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

"We are going to continue to work with them to make sure they understand the reality of the Internet.  A lot of these people don't have Ph.Ds, and they don't have a degree in computer science." -- RIM co-CEO Michael Lazaridis

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