Microsoft Betting on the Surface

From time to time even the biggest companies arrive at a crossroads where, depending on what actions they take, they will either end up paving a new growth path or plunging into crisis. Now, it’s the turn of Microsoft Corp, which has for decades been the undisputed king of the global software market, but has increasingly, in the boom time of the mobile internet over the past few years, faced challenges from rapidly-growing rivals such as Apple Inc. and Samsung Electronics.

In addition to strenuous efforts to revamp its proprietary mobile operating system to keep up with its rivals, the software giant finally made a foray into the PC hardware manufacturing world in October, taking the wraps of the 10.6-inch Surface tablet.

The global launch of the Surface, four months after its unexpected unveiling by Steve Ballmer, chief executive officer of the Redmond, Washington-based software company at a Hollywood press conference, made an immediate splash in the tech world, already flooded with a dazzling array of tablet PCs running on Apple’s iOS or Google’s Android systems, which are currently the top two mobile platforms worldwide.

The Surface, powered by the long awaited next-generation Windows 8 system, gives a glimpse of the future of Microsoft and is really what consumers want, claimed Ballmer. Speaking in a CNBC interview a few days after the new tablet’s launch, he said, “I don’t think anybody has done a product that is the product that I see customers wanting.”

“Not Apple. Not Google. Not Amazon,” stated the boss of the world’s top software maker in terms of revenue, in a direct reference to the current market leaders. “Nobody has a product that lets you work and play that can be your tablet and your PC. Not at any price point.”

Ballmer’s exuberant description of the Surface is a sign of the software giant’s eagerness to share in the tablet computer bonanza, despite market doubts over any quick success of the new gadget in the face of stiff competition from already well-established products.

The first tablet under the Microsoft brand, packing a pre-installed version of the Office suite as well as a full-sized USB port, is designed for work use, in addition to home entertainment. This point is emphasized by Microsoft in an evident attempt to differentiate it from the various tablet PCs already on the market.

For Microsoft, venturing onto the tablet hardware battlefield is undoubtedly a bold move. But it may be just the beginning.

 

New Strike in the Tablet War

With its up-to-date tech specifications, the Wi-Fi only version of the Surface with Windows RT – a cut-down, mobile version of Windows 8 – began shipping on October 26 in both brick-and-mortar stores and online outlets in the United States and Canada; it was made available for online purchase the same day across six other markets, including the Chinese mainland and Hong Kong.

In addition to the Windows RT model, a higher-end Surface Pro model featuring the fully-fledged Windows 8 system for Intel CPU is expected to hit the market as early as January next year, alrhough Microsoft has yet to announce the exact specs and availability.

By including China on the list of its priority markets, Microsoft is revealing its determination to bite into the tablet market, considering the growing tech savyiness of the world’s largest population of online users.

At the end of June this year, the number of internet users in China hit 538 million, raising the country’s online penetration rate to nearly 40 percent, according to the latest data from the China Internet Network Information Centre (CNNIC). Of particular note is the CNNIC’s revelation that the country’s mobile internet population climbed to 388 million in the first half of the year, for the first time overtaking the number of those accessing the internet via desktops.

Suining Appliance Co. is the authorized China distributor of the Surface tablet, offering the new device via its online store on debut day and later through a total of 500 retail outlets across the mainland and Hong Kong. By selecting Suning, a leading Chinese home appliance retailer, Microsoft is hoping to generate an enthusiastic response from the mainland market, which despite its recent rise to prominence on the tech turf, has rarely featured on lists of the first batch of region to receive the newest gadgets from tech giants such as Apple.

Microsoft’s China strategy seems to be having an impact. The first buyer of the Surface tablet was a young man in Beijing, according to the Beijing Times Daily. In a report the day after the product’s global launch, it named 25-year-old Chen Shi who works at an advertising company in Beijing, as the world’s first Surface owner. The young man queued for more than 30 hours to receive his Surface at a Suning outlet in Beijing. Both Microsoft and Suning expressed satisfaction with the high levels of orders for the gadget, after pre-ordering began on October 16. However, neither company has given any exact figures.

Consumer curiosity is thought to have been one factor in the enthusiasm shown for the Windows RT-powered gadget. In addition, some market watchers gave positive feedback on the device, pointing to its edge over the raft of rival products in terms of price and differentiation.

“The Surface represents a key element in Microsoft’s strategy to transform itself from a software maker into a devices and services provider.” Andrew Rasswiler, senior principal analysis for teardown services at IHS iSuppli., a market research firm based in US, said in a statement released on November 5.

“From a hardware perspective, Microsoft has succeeded with the Surface, offering an impressive tablet that is more profitable, on a percentage basis, than even the lucrative iPad, based on current retail pricing,” Rassweiler remarked, while noting that the optional Touch Cover coming in five colours “represents a best-of-both-worlds approach for the Surface, giving it the most attractive features of both notebook PCs and media tablets”. The cover is capable of acting as a full-function keyboard, which together with a kickstand on the back of the main body makes the device feel like a notebook. Referring to the cover, the HIS iSuppli analyst said, “This feature differentiates the Surface from the iPad.” For some other industry experts, however, it may be too early to applaud the Surface’s innovations.

“Surface may defy categorization, but it cannot defy market realities,” Sarah Rotman Epps, senior analyst at Forrester Research Inc., another research firm in the United States, wrote in her blog following the Surface’s release. “To succeed as a product, it needs to expand its distribution footprint; to be in as many retail channels as the iPad by Black Friday would game-changing but seems unlikely at this point.” Epps said, describing Microsoft’s Surface as a bet that is “high risk and self-cannibalizing”.

Some analysts also expressed worries about the tablet’s price position, which is virtually on a par with Apple’s iPad. Another area of concern was the number of apps available on the Windows platform, which falls a long way behind that on the iOS and Android systems. Tim Cook, successor at Apple to the late visionary Steve Jobs, took the opportunity of a quarterly earnings conference call in late October to hit back at Microsoft’s invasion of traditional Apple territory, with Reuters quoting him as saying, “I haven’t personally played with the Surface yet, but what we’re reading about it, is that it’s a fairly compromised, confusing product.”

 

Surface Tension

While market views on Microsoft’s own tablet device remain mixed. Latest reports concerning the device point to a somewhat chilly winter for the software giant after its belated foray into the tablet manufacturing field. As if to prove that the market’s concerns over the Surface are not groundless, Ballmer was quoted by French daily Le Parisien on November 10 as saying, “We’ve had a modest start because Surface is only available on our online retail sites and at a few Microsoft stores in the United States.” Ballmer’s statement soon made headlines worldwide, spurring concerns over the market reception of the new gadget.

The Wall Street Journal had previously reported ahead of the October launch of the Surface that Microsoft had placed orders to market 3 to 5 million Surface devices in the last quarter of the year, a quantity similar to orders for Amazaon’s Kindle Fire tablets and Google’s Nexus 7 products. In an attempt to quell market nervousness, Microsoft said in a statement sent to CNET, a leading technology website based in the United States, on November 12 that, “When asked about Surface,

Steve’s use of the term ‘modest’ was in relation to the company’s approach in ramping up supply and distribution of Surface with Windows RT.” The statement went on, “While our approach has been modest, Steve notes the reception to the device has been ‘fantastic’, which is why he also stated that ‘soon, it will be available in more countries and in more stores’.”   Adding uncertainty to the situation, Steven Sinofsky, head of the Windows division and a 23-year Microsoft veteran who had been widely tipped as Ballmer’s successor, surprisingly quite Microsoft on November 12, just weeks after the launch of the Surface – the development of which he had led.

Sinofsky’s departure from the company served to rattle investors’ nerves, with Microsoft shares ending the trading day 4 percentage points lower on November 13, the BBC reported. Some industry insiders and analysts attribute Sinofsky’s departure to rising friction between him and Ballmer, as the latter aims to strengthen his leadership of the company in the face of the growing competition from Apple and Samsung.

Microsoft CEO Ballmer, in a statement to the media shortly after informing his employees in a memo on November 12 of Sinofsky’s departure, said it was “imperative that we continue to drive alignment across all Microsoft teams, and have more integrated and rapid development cycles for our offerings”.

An on-going lawsuit against Microsoft by California-based lawyer Andrew Sokolowski, accusing the company of falsely advertising the storage space of the Surface tablet, casts doubts on Microsoft’s claims about its new product – although some analysts point out that it should not come as a surprise to find less storage available than advertised, given the space taken up by the operating system and Office suite.  Amidst the latest bout of tensions, market sentiment concerning Microsoft’s flagship tablet has unavoidably taken a hit, while some tech experts and aficionados are eagerly anticipating the arrival of the Surface Pro, featuring the complete Windows 8 operating system, which may blur the boundaries between ultrabooks and tablet PCs.

 

Beneath the Surface

The expectations for the Surface Pro are actually a reflection of brighter prospects for the Redmond-based software giant following its revolutionary overhaul of the Windows operating system, and may help revive the entire PC industry. Windows 8, Microsoft’s latest computer operating system, debuted on the same day as the Surface was introduced to the market. With a touchscreen interface, the next-generation system is instantly set apart from its predecessors, offering users a combination of traditional PC operating system and mobile platform. Initial user reaction is a cause for excitement, according to Microsoft boss Ballmer, who revealed at an industry event in Santa Clara, California at the end of October that a total of four million upgrades to Windows 8 had been sold within the three days following its launch, with analysts saying that the more affordable price tag, only US$14.99 for an upgrade to Windows 8 Pro, is serving to spur user adoption. This could come as a significant boost for the software giant as it ambitiously moves into the mobile Internet era. Currently, there 670 million PCs running on Windows 7, according to Ballmer, all of which can be upgraded to the latest system. Besides the great potential of existing Windows 7 users, analysts also predicted considerable sales of PCs next year, which will help contribute to more widespread usage of Windows 8.

This will undoubtedly be good news for partners of Microsoft that are pinning their future hopes on Windows 8. They include Chinese brands Lenovo, Acer and Asus, which have recently released their newest touch-enabled Windows 8 ranges. However, Microsoft’s own aggressive foray into the hardware arena with its tablet PC and perhaps more devices under its brand name has the market worrying about the direct competition between Microsoft and its hardware partners.

Ballmer hinted at a tech industry event in California on November 14 that his company may introduce more if its own personal hardware devices. “Do I anticipate that partners of ours will build the lion’s share of all Windows devices over the next five years? The answer is, absolutely,” the 56-year-old Microsoft veteran with almost 13 years as the company’s CEO, said. He added, however, “With that said, it is absolutely clear that there is an innovation opportunity on the scene between hardware and software and that is a scene that must not go unexploited at all by Microsoft.”  Ballmer’s ambition has yet to upset his partners, which have for years been relying on its Windows operating system. But problems may arise if his ambition goes further. And as for his company’s bold move into hardware manufacturing, which has so far gained a mixed reception, it remains too early to jump to any conclusion as regards it ultimate fate.

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