Microsoft admits Surface competition risk with tablet OEMs

Microsoft admits Surface competition risk with tablet OEMs

Summary: In an SEC filing, Microsoft notes that its OEM partners could see their loyalties challenged as the software giant warns of "significant competition."

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Buried in a filing with the U.S. Securities and Exchange Commission (SEC), Microsoft warns that it faces "intense competition across all markets" which could lead to lower revenue or pressure on its operating margin.

But its Surface tablet could cause the company a long-term headache with its friends in the hardware building space -- now its rivals in the tablet market.

On page 14 of Microsoft's 10-K annual report as required by law, the software giant warned of potential trouble ahead particularly with the impending launch of its Surface tablet. 

Talking about overall competition in the technology sector, Microsoft gave the usual flags to its business, such as the need to stay ahead of the competitor curve by distributing low-cost products "broadly and quickly." It also noted innovation, something many tech companies in recent years failed to achieve (hint: Nokia, RIM; just to name two.)

But the meat of the sandwich comes with Surface.

There's no secret that the company has disrupted the tablet space in a bid to take on the iPad in the enterprise space. But it's making public progress by noting the concerns, as it rightly should. 

The section on competition among platforms, ecosystems and devices, Microsoft prides itself on its "well-established ecosystem" of users, application developers, and partners that provide platforms that "accelerate growth." Microsoft adds that the impending "launch the Windows 8 operating system, Surface devices, and associated cloud-based services" adds further pressure to its existing ecosystem. 

Building up to the crux, Microsoft said its operating margins face pressure from rivals that control both the hardware and software of a product or service. Apple's the most famous one with its iPhone and iPad devices, and Mac computers, but Microsoft too acts in a similar way with the Xbox and its cloud platforms.

We also offer vertically-integrated hardware and software products and services; however, our competitors have been in the market longer and in some cases have established significantly large user bases. Efforts to compete with the vertically integrated model will increase our cost of revenue and reduce our operating margins.

But Surface will cause the largest shake up in the Windows-based tablet market and could force OEMs to feel neglected and pushed out, resonating with Acers' sentiment that Microsoft's strategy to take on Apple with its surface will "fail." Dell said pretty much the same thing, despite reiterating its ongoing commitment to Microsoft and it would bring out its own slate-like device.

Here's the kicker line (emphasis mine):

We derive substantial revenue from licenses of Windows operating systems on personal computers. The proliferation of alternative devices and form factors, in particular mobile devices such as smartphones and tablet computers, creates challenges from competing software platforms. These devices compete on multiple bases including price and the perceived utility of the device and its platform. [...]

Even if many users view these devices as complementary to a personal computer, the prevalence of these devices may make it more difficult to attract applications developers to our platforms. In addition, our Surface devices will compete with products made by our OEM partners, which may affect their commitment to our platform.

Arguably, however, Microsoft chief executive Steve Ballmer said the company will "prime the pump" in kick-starting hardware partners and OEMs in bringing Windows 8 to as many platforms and device makers as possible, but in doing so has royally ruffled the feathers of its friends and extended family in the hardware space.

Despite its desire to succeed, Microsoft's tablet epitaph could read that while its Surface tablet was to show off to hardware makers its design for a Windows 8-powered tablet, it was merely a goalpost for others to overtake. Either way, Microsoft gets off lightly. It succeeds with Surface and generates vast revenue, or its hardware partners win the tablet race and Microsoft says that its own 'encouraging push' was its plan all along.

Microsoft remains quiet on a lot of things, not least pricing, despite reporting to suggest otherwise. At least the software giant isn't burying its head in the sand on the wider issues, though.

Image credit: Josh Lowensohn/CNET.

Topics: Microsoft, Mobility, Tablets, Tech Industry

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12 comments
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  • Worst Case ...

    ... Surface drives away OEMs, while failing to sell well in its own right. Lose-lose.

    Actually, considering how poorly Windows tablets have done over the years, that seems like a very likely outcome...
    ldo17
    • Forgetting two big differences

      Touch-enabled does not in any way mean touch-friendly. That is one HUGE problem with Windows 7 tablets. How in the heck is an average sized index finger going to touch the tiny menus? Or 'right click'?

      Additionally, as the Kindle Fire, Nexus 7, Nook color/tab, and pretty much most of Android smartphones have shown, price is a HUGE factor. If the Surface RT is priced to compete with the entry iPad 3 (including the keyboard), that would be huge. If it is $399, that is even bigger. When most Android smartphones are still mid-level or low-end, that is very telling.
      ikissfutebol
      • To answer your question

        This has changed in Win8.

        If you've played with Windows 8 you'll notice that now in the desktop UI environment the menus have been replaced with ribbon bars. (Users wanting the traditional menus can still change to that configuration).
        The ribbon menus, now not just in programs like Office apps but also included in the standard explorer-based windows for file operations, makes it incredibly easy to navigate with your index finger.

        Regarding right-click, not certain of this as I've yet try Win8 on a touch screen device, but there are many potential possibilities. Delay hold with your finger could trigger the same function as a right click.
        milo ducillo
    • So what... what is your point?

      Why bring up history when MS have clearly changed the model? The new model addresses the complaints everyone has with Android and Google losing control. I cant wait to see the new tablet hardware and will look keenly despite having an ipad2 and an Asus Transformer. Every bit of kit brings something new to the market and I'm sure this will too.

      Plus MS will set a decent benchmark for others to follow, or not. And if this pushes Linux into a touch version then so much the better for us all. All I see is win-win for me.
      johnmckay
  • Shoot from the hip advice

    'meat in the sandwich' ... you meant 'hidden in the small print' ;-)
    'building up to a crux'
    'disrupted the tablet space'
    'here's the kicker'
    'merely a goalpost for others to overtake' WTF!
    'burying its head in the sand'
    ...

    Zack: I note a certain increase in the maturity of your posts from student days ... but please do not let your talent be absorbed into the Borg collective of corporate sheep ... best advice for any artist is to find his own style, lest he become 7 of 9.

    Just saying, the jargon/cliche generator was clearly working harder than the brain on this post.
    jacksonjohn
  • What will be Borg post no the leader says what many deny

    I bet they again scream to silence dissenting opinions;-)
    Richard Flude
  • OEMs should welcome the competition

    I do realize Microsoft has a competitive advantage, however, they also have to develop/R&D the software. So that costs them, too. That said, the Surface is a totally concept for current tablets. From the material, cooling (on the Pro), etc., no other OEM has come up with the ideas.

    There are plenty of people that are tired of the traditional chassis design. My hope is that the Surface family sparks the OEMs that want to succeed to come up with innovative designs. How many people have said they want the Lumia 900 to run Android because the actual device is very appealing? I've seen plenty...
    ikissfutebol
    • Windows cheats

      Microsoft controls how well it works on the hardware. Hard for the OEMs to compete then, eh?
      symbolset
    • Competition and OEMs

      The risk for Microsoft in alienating their OEMs is that those manufacturers will have to make the decision to be loyal to Microsoft and be "second rate", or just design their very own platform(s) and compete. Then, none of them will be Windows-only and we will see some real competition again.. after decades.
      danbi
  • Microsoft admits Surface competition risk with tablet OEMs

    That comes as no surprise that they admit it. I've said it when Microsoft Surface was first announced. However that risk is very minimal because Microsoft is the one setting the standard of how Windows 8 tablets should be designed. The OEMs can either choose to follow with good design or be left behind. If they get left behind then that is less competition for Microsoft ;)
    Loverock Davidson-
    • Left behind

      Indeed, current Microsoft OEMs can choose to follow (Microsoft) or somebody else, or nobody.
      Somebody is going to be left behind.

      Most probably Microsoft.
      danbi
  • You were warned

    Putting a statement like that in their annual report is mostly CYA boilerplate. In the event HP and Dell both sell their PC operations to Lenovo, such that Microsoft is faced with negotiating Windows 8 prices with a single, giant, global provider of laptops and desktops, leading to, erm, reduced margins, no lawyer can say that investors were not warned.
    Robert Hahn