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Microsoft to drive Windows tablet strategy with smaller devices, OS rebates

Outgoing CFO confirms move to smaller tablets; hints at reduced-price Windows for cheaper devices

Microsoft's chief financial officer yesterday confirmed that the company and its hardware partners would ship smaller, lower-priced Windows tablets in the next months.

"We are working closely with OEMs on a new suite of small touch devices powered by Windows," said Peter Klein Microsoft's outgoing CFO in a conference call with Wall Street analysts Thursday. "These devices will have competitive price points, partly enabled by our latest OEM offerings designed specifically for these smaller devices, and will be available in the coming months."

Later in the call, Klein said that the expanded tablet portfolio would feature Surface devices as well as ones from its OEMs (original equipment manufacturers), and that lower prices would be one of their hallmarks.

Last week the Wall Street Journal reported that Microsoft itself would launch a series of smaller, less-expensive Surface tablets in 2013 to better compete in that fast-growing segment of the market. One analyst pegged $299 as a possible starting price; previously, other experts had speculated on prices ranging from $199 to $399.

Microsoft's tablets start at $499 for the Surface RT, which uses Windows RT, the tablet-oriented, touch-only operating system, and $899 for the Surface Pro, the device that relies on Windows 8 Pro and can run "legacy" applications that also run on Windows 7 PCs. Those prices do not include the keyboard-slash-covers which Microsoft emphasizes as a key component of the it's-a-tablet-it's-a-PC strategy for Surface.

Although the Surface RT's price is competitive with that of Apple's 9.7-in. iPad, all the Surface tablets cost significantly more than Apple's 7.9-in. iPad Mini or the slew of 7-in. tablets running Google's Android.

Klein's comments were the first official word from Microsoft that it plans to join the sub-8-in. tablet market.

Analysts have stressed how important it is for Microsoft to prove Windows 8 and Windows RT can compete with Apple's iOS and Google's Android as tablet operating systems. If its tablet strategy fails, the company faces waning influence as it becomes even more of an enterprise-centric vendor.

Klein, speaking to investors through the Wall Street analysts on yesterday's earning call, laid out Microsoft's strategy and explained why Windows 8 and Windows RT have not yet gained traction.

One of the factors in Windows 8's performance, Klein said, was a dearth of more powerful, less-expensive devices. The former will come when Intel starts shipping its next-generation processors, dubbed "Haswell" and "Bay Trail."

"We've always felt that with Windows 8, it was a process of the ecosystem really innovating across the board, and really starting to see that on the chips," Klein said, talking about upcoming processors from Intel. "And we're very encouraged by both Haswell and some of the Atom processors to really improve the overall user experience that Windows 8 delivers."

Intel's soon-to-retire CEO Paul Otellini talked up Haswell and Bay Trail, and their impact on Windows 8's performance and device prices, on Tuesday. Otellini predicted Windows system and device prices as low as $200 by the fourth quarter.

Klein also acknowledged, with a frankness not expressed thus far by Microsoft's executives, that the giant faces a tough environment.

"There is no doubt that the device market is evolving. Consumers and businesses are increasingly shifting their focus to touch and mobility, and as a result, they want touch-enabled computing devices that are ultrathin, lightweight, and have long battery life," said Klein, admitting that Windows' revenue has been affected by the change from PCs to more mobile devices.

He also called that transition "complicated" for Microsoft, but not surprisingly remained upbeat. "We still have an immense amount of work to do, yet we feel good about the foundation we have laid and are optimistic about the long term success of Windows," Klein said.

Simpler said than done, pointed out Patrick Moorhead, principal analyst at Moor Insights & Strategy.

"Their strategy relies on them bringing something to the table [in tablets]," Moorhead said. "So far, consumers have said that they'd prefer buying tablets and smartphones over PCs. It's going to be hard for Microsoft to turn around to that."

Moorhead pointed out one comment by Klein that struck him as revealing.

When Klein said that part of the Windows strategy relied on devices at competitive prices, the CFO noted those lower prices would be "partly enabled by our latest OEM offerings designed specifically for these smaller devices.

Klein, said Moorhead, was essentially confirming reports last month that Microsoft has discounted OEM prices of Windows and Office 2013.

"MSFT does have an initiative in place to drive smaller tablet [sales] with a cut-rate, rebated operating system," said Moorhead, citing sources of his own. "They'll rebate OEMs if they do certain things, use certain chips and certain form factors. The official program is to drive volume [sales] to the $199 to $399 range."

Klein also said Microsoft's plans rely on Windows "Blue," a code name he used during the call to refer to the Windows 8 upgrade expected to ship this fall, as well as for the accelerated release schedule that Microsoft intends to adopt.

"With Windows 8, we are setting a new, accelerated pace for updates and innovations, as we focus on making the Windows experience richer and better," said Klein. "We will release the next version of Windows, code named Windows Blue, which further advances the vision of Windows 8 as well as responds to customer feedback."

As long-time Microsoft watcher Mary Jo Foley, who blogs for ZDNet, said earlier today, the phrase "responds to customer feedback" may be a reference to plans by Microsoft to tweak some Windows 8 features -- particularly the lack of a Start button and a forced boot to the tile-style Start screen -- in Windows Blue by restoring the first and making the second optional.

Klein also announced yesterday that he would leave Microsoft at the end of the fiscal year, which wraps up June 30. Microsoft will fill the CFO position internally, the company said.

Some commentators have seen Klein as the scapegoat for Windows 8's lackluster sales. But Rob Helm, analyst with Directions on Microsoft, wasn't buying it.

"Not everything comes down to the CFO," said Helm. "Microsoft's problems stem from the fundamentals of the Windows business rather than what a finance wiz can do or does."

Helm credited Klein, along with Kevin Turner, Microsoft's COO, with instituting cuts in operating costs last year. "You have to give them credit for squeezing operating costs enough to do Surface," said Helm.

Whomever Microsoft promotes -- the company said it would find its next CFO from within its current financial leadership team in the next several weeks -- he or she will not have it easy, Helm warned.

"This will be just as tough for the new person as it was for Klein," Helm said, talking about Microsoft's stated intention to shift from a Windows-dependent business to one devoted to devices like the Surface and services such as Office 365. "The new CFO will have to deal with changes at Microsoft to how it makes money and how much it makes," said Helm.

Klein joined Microsoft in 2002, led the financial efforts of the Business division -- one of the company's biggest money makers -- and stepped into the CFO role in 2009.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

Read more about tablets in Computerworld's Tablets Topic Center.


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