The multiple challenges facing Microsoft Surface Tablet

According to a recent IDC report about tablets, there's good news and bad news for Microsoft. The good news is that Windows tablet sales will surge in the next four years. The bad news is that even then, they'll be only 10% of the market. In the report, IDC increases the number of tablets it expects to be sold in 2012, 122.3 million of them, compared to a 117.1 million estimate previously. By 2016, it expects a whopping 282.7 million tablets to be sold.

Apple tablets will rule the roost for years to come, according to IDC. In 2012, it will have 53.8% of the market, and by 2016 it will have 49.7% of the market. Android, meanwhile, will have 42.7% market share this year, and 39.7% in 2016.

Windows tablets will grow from a 2.9% market share in 2016 to a 10.3% market share in 2016. In terms of actual shipments, Windows tablets will see a 69.2% compound annual growth rate (CAGR), while Apple will see a 20.9% CAGR and Android a 21% CAGR.

While that 69.2% CAGR looks good, keep in mind that Microsoft is starting out at the bottom of the market, so it's easy to rack up high numbers. Far more impressive is the Apple 20.9% and the Android 21%, because they're already shipping plenty of devices.

Microsoft can't be pleased with these numbers. A mere 10.3% market share by 2016 is very bad news. If true, would show that the Windows 8 experiment of designing a tablet operating system for PCs as a way to get people used to the tablet interface so they buy tablets, has failed. But that is only an IDC projection!

There's also some more evidence that Microsoft's Surface RT tablet sales have been sluggish. The Boston-based brokerage firm Detwiler Fenton says that Microsoft is expected to sell only 500,000 to 600,000 of them in the December quarter, compared to Microsoft's expectations of one million to two million. So reports AllThingsD. AlThingsD says that one reason is poor distribution. Detwiler Fenton said, according to AllThingsD:

"Lack of distribution is killing the product. Mixed reviews and a high starting price tag certainly don't help, but lack of retail exposure at Best Buy and others is severely depressing sales." In Africa for instance, Microsoft Surface is yet to be officially launched.

None of this is good news for Microsoft in a world in which tablets and mobile are where the growth is, not personal computers. So far, at least, it looks like Windows 8 might not do anything to help Microsoft in mobile.

Again, of more than a dozen tablets Microsoft and Intel touted for the new version of Windows, only five can be purchased for immediate US delivery. Early demand for Microsoft's first computer, the Surface tablet, seems "disappointing", said Craig Berger, an analyst at FBR Capital Markets. And computer-makers have been hampered in introducing tablets by limits Microsoft imposed on which manufacturers got a crack at prototypes, and by delays in Intel power-management software.

The hold-up is making it harder for personal computer makers, already beleaguered by plummeting demand, to challenge Apple and Google during the year-end holiday shopping season. While PC variants running Windows abound, tablets built on ARM technology-based chips or low-power processors from Intel are scarce.

To compound this, the list of Windows tablets is short. In addition to Microsoft's Surface, Asus's Vivo Tab RT and Lenovo's IdeaPad Yoga run the RT version of Windows and boast ARM-based chips. Samsung's ATIV Smart PC and Acer's Iconia run Windows 8, and rely on Intel chips.

Two of them, the Surface and the Acer device, are only available at Microsoft's stores, which number just more than 60 for the holidays. FBR's Berger wrote in a note last week that Surface sales "have underwhelmed expectations". Microsoft has declined to comment on Surface sales, which isn't a positive sign, said Wes Miller, an analyst at Directions on Microsoft.

"When Microsoft is stealthy about numbers, that usually means something," he said.

At a September event, Intel said nine PC-makers, including Dell and Hewlett-Packard, would have devices with its newest low-power chip on sale when Windows was released in October. More than a month later, only four manufacturers do.

Days before Windows went on sale, Microsoft provided a list of five Windows RT devices it said would be available at the software's release. Only two made it out of the gate, and Microsoft later said the list contained errors. In a note to clients, Rick Sherlund, an analyst at Nomura, termed Windows 8's release an "awkward launch, with PC vendors slow to bring out" new tablets and Ultrabook touch devices.

For the PC industry, Windows 8 and RT tablets and touch- screen laptops that convert to handhelds are an attempt to build a beachhead in the mobile business. The PC market is forecast to shrink this year for the first time in more than a decade. Tablet shipments will pass notebooks in the second half of 2013, estimates Eve Jung, an analyst at Nomura. NPD DisplaySearch projects the tablet market will reach $162 billion in 2017, more than double its size this year.

Intel and Microsoft shares have suffered as concern rises about the future of the PC industry, exacerbated by the lack of Windows tablets on the market. The PC market's lack of momentum contrasts with the 43 per cent jump in tablet shipments in the third quarter, according to Strategy Analytics. Apple, before it introduced a new line-up of iPads, including the lower-cost iPad Mini, had 57 per cent of the market in the period. Devices based on Google's Android mobile operating system had 41 per cent, and Microsoft Windows-based tablets had 1.6 per cent of the global market.

"Windows doesn't typically come screaming out of the gate, but it's fair to say that Intel and Microsoft would have hoped for more," said Alex Gauna, a San Francisco-based analyst at JMP Securities. Microsoft chief executive Steve Ballmer said at a shareholder meeting in Bellevue, Washington, last week that Microsoft is seeing "fantastic demand" for tablets and touch-screen PCs featuring Windows 8, and is working to get more into stores.

Microsoft declined to comment for this story except to refer to comments from Windows chief financial officer Tami Reller at a conference last week. "There are some touch devices in retail today and we're working to get more touch devices out there," Reller said. "But broadly speaking there's a lot of great devices that have come to market, some that have sold out, some that are now being replenished and coming to market, and more models to come."

Typical Windows releases are accompanied by hundreds of new machines. In this case, hardware manufacturers have done a better job delivering PC and notebook designs than tablets. While there are few tablets available, Microsoft has certified a total of 1500 machines to run Windows 8.

Microsoft’s Windows RT Surface tablet has proved a dud in the market so far. From being praised to be the first tablet to run on Microsoft’s latest Windows RT OS, the tablet is being written off as another unsuccessful venture by Microsoft. But there are analysts who have said that the tablet is failing not because of the dissatisfaction of people with hardware or its OS, but because of the fact that it is not available in much of the world. Only Microsoft is selling the tabs either online or through a handful showrooms it owns.

But to be true, Microsoft from the very beginning didn’t have great hopes from this tablet. They were expecting at least a few million tabs being sold in the market. Unfortunately given the low demand for Surface RT tablet, Microsoft was forced to cut the orders by as much as half to its OEM partners in Asia. Reports suggest that the company may not be able to cross 1 million surface tablet sales mark in the current quarter. That and the fact that the existing price tag is just unreasonable. Analysts have attributed weak sales of Microsoft’s Surface to its hefty price tag, and the Surface Pro does little to alleviate this burden on users’ pockets.

Microsoft revealed the pricing information for its fully stocked Windows 8 Surface Pro tablet at the end of November, and the device will cost $899 for the 64GB model and $999 for the 128GB edition. While Microsoft’s forthcoming gadget boasts a fuller operating system and more storage, users can purchase a loaded Windows 8 PC for less than this $899 price point. Many mid-range Windows 8 hybrid laptops, such as Sony’s VAIO 13.3-inch ultrabook, fall in the $600-$800 bracket.

The device will compete with the likes of Apple’s iPad, Google’s Nexus 10 and other various 10-inch tablets come 2013, although its price and features appear to be aimed at laptop buyers rather than slate shoppers. The Surface Pro’s primary issue lies in the fact that it’s too expensive to really make a splash in the market as a tablet, but it’s not impressive enough as a laptop to gain traction with PC buyers.

As some acknowledge, the Surface Pro seems like an appealing laptop/tablet hybrid for businesses, but Microsoft will have to gain a lot of market share to rival Apple in that area.

“Love it or hate it, the iPad started the Bring Your Own Device (BYOD) movement in IT,” Steven J. Vaughan-Nichols writes. “Steve Jobs may not have had office workers in mind when he dreamed up the iPad, but the iPad has become the poster child for tablets in business.”

Microsoft is in the early stages of creating what could be a successful Surface brand, but it has yet to learn from its mistakes. There have been talks of a Surface smartphone in the works or a gaming-based tablet referred to as the Xbox Surface, and perhaps Microsoft will work out its kinks and find a strategy that works by then.