Business | Microsoft and the launch of Windows 8

Tablets from on high

Microsoft makes its pitch for the mobile age

“IT TRULY is a new era at Microsoft,” gushed Steve Ballmer, the giant software company’s boss, in a letter to shareholders this month. For once, such grandiloquence seems justified. On October 26th Windows 8, the newest version of Microsoft’s operating system for personal computers, is due to be released. It looks very different from past editions; it is designed for touchscreens on both PCs and tablets; and it can run on processors designed by ARM, a British company whose allies dominate mobile devices, as well as chips made by Intel, Microsoft’s long-term partner. Also on sale will be the Surface, a tablet-cum-PC bearing Microsoft’s own brand. A version of Windows 8 for smartphones is due on October 29th.

Whether the new era will be a successful one is an open question. It got off to a stumbling start when the European Commission warned Microsoft not to repeat the sin of steering users away from rivals to its Explorer browser. (The company insisted all would be well before the launch.)

What is not in doubt is how much is at stake for Microsoft. To see that, look at the chart. In its past financial year its Windows division accounted for about a quarter of its revenue of $73.7 billion; three-quarters of that came from sales of Windows to PC-makers for installation on new desk- and laptops. Windows is the dominant system on such devices, with more than 90% of the market despite the growing popularity of Apple’s Macs. But that market has slowed. In the year to the third quarter, shipments of PCs fell by 8.6%, according to IDC, a research firm. However, the drop largely reflected a clear-out of stocks by PC-sellers before Windows 8’s arrival as well as the ropiness of the world economy.

People are doing more and more computing on the go, using tablets and smartphones. Apple rules the tablet market, although devices powered by Google’s Android operating system have been taking a bigger share. On October 23rd Apple unveiled the fourth incarnation of the iPad as well as a smaller version with a screen less than eight inches (20cm) across; Google and Amazon had already launched much cheaper seven-inch tablets. In smartphones, Android devices account for most of the volume; Apple’s iPhone scoops most of the profit. Windows has a tiny share of smartphones; in tablets it is invisible. If you lump these in with PCs, says Frank Gillett of Forrester, another research company, Microsoft’s share of personal-computing devices drops to only 30%.

Microsoft’s plan has several parts, starting with the transformation of Windows into a system for touchscreens. “Tiles” replace the icons that have cluttered screens since Windows 95 appeared 17 years ago. Tiles can represent pretty much anything you like, from applications to photos of loved ones. They are also “live”, showing new information as it comes in. Xbox, Microsoft’s games and home-entertainment hub, and existing Windows phones already have this look.

Complementarity between devices goes beyond appearances. Using Microsoft’s cloud services, owners of Windows 8 devices will be able to start doing something on one machine (working in the office, say) and continue on another (finishing a document on the road). They will also be able to play Xbox’s music, video and games. In effect, says José Piñero of Microsoft’s entertainment and devices division, this stretches Xbox’s reach from the 67m consoles sold so far to “hundreds of millions” of devices. Through an app called SmartGlass, tablets and phones can become adjuncts to Xboxes in the home, showing information about a film playing on the screen in the living room.

This distinguishes Microsoft from Apple. Apple’s desk- and laptops, on the one hand, and its iPhones and iPads on the other, have different operating systems and appearances. Microsoft is also more generous than Apple to its army of developers, on whom it must rely to fill the Windows Store, the online shop for Windows 8 apps. Apple (like Google) snaffles 30% of all revenue from its store. Microsoft will take 30% only of the first $25,000 and 20% on the rest. Developers may also take payment outside the shop, cutting Microsoft out.

At the same time, Microsoft is taking a leaf out of Apple’s book, by making and selling its own devices. Hitherto, it has supplied the operating system; others have made the PCs. Although lots of devices will be on offer, the Surface, says Tami Reller, the chief financial officer of the Windows division, is “the perfect stage for Windows 8”. The most basic version costs $499, the same as the cheapest full-sized new iPad; another $100 buys a cover containing a keyboard. At least at first, the Surface will be sold only online or through Microsoft’s own bricks-and-mortar shops.

Mark Moerdler of Sanford C. Bernstein, a research firm, says that although Windows 8 may sell on PCs it is “a tablet operating system first and foremost”. Unlike Apple’s and Google’s systems, he says, it has been designed to allow people to create content as well as to consume it. Being able to use Microsoft’s popular Office suite of Word (document), Excel (spreadsheet) and PowerPoint (slide) software on a tablet designed for the purpose should give Windows 8 an edge over its competitors. A version will be installed on devices that run Windows RT, the cheaper, less powerful, ARM-based flavour of Windows 8, such as the first Surfaces. Microsoft does not make Office for the iPad.

Microsoft says advance sales have been brisk: at $800m by the end of September, they were 40% higher than for Windows 7 before its launch in 2009. Even so, there are obstacles. One, suggested by some previews, is that the new look and feel will take getting used to—though Ms Reller says that in trials 84% of people got to grips with it within a day. Another is that Windows 7 has been popular, so people may be wary of upgrading. And touchscreen adds about $100 to the cost of a PC, reckons Kirk Yang, who covers technology hardware for Barclays in Hong Kong. All this may make consumers hesitate before they buy.

Companies are likely to be slower on the uptake than consumers. Many have not long switched to Windows 7 (or are still using Windows XP, released 11 years ago). They will be in no hurry to invest in touchscreen PCs or to retrain staff to use Windows 8. They may, however, be happy to see their staff using tablets with Office.

Mr Gillett at Forrester thinks that for all these reasons sales may not really get going until 2014. But he forecasts that by 2016 Microsoft will have over a quarter of the tablet market and a fair if smaller share of smartphone operating systems too. The personal-computing market is shifting fast, from desk-bound to mobile and from mouse-and-keyboard to touch. Microsoft had little choice but to go mobile. Its chances of success boil down to how much people care about having more or less the same operating system, tools and content in the office, on the road and on the sofa, as well as on the quality of what Microsoft has to offer. It is touch, and go.

This article appeared in the Business section of the print edition under the headline "Tablets from on high"

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