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Microsoft saw its partners were needy, unwilling and unable to push the envelope in the tablet space

As the picture surrounding Microsoft Corp.'s (MSFT"Surface" tablet fleshes out via interviews and leaks, one thing is for sure -- Microsoft would love to see its third-party partners succeed with their Windows 8 tablet designs, despite the fact that it's now competing with them.  But the decision to compete is also a big vote of no confidence in these third-parties' ability to compete with Apple, Inc. (AAPL).

According to a new report in The New York Times, which uses a former Microsoft executive as a source, Microsoft's decision is deeply rooted in a fallout with Hewlett-Packard Comp. (HPQ) regarding the Slate tablet and subsequent disappointments from other OEMs.

I. Microsoft Predicted Tablet Market Early, Had High Hopes

In 2007 Apple shook up the market when it released the iPhone, the first multi-touch smartphone.  To be fair, the market was already trending towards touch-screens, but suddenly the trend was summarized with a singular iconic device.  Microsoft, which had played with touch technology in its labs and mobile products for years, took note of the increasing convergence between mobile devices and the personal computer (PC).

It baked basic touch capabilities into Windows 7, which launch in late 2009.  To Microsoft's disappointment, partners expressed little interest in taking advantage of these capabilities.  Initially Microsoft played with idea of a dual-screen tablet called Courier.  But internal disputes and hesitance to become a first-party PC maker caused Microsoft to shelve the plans.

Then rumors of an Apple tablet picked up, and suddenly the touch-plans went from an expansion effort, to an essential effort.  Microsoft was determined to not let Apple gain a monopoly in this market, which it had long recognized the merit of -- perhaps even before Apple.  It contacted HP, the world's largest maker of personal computers, and what Microsoft considered a trusted partner.

And HP delivered at first.  Prototypes of the Slate 500, like the one presented by Microsoft CEO Steve Ballmer at CES 2010, were relatively attractive.

Ballmer Slate
A prototype of the Slate tablet, demoed by Microsoft CEO Steve Ballmer at CES 2010, looked attractive. [Image Source: Bloomberg]

II. Slate Design is "Completely Ruined", Subsequently Flops

But both the former Microsoft executive and a former HP executive comment that the Slate 500 was "completely ruined" when it was handed over to HP's manufacturing organization.  The tablet ballooned in size.  To make matters worse, HP poorly integrated the touch screen with Windows 7.  Users would touch the screen and face a lag before the tablet would respond.  Describes the former HP executive, "It would be like driving a car, and the car not turning when you turn the wheel."

Three weeks later late Apple CEO Steven P. Jobs showed off his slick iPad, which had none of the awkward lag of the HP Slate.  While the original Slate prototype was relatively good looking, it was outshone by the iPad, which featured a slick aluminum case.

Steve Jobs iPad
Steve Jobs's iPad was a hit, while the Slate flopped. [Image Source: Reuters]

The case was no small feat.  Apple had to procure a large amount of high quality aluminum to make it, so it entered a large bulk purchase agreement with a mine in Australia.  The former executive recalls shock at Microsoft meetings regarding just how deep Apple would dip into global supply chains to produce Mr. Jobs' "perfect" device.

And if the early Slate prototype was a bid homely compared to the original iPad, the final bloated design was downright unsightly.  Microsoft was frustrated.

And it didn't help that HP blamed Microsoft. HP saw its tablet shortcomings as primarily in the software department.  It complained how Microsoft's small icon size made icons hard to click and it was not a fan of Microsoft's Windows 7 touch keyboard.  HP felt that the licensing fees it paid Microsoft for Windows should have been applied towards making better OS software/firmware support.

Seeing that the Slate was destined to flop in sales (and it did, after almost being cancelled), Microsoft tried to reach out to other partners.  But it faced disagreements regarding price and features.  "Faith had been lost," the former Microsoft executive recalls.

III. Microsoft Focuses on Surface and Windows 8

Ultimately, Microsoft decided not to devote significant resources to cultivating a Windows 7 tablet from any of its partners.  Instead it focused on perfect Windows 8 for touch devices.  But this time around it knew better than to trust third-parties.  It was sick of their failure to compete with Apple in the tablet space, and it was sick of taking the blame for that failure.

Evidence of just how much Microsoft has learned was on display at the Surface announcement.  Much like Apple bragged of its iPad's unique aluminum case, Microsoft's belated counter was built on a material it went to great lengths to secure bulk purchase agreements on -- magnesium.  It argues that magnesium offers many advantages over Apple's aluminum, including superior scratch resistance.  Comments Windows President Steven Sinofsky, "The case is one-of-a-kind."

Notably, nary a partner delivered that kind of dedication to their supply chain and innovative case design at Computex 2012.  They instead relied on their Chinese partners to build more standard designs, although they expect to price them at similar points to the iPad and Surface.  This lack of ambition is all too familiar to Microsoft and a validation of why it made a smart move with Surface.

With "Surface" Microsoft controls its own fate. [Image Source: Microsoft]

Microsoft may say its decision to make Surface was not a slight to its third-party partners.  Comments Steven Guggenheimer, a Microsoft corporate vice president, "Microsoft has tremendous respect for our hardware partners and the innovation they bring to the Windows ecosystem.  We are looking forward to the incredible range of new devices they are bringing out for Windows 8."

But no matter what words it chooses, Microsoft can not hide the unspoken message -- it is dead-determined to beat Apple -- with or without its partners.

Source: The New York Times

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RE: x86
By Tony Swash on 6/26/2012 5:27:28 AM , Rating: -1
The price doesn't have to beat the iPad - this will sell more as a laptop with physical keyboard and a touch screen (running Windows 8) than as a tablet. So, I think this would compete against the Sleekbooks/ultraportables/netbooks out there, not against the iPads (it might take market share away from the iPads, but this Surface demo is primarily a laptop, not a tablet).

You are right - sort of - although the Sleekbooks/ultraportables/netbooks themselves also have to be competitive against iPads to some extent. However the whole light weight and sleek laptop market is also hegemonised by the MacBook Air. The Surface Pro needs to at least broadly match the MacBook Air on price and that may be quite hard given that Apple has the world's best supply chain.

Producing a prototype which can pass muster in a carefully staged and controlled public presentation where nobody is allowed to touch it and we don't actually see it working in any real way or in any depth is one thing. Building a manufacturing pipeline that can reliable make such things in huge numbers and with very tight price constraints is quite another. And then there is the problem of channels.

Many people think that Microsoft pulled this off with the Xbox but the nature of the Xbox and the Surface as products are very different. Microsoft cannot, strategically, afford for the Surface to be a loss leader.

First the Xbox did not threaten to disrupt the existing relationship with Windows OEMs. The OEMs have been critical to the Windows ecosystem and have underpinned it's success. This move by Microsoft threatens that relationship and is almost certainly an attempt to grab more of the value and revenue stack in the Windows markets. Surface is more of a potential threat to Windows OEMs than it is to Apple or Google. Disrupting their relationship with the OEMs is a very risky undertaking for Microsoft.

Secondly the Surface initiative is a response to the ongoing disruption caused by the rise of the mobile computing devices and the erosion of software margins resulting from the 'app' phenomena. Microsoft can see the writing on the wall and knows that software prices, revenues and profits per unit can only fall. This means that Surface must succeed as a profit generating business, something Xbox largely failed to do, in order to replace the revenues that their software business will probably lose over the coming years. Xbox was a loss making operation for many years and will almost certainly never give a return on the billions invested to make it happen. If Surface is a business 'success' like Xbox was it will kill Microsoft, and for Surface to succeed as a business they have to hit the ground running, and set up, in record time, the production pipelines, supplier chains and distribution channels needed to ship tens of millions of working and reliable Surface devices and make a healthy profit doing so. I do not believe that on balance that that is likely, especially given that based on the curiously staged and artificial launch event they clearly do yet have a functioning product.

"We’re Apple. We don’t wear suits. We don’t even own suits." -- Apple CEO Steve Jobs

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