Small Business bannerSmall Business Centre
http://www.canadianbusiness.com (© Rogers Digital Media 2013, All Rights Reserved.)
Updated: Tue, 01 Oct 2013 09:10:00 GMT | By Samson Okalow

Microsoft fighting for share (and honour) with Surface

A long, slow climb out of anonymity


CB_microsoft ad

Back in 2006 Apple began airing a long-running series of TV commercials featuring a then relatively unknown Justin Long playing a dead-pan Mac comparing himself to a hapless Microsoft PC (played by some other guy). Whatever the consumer's product preference, everyone could admit the commercials were well done-funny and clever. Now several years later, and on the occasion of a product refresh, Microsoft is seeking revenge with a similar commercial that pits its consumer-level Surface RT tablet head to head against the Apple iPad. Narrated by a Siri-like voice, it uses a similar conceit as the Long commercials (but with two products instead of two humans pretending to be products), and it too aims to amuse with dry wit. But it falls very, very flat. In closing with the words, "This isn't going to end well for me, is it?" the viewer can be forgiven for thinking the Surface RT is talking about itself.

The problem is that playing the underdog only works when there's a plausible narrative that David at least inhabits the same galaxy as Goliath. But Windows and Windows RT have a combined 4.5% market share by operating system that is a very distant third to the second-place Apple iOS. (Apple continues by far and away to be the leader by total units shipped with a 32% share.) If Windows' mind share could be measured that number would almost certainly be even lower. In short, not the same galaxy. And so the kind of laughter that's generated by what is supposed to be a funny ad is rather nervous and uncomfortable , like watching a stranger without any self-awareness embarrass themselves in public.

Tablet-OS-market-share_fina

At a Sept. 23 rd launch event, the other shoe fell when Microsoft announced the launch of the Surface 2 and a refresh of the Surface RT tablet. Its Siri series of ads, which made their original debut in May, appear to have been in heavier rotation in the weeks leading up to the launch. Anchoring the tech improvements is a prominently, if briefly displayed, graphic comparing the price of a 32GB Surface RT to the 32GB iPad. It's $349 (the July re-pricing from the original $499) for the former and $499 for the latter. Is this the beginning of market share gains for Microsoft's tablet line?

Describing the changes as "incremental improvements," Jan Dawson, chief telecoms analyst at market research firm Ovum, says, "I don't think this makes a huge difference. Ultimately if Microsoft is to be successful in tablets with its own hardware it's going to be a long slog."

IDC Canada analyst Krista Napier is slightly more optimistic about prospects for the Pro, but agrees it will be tough sledding for the RT. "Bringing the price down is probably appropriate given the capabilities that it has. But it's still going to be pretty fierce competition when you're up against the Samsungs and Apples of the world."

So far, not so good. Microsoft in its fiscal Q3 took a US$900 million write down on its RT tablets (incidentally about equal to the recent nail-in-the-coffin losses over at another prominent tech company, BlackBerry). But at a market cap of US$273 billion and with consolidated revenues of about US$78 billion, Microsoft is a much larger and more diversified company and can withstand the losses, as eye-popping as they are. Its Office 365 product, for example, continues to grow its subscriptions and recorded an impressive US$500 million, or 50%, jump from Q2 to Q3. And its patent licensing business, which includes Windows phone, also remains strong, having recorded a US$222 million increase in Q3. All the recent damage to the company's equity valuation was done on news of the Jul. 18 write down, when the stock fell 13%, to US$31.40 from US$36.27. While the stock has yet to recover, the Sept. 23 product reveal saw prices remain flat.

So the $900 million is survivable, but as Kim Forrest, senior equity analyst at Fort Pitt Group, points out, "it's still money that could have been returned to shareholders."

It isn't clear what will happen to the RT line going forward-whether it will continue to be sold or the inventory run out before being discontinued. "I don't think they're going to make any more of those," says Dawson. However, at the time of the July write down, Microsoft did affirm that it remained committed to the RT (and the commercials have returned).

Dawson adds that the underlying problem is there is still too much confusion among consumers about which Surface tablet does what or how they are in fact different. (The RT runs a version of Windows 8 that does not actually run the desktop versions of Windows 8 programs.) The marketing hasn't been clear and at any rate misunderstands the motivations of the consumer market, which cares more about entertainment than the productivity Microsoft is pushing, he says.

The RT’s in-market performance appears to make this a self-evident reality, but conversely it should be an opportunity for Microsoft at the enterprise. However, interest there remains muted and neither Dawson nor Napier see the Surface 2 significantly changing that, although both expect some increase in sales.

"I don't sense so many IT departments are really taking the plunge on that whole approach," says Dawson.

A large part of the problem is that many businesses have seen an increase in the so-called BYOD (bring your own device) phenomenon among employees. Except that these employees keep bringing in iPads and Android devices, which constantly pushes IT departments toward those vendors and away from Microsoft.

"There's a lot of employees that are dictating what devices are being brought in, and a lot of them are still going after the Apple and Samsung devices," says Napier.

Still, it's an opportunity for Microsoft to find its niche and gain share. "I think [share will] slowly creep up," says Dawson. "I don't think it's going to get to 10% or 15% any time soon [but] there's clearly a huge installed base of Windows that needs to migrate to something eventually and tablets will end up being a part of that picture along with convertibles and traditional laptops."

Microsoft has a solid shot at owning the enterprise because the segment is currently underserved as iOS and Android tablets lack the beefiness required to run and manage custom enterprise software. Fort Pitt's Forrest says that while IT departments are indeed feeling pressure from a BYOD movement dominated by iOS and Android, IT doesn't want to develop for and support three versions of the same application-especially for consumer-focused devices that can't really handle the work. "That's expensive. And let me tell you, it's not gonna happen."

Advances in battery life and processing power, such as demonstrated in the upgraded Surface 2, should help make the tablet more attractive to industries like insurance and pharmaceuticals that run specialized software. It's not a sure thing that this will translate into a clear win for Microsoft, but the company does have a built-in advantage given the installed base of Windows in the enterprise.

So far investors have proven patient with Microsoft-Forrest describes them as value investors for the most part-and are willing to bear losses for a while in order for the company to position itself. Says Forrest, "This is going to be a long grind upward and then one day you're gonna look up and go, 'They have 20% market share? Really?' It's going be one of those stealth things."

More stories from Canadian Business

Scroll upScroll down

Recently recommended stories

advertisement