Microsoft's Surface Tablet Another Sign of Apple's Disruptions
06/19/2012| 02:37pm US/Eastern
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By Ian Sherr
SAN FRANCISCO--Microsoft Corp.'s (>> Microsoft Corporation) first personal computer, the Surface tablet, provides further evidence that Apple Inc.'s (>> Apple Inc.) strategies and success continue to shake up the tech sector.
The software giant is for the first time emulating Apple's longtime practice of managing both elements in a computing device--one that will directly compete with products from its biggest customers.
Though insisting it remains committed to helping other hardware companies make successful tablets using its software, Microsoft also endorsed Apple's philosophy in forceful terms.
"We believe that any intersection between human and machine can be made better when all aspects of the experience--hardware and software--are considered and working together," summed Steve Ballmer, Microsoft's chief executive, during the Surface launch event Monday.
Indeed, the Surface mirrors the signature traits of many Apple products: It has sleek edges and it's encased in various metals. The device is also thin and light, with specifications very similar to the newest iPad, which went on sale in March. Microsoft also touts the interplay of software and hardware, particularly with its magnetically attachable screen cover, which also doubles as a touch keyboard and trackpad.
The company even borrowed from Apple's well-worn playbook of remaining very secretive about its launch event, keeping unusually quiet about details like where it would be held and leaving partners in the dark about its plans.
"This is a drastic change for the company," Raimo Lenschow, an analyst for Barclays, said in a note to investors. "With Microsoft taking on the end-to-end design and manufacturing of the device, it is clear that they realize the competitive threat that tablets present and are thus taking steps to compete in the tablet market directly."
The Redmond, Wash., software giant's road to the Surface punctuates nearly four decades of being primarily a software company. While it's had fits and starts selling accessories, such as keyboards and mice, the company didn't truly begin producing hardware until it unveiled its Xbox videogame console in 2000. The device was a sharp reversal of Microsoft's longstanding history of relying on other companies to make hardware that runs its software.
The new strategy paid off and the device since became a must-have device among many gamers, making it the top-selling console in the U.S. six months running, according to the latest data from NPD Group, an industry researcher.
Despite the Xbox's success, Microsoft held to purely being a software company in the PC industry, releasing only accessory devices, such as the Zune music player. The Zune was discontinued last year, after anemic sales. In cellphones, Microsoft also has stuck to supplying software, despite the successful counter-example of Apple's iPhone.
Not so with the Surface. Instead, Microsoft's Mr. Ballmer said it built its tablet as a way to show off what its new Windows 8 operating system can do.
At the same time, the success of Apple's products have demonstrated to Microsoft and others the benefits of tightly integrated hardware and software. The iPhone is the crowning example of that business model. It is lauded for its ease of use and functionality, helping to grow sales to more than 35 million in the most recently reported second quarter alone.
Until now, the smartphones and tablets that have received the most attention, other than those built by Apple, from consumers were tightly integrated, such as Amazon.com Inc.'s (>> Amazon.com, Inc.) Kindle Fire, which runs a customized version of Google Inc.'s (GOOG) Android mobile operating system. Samsung Electronics Co. (005930.SE, SSNHY) as well has made Android its own, adding different visuals and specialized software that connects its devices together in ways only Apple has been able to do.
Despite the challengers, Apple still has advantages--including 3 1/2 decades of experience in refining its approach. A more recent edge is the fact that Apple buys so many components it can get lower pricing than competitors.
"Apple's advantages in its supply chain and unique business model have made it very difficult for competitors to make money," said Shaw Wu, an analyst at Sterne Agee.
As a result, many challengers who have attempted to follow its lead have fallen short. For example, Hewlett-Packard Co. (HPQ) discontinued its TouchPad tablet about six weeks after its release in 2011. Reviewers liked its software, but complained the hardware was too bulky, heavy and slow. Lines of eager customers ready to buy the device eventually materialized, however, but only when its price was slashed to $99, when H-P lost an estimated $207 per sale.
Research In Motion Ltd. (RIMM) as well has seen limited sales of its tablet, the PlayBook. Reviewers and customers alike said the device, which runs on the QNX operation system RIM purchased two years ago, was not ready for prime time when it was released.
Still, Microsoft has shown it's willing to try. The Surface will be released later this year, leading the charge of computers and touchscreen tablets built using its new Windows RT and Windows 8 operating systems. It will initially only be available in Microsoft's handful of branded retail stores around the country, but analysts expect wider availability soon thereafter.
-Write to Ian Sherr; ian.sherr@dowjones.com
--Shira Ovide contributed to this report.
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