Microsoft's risky Surface strategy

The jury is still out on whether the Surface RT will deliver the goods and Microsoft's answer to the iPad could cause more damage than good.

Microsoft has high hopes for its answer to the iPad, Surface RT, and the early signs look good. According to the Microsoft online store, the $US499 32GB model (without the Touch Cover) has sold out in a day and scheduled to ship "within three weeks." With the big reveal scheduled for October 26 there is a palpable sense of excitement within Microsoft’s ranks. But without raining too much on their parade, this hardware exercise doesn’t necessarily guarantee a win for Steve Ballmer.

The software giant’s foray into the hardware space seems a case of too little to late and then there is something a little unpleasant about its intentions with the device.

Plenty of room for trouble

On the one hand there is the juggling it is doing in not being seen to compete with its hardware partners and on the other, there is the equally problematic dilemma it is trying to avoid in competing with the PC market generally and its own cash cows, Office and Windows.

The PC market is already feeling the brunt of the surge in popularity of the tablet with PC shipments due to decline by 1.2 per cent  in 2012. Although some of this may been due to poor economic conditions, the fall is largely being attributed to the surge in tablet sales. The problem for Microsoft is that the tablet market is split between Apple, Amazon and Android. Even if Windows RT proves to be relatively successful on other companies’ hardware, Microsoft will see its revenue and profitability impacted.

Then there is Ballmer’s comments to shareholders in which he outlines Microsoft’s ambitions to focus on devices and services. Being in control of the hardware would certainly be one way of compensating for the reduced income from the software. But this again would come at a price. The PC manufacturers are already seeing the writing on the wall when it comes to declining sales. Many have made the shift to tablets already. Facing a double whammy of Microsoft competing in the hardware space, many may decide to opt to concentrate on Android.

The enterprise pitfall

In Ballmer’s letter, he further made reference to the “Consumerisation of IT”. The drive to mobile in the corporate world has been accelerated by the adoption of BYOD. But these devices have been essentially consumer devices. They have displaced the more corporate BlackBerry and Microsoft Windows Phone because they were devices staff had bought for themselves, were pleasurable to use and were truly useful because of the huge number of apps they ran. This of course works for corporations because it is much cheaper, staff are happier and generally, more gets done.

For Microsoft this spells disaster. They charge a premium for their corporate software. Even with the Surface RT, they have been careful to stress that the version of Office that comes pre-installed can not be used for commercial use. The last thing they want to see happen is businesses buying the cheaper Surface RT in preference to the professional and more expensive Surface Pro.

Even with the Xbox, Microsoft’s only successful consumer device to-date, the hardware was only a vehicle for sales of the more expensive and profitable games. The same opportunity to leverage the hardware platform is missing with the Surface RT as Apple and Google have established a largely free and inexpensive price point for all software that runs on mobile devices.

This is a losing battle for Microsoft and reflects how slow they have been in responding to both Apple and Google. This is also not a rerun of Internet Explorer vs Netscape. Microsoft doesn’t have any particular advantage when it comes to mobile and so they can’t leverage a monopoly position in the same way they did with the browser.

For the Surface RT, the lack of distribution channels and more importantly, lack of applications to run on the device will essentially seal its fate. It won’t be a repeat of the Zune or the Microsoft Kin (the disastrous phone that Microsoft pulled after 2 months of no sales) but it won’t be that much better.

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