Microsoft scored a huge publicity coup by unveiling its innovative Surface range of Windows 8 tablets at a "mystery" press conference in Hollywood yesterday. The event dominated Twitter and prompted thousands of blog posts, with saturation coverage at tech sites such as The Verge, most of it favourable. Since Microsoft hadn't even hinted at what it might be announcing, this was a huge risk. If the journalists who'd paid to make the trip to Los Angeles at short notice had been disappointed, the backlash would have been fearsome.
However, the Surface announcement is also risky in a different way: it means Microsoft will be competing against its own partners, the OEMs (original equipment manufacturers) who license Windows and build hardware to run it. Competing against platform partners is rarely if ever a good move.
Microsoft is obviously aware of the problem. Chief executive Steve Ballmer said that its partners had been aware of what Microsoft was launching, and that the Surface was priming the pump for Windows 8 tablets -- and ultimately, of course, for Windows 8 smartphones.
But Microsoft will clearly have a price advantage if its Surface prices don't include the cost of the operating system and, in the RT version, Office 2013 for Students. These have cost Microsoft hundreds of millions of dollars to develop.
Microsoft declined to say how much its Surface tablets would cost. However, it said the RT version would be comparable to other ARM-based tablets, while the Windows 8 version, which has an Intel Core i5 (Ivy Bridge) processor, would cost something like an Ultrabook.
There are bound to be tensions over pricing. Microsoft will want to sell at a premium price, both to make money and to give its OEMs room to undercut it. On the other hand, Microsoft will also want to sell Windows RT tablets in large quantities, to bump-start the market. It might even make sense to sell them at cost, because Microsoft will make profits on apps, games, and media services such as Xbox Movies and Xbox Music. This is what Amazon did with its Kindle Fire tablet.
At the moment, my feeling is that Microsoft will be aggressive on price with the ARM versions, but will restrict availability. The news from the press conference was that Surface will only be available from Microsoft online and from select Microsoft stores, not in the mass market retail channels. That means there will probably be queues and waiting lists, and Surfaces will fetch premium prices on eBay, which won't do the brand any harm at all. That will still leave plenty of room for OEMs to sell tablets through their existing channels, especially if they have innovative designs.
OEMs are in a difficult position, because they have nowhere else to go. They can't use Apple's closed, proprietary iOS and Mac OS X operating systems without getting sued into oblivion, as Psystar was. (See Apple nukes Psystar.) They could try switching to Ubuntu Linux -- which is what Canonical hopes -- but they'd probably not last very long. Historically, it has proven almost impossible to sell Linux machines, and they're too expensive to support.
OEMs can, of course, use Google's Android (which is Linux-based) on tablets, as many of them already do. However, this is a smaller, tougher market, and Google is likely to compete against them with Google-branded products. Google's purchase of a hardware arm from Motorola makes it look even less partner-friendly than Microsoft, and it would be surprising if Google's larger partners hadn't already developed a back-up/exit strategy based on forking Android, as Amazon did.
Either way, Microsoft is never going to ship anything like the 350 to 375 million PCs that OEMs will sell in 2013, most of which are cheap laptops and desktops. Microsoft is only competing in tablets, which currently comprise a negligible proportion of Windows machines. It's not as though Microsoft is muscling in on a profitable existing market that the OEMs already own.
The Windows OEMs might not like what Microsoft is doing, but it's much better for those OEMs to have a vibrant Windows 8 tablet market than for the business to go to Apple.
Finally, of course, Microsoft has its own, very obvious, exit strategy. After it has done the pump-priming, it can simply license the Surface brand name and technology to any OEMs who want it. The net result would be a much stronger Windows ecosystem, not a weaker one.
http://www.youtube.com/watch?v=jozTK-MqEXQ Microsoft Surface press conference video from The Verge