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Could Microsoft's Tablet be as Successful as the Zune?

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Microsoft (NASDAQ: MSFT) announced ambitious plans on Monday to produce a tablet computer, competing for the fast-growing segment alongside the likes of Apple's (NASDAQ: AAPL) iPad and Amazon's (NASDAQ: AMZN) Kindle Fire. The Microsoft Surface comes with a keyboard built into its cover, a magnesium case, and two available versions -- a basic Surface running WindowsRT with processors from ARM Holdings (NASDAQ: ARMH) and a Surface Pro model running Windows 8 with processors from Intel (NASDAQ: INTC). CEO Steve Ballmer called the device "a tool to surface your passions and creativity," reflecting both his optimism and his limited understanding of how to use “surface” as a verb. 

So how likely is Microsoft to capture a significant chunk of a market expected to reach $80 billion by the end of the year? Microsoft, a software giant that found success by selling its applications to third-party original equipment manufacturers, has ventured into making its own hardware before. Let's look at their track record. 

Remember the Zune? No? Fair enough. When it was released in 2006, it was thought that Microsoft could design a digital music player that would challenge the supremacy of the iPod. Zune was discontinued in 2011 after five years of abysmal sales. Not to be dissuaded, Microsoft fired a shot across the bows of the iPhone by releasing their proprietary KIN phone, aimed at capitalizing on social networking. After spending several years and $1 billion on developing the KIN, the phones were pulled from shelves within months, and retailers returned droves of unsold phones back to Microsoft.

But hope springs eternal at Microsoft headquarters, and the company is hoping the tablet will be less like the Zune and more like the company's hit gaming console, the Xbox. Building upon the success of their Windows operating system, which occasionally does manage to meet consumers' expectations, lead designer Panos Panay said the Surface is meant to work seamlessly with the operating system, so that “the hardware fades into the background.” That seems like an ominous endorsement. Apple sells hardware that is engaging and sexy; that people want to own. Microsoft has so far shown no talent for doing the same – even the Xbox is prized for its content library and user interface, not its hardware design – and touting their hardware as “fading into the background” does not instill confidence.

Besides aesthetics, however, there are more functional reasons for investors to be wary of the Surface. First, it was a disjointed decision for Microsoft to put Windows 8 and WindowsRT on its tablets when it is simultaneously pushing Windows Phone for mobile devices. Apple uses iOS and Google uses Android for both phones and tablets. While both operating systems have applications that are optimized specifically for tablets or phones, the homogenous design environment allows app developers an easier entry point to the platform. Microsoft's approach will make it more difficult to design apps for their multiple operating systems, which is especially damaging because Microsoft is running so far behind Apple and Google in the app race. Microsoft will probably have to heavily subsidize development for its platforms in order to be competitive, an expense its rivals do not have.

Second, speaking of rivals, Microsoft potentially just made itself a lot of enemies. By producing its own hardware, Microsoft has made competitors out of a slew of companies that used to be partners, including original equipment manufacturers like Dell, Hewlett-Packard, Toshiba, and Acer. It remains to be seen whether these companies will respond to Microsoft's challenge by refusing to use a Windows operating system in their own devices.

At the announcement, Microsoft left several critical pieces of information unsaid. We do not know what to expect in terms of screen resolution, battery life, precise release date, or even, most critically, price. In a way, Microsoft will lose no matter where their devices are priced. If Surfaces are more expensive than iPads, they shouldn't expect to sell any. Even a superior product will not overcome the coolness cachet that Apple products command. If Surfaces are cheaper, they will be seen as an inferior product, and may provoke undesired responses from their hardware manufacturing partners. Even worse, Microsoft failed to capitalize on any hype their announcement might have generated, as the company offered no way to pre-purchase or pre-order the Surface. Under CEO Steve Ballmer, Microsoft has strayed from its core competencies with unfortunate results multiple times. I am inclined to think that the Surface is no different, and is destined to be as successful as the Zune.

Daniel Ferry owns shares of Apple and Amazon.com. The Motley Fool owns shares of Apple, Amazon.com, Intel, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

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