoft is expected to preview a company-branded tablet at an event in Los Angeles today, according to people familiar with the matter who asked not to be named because the plans aren’t public. The devices may run Microsoft’s latest operating system, Windows 8, and different versions may be powered by either processors based on designs from ARM Holdings Plc or x86 chips from Intel Corp., the people said.

As the primary pitchman for its own tablets, Redmond, Washington-based Microsoft needs to assemble a compelling lineup of applications at an attractive price, which may be tough given the least expensive current iPad sells for $499. That’s been impossible for challengers such as Hewlett-Packard Co. and Research In Motion Ltd. that have tried to compete with Apple in the tablet market, estimated to reach $78.7 billion this year.

“Telling compelling marketing stories to consumers for the most part is not something Microsoft has demonstrated an ability to do,” said Michael Gartenberg, an analyst at market researcher Gartner Inc., in an interview.

Xbox is the exception, he said. Microsoft has sold 67 million Xbox 360s in seven years on the market, making it the most popular game platform, even appearing in rocker Liz Phair’s song lyrics.

Xbox Entertainment

Sales surged as Microsoft transformed Xbox from a video- game player into a full-fledged entertainment center, starting in 2008 with the addition of Netflix Inc.’s video streaming and the music service Last.fm. Earlier this month, Microsoft unveiled Xbox SmartGlass, an app that will work on Windows 8 to let smartphones, tablets and computers stream media to a screen controlled by the console.

“Obviously, Microsoft is hoping this will be another Xbox,” Gartenberg said.

Microsoft might have a shot at competing with Apple if its tablet includes the content and functionality of Xbox, particularly if the device had a controller letting it work as a gaming platform, said Ed Maguire, an analyst at Credit Agricole Securities USA.

“When you add up all of the relationships Microsoft has through the Xbox, Microsoft has all of the content relationships to compete with Apple,” Maguire said in an interview.

Worldwide shipments of tablets this year will be 107.4 million units, Framingham, Massachusetts-based researcher IDC said in a June 14 report. Worldwide shipments should reach 142.8 million next year and 222.1 million by 2016, the group said.

Apple’s ‘Grip’

Even as companies including Amazon.com Inc. (AMZN:US) and Samsung Electronics Co. (005930) release new tablets running Google Inc. (GOOG:US)’s Android operating system, Apple’s iPad continues to dominate the market. IDC predicts the iPad 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.

“Apple’s iPad shows few signs of slowing down,” Tom Mainelli, IDC’s research director of mobile connected devices, said in the report. “If Apple launches a sub-$300, 7-inch product into the market later this year as rumored, we expect the company’s grip on this market to become even stronger.”

DisplaySearch, another research firm, said revenue from tablets reached $44.9 billion worldwide in 2011 and will rise to $78.7 billion this year.

Pricing Challenge

Microsoft may not be able to sell tablets running Windows RT, the version of Windows 8 for machines with power-sipping ARM chips, for less than $599, said Bob O’Donnell, an analyst at IDC, in an interview.

“When you look at that pricing compared to Apple, it’s a non-starter,” said O’Donnell, whose price estimate is based on his checks with component suppliers in Taiwan. “It appears pricing is going to be a lot higher than people thought. From a tablet perspective, that’s going to be a challenge.”

Amazon.com had to make several tradeoffs to get its Kindle Fire tablet to $199, such as sporting a smaller screen size, forgoing Bluetooth wireless connectivity and reducing on-board memory. Sales of Amazon’s electronic books, movies and music on the device may help make up for the narrower profit margins that will probably result from the low price, according to Brian Blair, an analyst at Wedge Partners Corp. in New York.

“There’s not a whole lot of room to move on price in these devices,” Gartenberg said.

Apps Disadvantage

Then there’s the apps issue. Tablets running Windows RT, the machines that are most comparable to the iPad, may have fewer apps than users are accustomed to because older software won’t work on the devices. There are more than 200,000 apps made specifically for the iPad.

Microsoft will make four programs in its Office suite -- Word, Excel, PowerPoint and OneNote -- available on its tablet- optimized operating system. That may not sway consumers who have gladly snapped up iPads without the availability of Office, said Michael Cherry, an analyst at Directions on Microsoft, a Kirkland, Washington-based market-research firm.

“I don’t believe consumers are going to pay a premium on a tablet to get those Office applications,” he said. Windows RT tablets may not have one feature people do use -- Outlook e-mail -- which could curb demand from corporate information technology departments, Cherry said.

Through a joint venture with Barnes & Noble Inc. (BKS:US) announced in April, Microsoft is developing a digital reading app for Windows 8 that will offer a catalog of e-books, magazines and newspapers. Barnes & Noble isn’t involved in the Microsoft announcement today, according to a person familiar with the matter who asked not to be named because the plans are private.

Building Apps

The company is also pulling out the stops to debut Windows 8 apps, lining up design firms, recruiting interns and sending engineers on an around-the-world road show to help developers get them built.

Microsoft’s last bid to challenge Apple by building its own device was the Zune music and video player, which was discontinued last year after failing to gain traction with consumers who overwhelmingly prefer the iPod.

Tablets based on Microsoft’s Windows operating system have struggled since their initial release in 2002. The company’s current market share? Zero, according to Gartner.

“The irony is, of course, Apple didn’t create this market -- you could argue Microsoft did 10 years ago when Bill Gates started talking about ‘Tablet PCs,’ ” said Gartenberg.

Those ill-fated machines used a stylus instead of a touch interface, joining the roster of tablet computer flops that includes Hewlett-Packard’s TouchPad -- pulled after just six weeks on the market -- RIM’s PlayBook and the Motorola Xoom.

“Where Apple succeeded was not by trying to force Mac OS onto a tablet,” Gartenberg said. “They created something that was true to the form.”

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net; Cliff Edwards in San Francisco at cedwards28@bloomberg.net

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


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