A Tablet Conundrum

CES came and went without any significant/useful/timely Microsoft announcements in the tablet sphere. If 2011 is finally to be the year of the tablet, and ownership of tablets starts to become as common as ownership of smartphones, what can Microsoft do about their current uncompetitive position?

Some have asked why has Microsoft not reacted more quickly to the new tablet form factor. After all they have considerable experience making software for tablets and touchscreen devices. I encountered a modified version of XP on tablets in 2003 (and have owned an XP-licenced IBM X41T for over 5 years) and touchscreen handhelds running Microsoft operating systems had been around for some years before that. Even the acquisition of the Surface product should have brought in relevant expertise.

We can point the finger of blame at Microsoft's incumbent status, or at their arguably over-bureaucratic HR and management systems; but there is another far more problematic issue: the business model currently required to succeed in this new marketplace.

Consider the leading operating systems in the new tablet marketplace, Apple iOS and Android. Consider also the bit-players of desktop Linux derivatives like Ubuntu, as well as the established business solution provider RIM with its PlayBook.

So what is the challenge for Microsoft from these tablet operating systems? Simply that those listed above have one thing in common - they are not in themselves sold. All are made by companies with different business models. Apple design and sell consumer hardware based on a premium brand and iOS is a by-product of that business. Android is made by multiple companies, the largest contributor, Google, gets its revenue from advertising and most of the other contributors design and/or make and sell hardware, both components and end-user products. The heavy lifting in Linux is done by companies who sell services or hardware, with significant input from academics and volunteers, and RIM sell a high value end-to-end service that is embedded in those companies that have adopted it.

Microsoft makes much of its money by selling software licences in bulk; specifically most of its profits are generated by software sales, with a large proportion of that being OS licences in massive quantities. But in the current tablet market there seems little opportunity for charging for an OS. Apple's pricing certainly has a premium, but that is accounted for by the brand; the Android tablet market is highly competitive on both price and design innovation, as will be the desktop Linux tablet market, while RIM will sell to RIM users with, maybe, a slight premium based on their unique proposition.

So there's a conundrum - whether or not to rush to invest large amounts of money in developing a tablet OS to sell in a market that does not charge for the OS. So if a decent entry level tablet stabilises at a 2011 retail price of USD350 (based on component and assembly costs and normal channel markups) what can Microsoft really charge manufacturers for the OS?

Depending on local sales taxes, a charge of USD50 for the operating system would put a 15-20% premium onto the tablet price, which can only be sustained if the market can be led to believe the product is premium. Given Microsoft's lack of recent success in mobile devices in general, to achieve this requires some considerable thought and work; they need to ensure that their tablet operating system is launched with minimum bugs, a decent upgrade process and roadmap and enough innovative elements to gain mindshare and thus justify a premium on the cost of the tablet. Of course they will also need a thriving application marketplace where most apps are free or nearly so.

That gets Microsoft to a requirement for more time. They need time to come up with innovations, time to optimise an operating system for a new hardware platform, time to have a strategy that allows a premium in mass market sales and time to generate market numbers sufficient to sustain the Microsoft operating cost model. The length of time required is likely to be at least 18 months, so nothing can be forthcoming until 2012 or later.

There is every sign that the advances in hardware that allowed the new tablet designs are also allowing tablets to have sufficient processing power to do most everything that a desktop PC can, but with 12 hours battery life. Then there is the increasing move online via wireless broadband, 3G or wifi - it is more and more common to have documents edited and published via the web, more common to have corporate and social interaction and collaboration via the Internet; even thin client and VDI developments lend themselves to a move to tablets.

Watch the tablet become ubiquitous, encouraging ever more people to move corporate and personal IT/IS functionality online; if Microsoft do not have a significant presence in the tablet market as this happens this hits their revenue stream from operating systems as the tablets eat at desktop and laptop sales, and hits it again as more people move functionality online, diminishing interest in high-priced desktop productivity tools.

This then is the real conundrum: do Microsoft rush to bring out an uncompetitive (features, user experience, extendability) operating system into an already competitive marketplace and risk failure because of the revenue requirement, the presence of incumbents and their alternative business' models, or take time to bring out a competitive OS while their main revenue streams are under attack, the players in the new market become ever stronger and ever more established; and while hardware prices reduce, increasing the premium their business model requires. And then still have a significant risk that the new OS is unable to get sufficient (or any) market share to replace their lost revenues...

I think Lorenzo Dow said it best a couple of centuries ago:

"And you will be damned if you do - And you will be damned if you don't"