Microsoft’s Surface Tablets Could Damage OEM Relationship

Microsoft CEO Steve Ballmer discussing Surface.

Microsoft’s upcoming Surface tablets, which the company is building in-house, could irritate its longtime manufacturing partners.

That seems like a given, considering how those devices will inevitably end up competing against Windows 8 tablets and PCs developed by Hewlett-Packard, Dell, and other vendors. But it’s another thing for a company like Microsoft—usually tight-lipped when it comes to discussing its vendor relationships—to actually admit the potential conflict in print.

“Our Surface devices will compete with products made by our OEM partners, which may affect their commitment to our platform,” Microsoft wrote in its annual Form 10-K filing with the Securities and Exchange Commission (SEC).

Microsoft has a mixed track record when it comes to building its own hardware in-house. While the Xbox and Kinect hands-free controller sold well, other projects—including the Zune music player—died on the open market with barely a whimper.

That’s not the only issue confronting Windows 8 and Surface. Compared to Apple, its main competitor in the tablet space, Microsoft has relatively little experience with the integrated hardware-and-software model. “Our competitors have been in the [integrated] market longer and in some cases have established significantly large user bases,” Microsoft continued. “Efforts to compete with the vertically integrated model will increase our cost of revenue and reduce our operating margins.”

Microsoft also faces a challenge in attracting developers to its new platform. “Competing platforms have applications marketplaces (sometimes referred to as ‘stores’) with scale and significant installed bases on mobile devices,” the filing added. “Efforts to compete with these application marketplaces may increase our cost of revenue and lower our operating margins.”

Surface will arrive in two versions: One tablet will run Windows 8 Pro, and rely on a third-generation Intel Core processor. The other will feature Windows RT, a version built for ARM processors. Both versions will feature 10.6-inch screens along with a kickstand and a cover that doubles as a keyboard. The Windows 8 version will debut with Windows 8′s general availability, while the Windows RT one will appear roughly 90 days later.

The new Windows will integrate the cloud more tightly than ever, including the baked-in SkyDrive for Windows. Apps from third-party developers, many of which rely on cloud services for functionality, will also help tip the balance toward success or failure; if Microsoft can build a healthy ecosystem for its app store, that would be a big step toward challenging the iPad and Android, both of which boast impressive app collections.

 

Image: Microsoft

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