Microsoft announced its new Surface tablets last week. Microsoft’s foray into tablet hardware signals historic importance. Despite the sizes and opportunities of the PC and smartphone markets, Microsoft did not make its own PC or phone; rather, it relied on its hardware partners for omnipresent distribution for its software. One could argue Microsoft Office drove the PC market to such an extent that Microsoft was a catalyst to widespread PC adoption and success of hardware partners like Dell. But the reliance on partners failed miserably with smartphones, even given the alliances with the world’s largest cellphone manufacturer, Nokia, and most relevant business smartphone manufacturer, Research in Motion. And, the experience in the tablet market, to date, has been equally as dismal. Was this failure caused by the inability of hardware partners to design a compelling product? Or is it something more?
Prior to the smartphone era, the technology world was pretty well defined amongst Microsoft, Apple and Google. In fact, Apple and Google were largely irrelevant to Microsoft because they played in different arenas altogether, consumer and Internet. Apple offered consumer software-hardware (iPods/iTunes) and Google provided Internet services (search) while Microsoft rested on its laurels and owned the largest category of all, the enterprise (Office). Market capitalizations reflected this: as of Q4 2004, Microsoft market capitalization was $301B while Google was $46B and Apple $22B (source: Capital IQ).
Along came the iPhone and, with it, came a cataclysmic shift in technology as we knew it. Apple created a more-advanced smartphone market through the introduction of apps. These began subtly blurring the demarcations of these companies’ defined domains and initiated a competitive convergence. Use of apps reduced the need to search because an app took a user right to the destination. When Apple stepped on Google’s search toes, Google shot back with development of its own mobile operating system, Android. Microsoft still paid little heed since the competition was outside its bailiwick. Microsoft was super slow getting to the smartphone category and did so half-heartedly relying on partnerships with Nokia and Research in Motion. But the opportunity to run or access Microsoft Office applications on a small smartphone screen was not (at all) compelling enough to even get noticed in what became the Apple iOS and Google Android war.
This time, the stakes are too high to rely on partnerships or dismiss the consumer market as small or irrelevant. The tablet market is growing too fast for Microsoft to wait for a killer product from its partners. Tim Cook pointed out in March at the New iPad debut that Apple sold more iPads in Q4 2011 than any PC maker sold of PCs. NPD Connected Intelligence expects that tablets will overtake notebook computers as early as this year, and Apple expects tablets to overtake PCs altogether, eventually. Microsoft needs to be there, and its partners haven’t gotten a seat in top rankings. As of May 2012, devices running on Apple’s iOS had 63% marketshare in mobile and tablet, followed by 20% for Google’s Android and 0.1% for Windows. Hardware statistics are similar. In Q1 2012, Apple had 62.8% market share in tablets, followed by Samsung at 7.5%. Amazon fell from 16.8% to 4% and Research in Motion held under 1%. Back in September, I wrote of the disappointing tablet results of HP, Research in Motion, Sharp, etc, and many were abandoning the market.
The Surface, announced last week, is Microsoft’s response. Not many details are known of the product other than its magnesium casing, larger screen size, keyboard incorporated into its cover and Windows 8 operating system. Specs on battery life, usability, RAM, CPU speeds, pricing or release date are not known and, as such, it is difficult to speculate on its ability to compete with Apple or Google. However, we do know what has made Apple the market leader in the tablet category and can analyze how Microsoft can stack up.
iPads have been successful for three reasons: apps, user experience (software) and intuitive software wrapped in elegant form factors (hardware). Of the three, it has less to do with the hardware, and more to do with the apps and the software. Microsoft’s partners did not fail because the form factors were off; the partners failed because the apps and the software were not enticing enough on this form factor. Microsoft’s challenge will be to make Windows 8 relevant enough to consumers/enterprise to want to purchase the Surface, or to create a new category or “use” for the Surface altogether.
The key to success with apps is attracting developers, ensuring quality and staying consistent with the user experience. To date, Apple has the largest app offering with over 685K apps, with the largest app developer community of over 43K. Over 25B apps running on Apple iOS have been downloaded. Google runs second with over 400K apps and 10K app developers. Apps are key to driving tablet adoption, and Microsoft knows this because Microsoft Office drove adoption of the PC. Developers have been slow to embrace Windows 8 because of the low penetration of these devices and mixed reviews. Window 8’s tile format is compelling particularly in an “app” world but other features are considered cumbersome. To entice developers, Microsoft is offering $60K-$600K to popular apps such as FourSquare to develop for Windows 8, as reported by the New York Times
Could Office be the “killer” app? Steve Ballmer noted that over 1B PCs in the world run on versions of Microsoft’s operating system. The issue is the form factor. Microsoft has held its position in the enterprise, primarily with cubicle-anchored worker creating and revising spreadsheets, documents and presentations, on desktops. Microsoft developed that stronghold in the 1980s. The worker bees from that era have moved up the corporate ranks and are most likely is reviewing documents, not creating them. And if they are currently reviewing docs on a tablet, the tablet is most likely an iPad. And revisions to Office documents on an iPad are easy. Worse yet for Microsoft, the iPad has done the “unthinkable” for Apple: enterprise adoption. Today, 95% of the Fortune 500 supports the iPad. There are 350M devices running on Apple’s mobile operating system, iOS. Remarkable, even compared to Microsoft’s 1B, because of its rapid adoption. It was launched only five years ago.
Microsoft, despite its enormous installed base, risks being considered passé, cumbersome, archaic, despite its usefulness. Microsoft needs to create a market position in the tablet market or risk losing its foothold, and it needs to do so quickly. Microsoft would be well served to carve its position in the tablet segment by being something different: create its own category that sits somewhere between a tablet and a notebook that caters to document creation. Those that tried to compete with Apple head-on have lost; those like Amazon Kindle Fire that define themselves as something tangential have had more success, at least initially. And as Amazon has noticed, this strategy would require an enormous amount of agility to defend.
The current market capitalizations of these three companies have changed dramatically since the pre-smartphone era and reflect the success or failure to remain relevant in this new technology paradigm. Now, Apple is the largest with a market capitalization of $534B, with Google at $183B, both substantially larger than before. Microsoft has shrunk to $250B. Microsoft is at a pivotal point in its history to be as relevant in the future as it has been in the past. With the advent of newer productivity tools such as Google docs that offer benefits of cloud storage and collaboration and of the younger generation’s familiarity with Apple products and iWorks due to Apple’s stronghold in the education market, Microsoft no longer is the only consideration in document creation. The success of the Surface will require a minimum of exceptional quality on the hardware side but, in order to gain a foothold in the tablet rankings, it will require exceptional user experience with Windows 8, rapid enthusiasm among the app developer community and carving out a “new” category outside Apple’s radar. It’s a tall order for Microsoft to be as relevant on tablets as it is on desktops, particularly given Apple’s iPad success and adoption in the enterprise. We will know more when Surface comes to market.
