Microsoft Can't Afford to Screw This Up

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

There is serious competition in the tablet market, and some of the largest technology players are trying to take share from Apple's (NASDAQ: AAPL) iPad dominance. Microsoft (NASDAQ: MSFT), Google (NASDAQ: GOOG), and Amazon.com (NASDAQ: AMZN) all have come to market in the last few years with tablets based on their ecosystems. However, there is one difference between the four, and that is only one of these companies offers a system that works across smartphones, tablets, and PCs. Surprisingly, first to this party is Microsoft. However, sometimes being first isn't a good thing, and there are three issues that the company needs to find a way to overcome.

Storage Is Not What it Seems on the Surface:

To say that the Microsoft Surface tablet has gotten a lot of attention would be an understatement. I regularly keep up with the articles written by other writers on Fool.com, and I've seen numerous titles related to the Surface. It seems like everyone was so surprised that Microsoft came out with a unique product that looked good that they didn't know how to respond. As a hardcore Apple fan, I have to admit that when I first saw the Surface tablet I thought it could be a serious threat to the iPad. My initial impression was the Surface RT at 32 GB for $499 was a better deal than the 32 GB iPad, which sells for $599. However, we've come to find out that is not the case after all.

According to Microsoft's specs, the 32 GB Surface tablet has about 16 GB available for user content, and the 64 GB version makes about 45 GB available for user storage. As you can see, the $499 Surface gives you only slightly more storage space for user content versus a 16 GB iPad. The key difference is, the iPad's operating system is separate from user storage. Ironically, Microsoft is the only company playing storage this way, as the Kindle Fire HD 8.9”, Galaxy Note 10.1”, and of course the iPad all make nearly all of their reported storage available to the user. The main difference between each of these companies is that Microsoft is still thinking like a PC company. Customers are accustomed to using part of their PC's hard drive for the operating system, but this generally isn't the industry standard on a tablet. Unfortunately for Surface buyers, what you see isn't really what you get.

Apps and Experience Are What Matters:

Whether Microsoft and others realize it or not, customers aren't buying tablets because they are the most powerful. There have been plenty of tablets introduced that had impressive specs but didn't sell well. One of the primary reasons the iPad has continued to sell is because of the Apple ecosystem. Contrary to popular belief, it's not the number of apps, but the quality of apps that determines the success of the system. This is something that Microsoft’s competition understands. Apple without question has the ecosystem in place with over 250,000 apps for tablets. Google's Android has less, but can scale up apps for tablet users. Amazon piggybacks off Android, and the company's content selection is second to none. What does Microsoft have in common with all of these companies? In a word, nothing. Microsoft has somewhere less than 10,000 apps, and less than 5,200 are available in the U.S. While it is true that quality apps might matter more than quantity, if you are a consumer, do you really want to hear that your tablet has about 4% of the apps that the most popular tablet carries?

$899, Are You Crazy?
If you look at the difference between the Surface RT and the Surface Pro, it leaves you wondering: What is the point? The Surface RT, for those who don't know, will only run apps from the Windows Store. On the positive side, the Surface RT starts at $499, which at least makes the tablet price competitive with the iPad and higher-end tablets.
However, there are two glaring problems with the Surface Pro. First, the price is insane, starting at $899. The reason the iPad, Kindle Fire, and other tablets sell is because they offer a cheaper and more portable alternative to buying a secondary computer.

On Amazon.com, if you search for the word “touch” under laptops, there are 11 different touchscreen laptops available on the first page of results alone. Eight of these eleven are priced at less than Microsoft wants to charge for the Surface Pro. In addition, if customers can buy a Kindle Fire HD 8.9” for $299 or a Samsung Galaxy Note 10.1” for $499, and use an office compatible program from the app store, why would they care to look at a Surface Pro for $600 or $400 more? I understand that the Surface Pro will run native Windows apps, but the point is, so will any other Windows 8 laptop.

Conclusion

The bottom line is that Microsoft has a chance to take serious market share in the tablet business. However, the company needs to stop thinking like a PC software vendor and get outside of its proverbial comfort zone. If the Surface RT has 16 GB of storage for the user, then re-brand it as the Surface RT 16 GB. Customers in the tablet arena don't expect the operating system and included apps to eat up half of the storage they see on the box. This makes a bad first impression to the first adopters.

The second move Microsoft needs to make is radical, but necessary. There should be one version of the Surface, and it needs to run native Windows programs. If pricing has to be adjusted so be it, but this is the differentiating feature that Microsoft brings to the table. The current setup looks doomed to failure over the long haul. Competitors like Apple and Google have a better ecosystem set up with iTunes and Google Play. Amazon has better pricing and big benefits with its Prime service. Microsoft at this point has an attractive tablet with not enough apps and crazy pricing on the Surface Pro. I'm hoping that Ballmer and the crew from Microsoft can fix these issues, because the company can't afford to screw this up. Without some adjustments, I'm afraid the Surface is going to be added to the list that begins with the Zune, Kin, and others.


MHenage owns shares of Apple. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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