Windows 8: A Competitive Assessment

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

The Vision

Since Microsoft (NASDAQ: MSFT) first previewed Windows 8 in June 2011, they have hewed to a vision of the future of personal computing in stark contrast with Apple’s public pronouncements.  It is a vision of ubiquitous touch screens, on desktops, laptops, tablets, and phones.  Given this premise, the logic of Windows 8 was simple and compelling: a single unified touch-enabled OS that would provide a consistent and coherent user experience across all touch devices, and would support the principal computing processor architectures from Intel and ARM

Meanwhile, Apple's (NASDAQ: AAPL) management have steadfastly resisted acknowledging the validity of the Microsoft vision, even as they continue to evolve Mac OS X towards the touch-enabled future.  They know it’s coming too, even if they can’t bring themselves to admit that Microsoft has gotten out in front, for once.  Thus, Tim Cook continues to insult Windows 8 in public with statements such as “Anything can be forced to converge. . .” 

The real question is how best to get to the touch screen future.  OS X Lion was introduced with a “Back to the Mac” theme, i.e. bringing iOS features to Mac OS X.  Multi-touch gesture support and the Magic Track Pad, along with full screen apps and swipe-based window scrolling without scroll bars, were all innovations of Lion that moved OS X closer to being a touch screen-enabled OS.  OS X Mountain Lion added integrated support for iCloud, Apple’s cloud services suite, which, although not essential for touch screen support, enabled even tighter integration between the iOS and Mac OS worlds.  Apple’s approach has been evolutionary, but Microsoft’s is leap-ahead.  

Microsoft and Apple have also adopted fundamentally different business strategies for their OS products, as illustrated in the following diagrams.  

<img src="/media/images/user_14227/applepcspace_large.png" />

Unlike Apple, Microsoft moves into a space completely ignored by Apple: the touchscreen enabled desktop, laptop and tablet, all powered by Intel processors.  

<img src="/media/images/user_14227/microsoftpcspace_large.png" />

Initially, Microsoft showed some ultra-light laptops (sans touch screens) with ARM processors, which would have extended RT into the lower left quadrant.  These have died on the vine as I predicted they would.  They were netbooks even more computationally underpowered than Atom-based netbooks, without even the saving grace of being able to run existing Windows software.  

As the months have worn on since Windows 8 was first previewed, Apple’s ignoring (at least in public) of the Intel-Touchscreen quadrant has come to seem an increasingly glaring omission.  Given how close Mac OS X Mountain Lion already is to being fully touch screen capable, I believe that Apple has such a device waiting in the wings, ready in case the Windows 8 strategy succeeds on the market.  

The Reality

As I discussed in my previous post, Windows 8 Pro: a Windows 7 User’s Reaction, I was somewhat taken aback by the two-headed beast that Windows has become.  On the bright side is the very slick and responsive Windows 8 Start Screen (previously referred to as Metro) that works elegantly with touch screen devices of all stripes; tablets, touch screen equipped laptops, or desktops.  The Windows 8 Start Screen and Windows 8 apps are inherently full screen apps ideal for a tablet or relatively small touchscreen monitor.  Such full screen apps make optimal use of the screen real estate and the tiles used as the principal touch UI objects are also optimally sized. 

Windows 8 offers cloud services competitive with iCloud, not the least of which is the Windows app store.  The Windows Store now affords Win 8 users online purchase and installation of Windows 8 apps, which is as effortless as purchasing from the Apple App Store or Google Play.  This is a huge accomplishment, which will go far towards advancing the Windows 8 ecosystem of apps, services, and hardware.

On the dark side of Windows 8 is the rather ungainly implementation of what is now called the Desktop, a compatibility mode for existing Windows 7 software and drivers.  The Desktop UI will be very familiar to Windows 7 users: there is the task bar, system management tools such as the Control Panel and Computer Management, with the very glaring exception of the Start Button and its pop-up menu of apps and other useful links. 

Some people don’t seem to miss the Start Button, but I certainly do.  All apps, regardless of stripe, are required to be launched from the Win 8 Start Screen.  Combined with the lack of Aero-mode translucent windows, the Desktop mode feels like a second class citizen in the new Windows 8 world, yet the operating system relies on it so heavily.  Virtually none of the familiar system management tools have been converted to Windows 8 apps, despite Microsoft’s claim that converting apps would be easy for developers.    

The Assessment

The duality of Windows 8 tends to make it seem a poor upgrade for Windows 7 users who don’t have touch screens for their laptop or desktop machines.  Unless you want to run out and buy a touch-capable monitor, there just isn’t enough in Windows 8 to motivate an upgrade.  Existing Windows 7 users will tend to regard Windows 8 as a downgrade rather than an upgrade and be chagrined at having paid for it.  I therefore expect the upgrade market for Windows 8 to all but dry up.  At BUILD 2012, Microsoft’s developers conference, CEO Steve Ballmer pointed out that there were 670 million Windows users who were potential upgrade candidates for Windows 8.  He also stated that in the first weekend, Microsoft had sold 4 million copies of Windows 8 Pro, but then admitted that this included copies in retail channel inventories and not necessarily the number sold to end users.  

A clue to the number of Windows Store downloads of Windows 8 in the first few days could be seen in Ballmer’s presentation, in which he demos correcting his own presentation where he states the Windows sales number to be 3.5 million, penciling in the addition 500,000.  So it appears that 500,000 users downloaded the Windows 8 upgrade, and 3.5 million Windows 8 Pro retail packages were shipped off to retailers.  Not a particularly impressive start given that Google activates more than a million Android systems every day, and Apple about half that.  After the existing Windows 7 users see what they’re getting, I expect the upgrade number to decline precipitously, with about 1% of Windows 7 users having upgraded by the end of the year.  

I also expect sales of non-touchscreen PCs to be seriously impaired by the negative buzz that will be generated regarding Windows 8, which is already apparent on any number of support forums.  Here’s just a small sample of thread topics from

“Windows 8, the repeated Vista failure”

“Bluescreen Hell”

“Do you want Aero?”

“Stuck in Automatic Recovery loop”

“What happened to Desktop Search?”

At BUILD, Ballmer stated an expectation of 400 million Windows 8 and RT systems to be sold in the coming year.  It’s not clear what the mix of touch screen vs. non-touch screen devices is expected to be , but with sales of non-touch screen laptops and desktops depressed, I expect the total sales to actually be 300-350 million.  Not that Mac OS X will pick up the slack.  The lost non-touch screen sales would have gone mostly to Windows users looking to upgrade.  These people will sit tight and hope for a better Windows desktop alternative in the future, or opt for a Windows 8 touch screen system. 

As a tablet OS, Windows 8 works very well, and I expect strong sales of Windows 8 tablets and touch screen-equipped laptops, since these also offer the advantage of being able to run existing Windows 7 apps and games.  The weakness of the Windows 8 ecosystem currently is the lack of apps.  There are only about 1,000 on the Windows store, but I expect this to have negligible impact on sales, because of the backward compatibility offered by Windows 8.  I consider Windows 8 tablets running Intel Ivy bridge processors to be the killer device for Windows 7 users looking for a tablet, of which there are many.  The Microsoft Surface Pro, which is slightly heavier and bulkier than its ARM-based sibling, should be an instant sell-out.  

I expect Windows RT, however, to perform poorly once Windows 8 Pro tablets become readily available.  Since Windows RT only runs on ARM processors, it will be hampered by the lack of available apps and the lack of performance compared to Intel based Windows 8 tablets.  Being slimmer and having longer battery life will not be enough to save RT sales from being cannibalized by Windows 8 tablets, especially because the alternative ARM ecosystems of Android and iOS are better established in the eyes of consumers. 

As I showed in my recent post, The Silver Lining of the Google Earnings Cloud, both Google (NASDAQ: GOOG) and Apple have about 400 million devices each to support their ecosystems.  Since Windows RT is positioned to compete directly with other ARM-based devices that run iOS and Android, I expect these ecosystems to suffer little impact from Windows RT.  Thus, Microsoft’s Surface RT is not an iPad killer, or even an effective challenger.  

The impact of Windows 8 tablets on the iPad and Android tablet markets is debatable, but I personally believe there is little market overlap between the Intel-based Windows 8  tablets and ARM-based tablets.  Intel tablets will appeal mostly to existing Windows users, of which there are at least a billion, who want a tablet that can also stand in as a Windows 7 machine; whereas ARM tablets appeal mostly to consumers whose intended use is more casual and recreational.  And never the twain shall meet.

I'll discuss what all this means for Microsoft’s bottom line in detail in my forthcoming SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of Microsoft.

MarkHibben has a position in Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, 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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