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Surface Tablet Likely to See Minimal Holiday Sales, Says Analyst

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Microsoft positioned to do well in the enterprise market.

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Kim also cited Amazon's (NASDAQ:AMZN) Kindle Fire as another tablet difficult to compete with on price. It sells for only $199. The larger, 8.9-inch Kindle Fire tablets cost $299. Plus, Amazon already holds a large subscriber base and a lot of content for its subscribers. When customers shop on Amazon, they "always see advertisements for the Kindle tablets when they shop."

Despite the competition, Microsoft may capture a larger portion of the tablet market. The International Data Corporation, or IDC, projected in a September forecast update that Microsoft will increase its share of the tablet market from 1% to 4% by the end of 2012.

This growth has a drawback, though, as sales of the Surface tablet with Windows RT may cannibalize some of its Windows 8 sales for PCs. Kim estimates that if Microsoft grabs 4% of the tablet market, half of the tablet sales could replace sales of PCs using Windows 8.

To help sales of Windows 8, Microsoft will purportedly spend approximately $1.5 billion to $1.8 billion on a marketing campaign, according to Forbes. Wired has reported, though, that Microsoft will not comment on the validity of the Forbes report. Either way, Microsoft and its hardware partners will still likely spend hundreds of million of dollars, according to the Wall Street Journal.

As for its effectiveness, Kim thinks the campaign will do little to generate direct sales. He highlighted that Microsoft has aggressively advertised its products to the consumer market, but over the past two years, the consumer PC market has "declined at an accelerated pace."

Also, the Surface tablet will have a very limited retail distribution. Just thirty-two holiday pop-up stores will open on October 26 for the release of the Surface. In comparison, Apple has 246 full-time retail stores in the United States.

Kim explained his view on the ad campaign:

Customers will likely not buy the tablet right away and will want to try it out at the store; it does not have the same reputation as the iPad or the Kindle. Since Microsoft has a limited retail distribution, it will limit sales opportunities because some potential customers won't be able to visit a store and test it.

The advertising dollars being spent are more likely for branding and marketing. The ads won't generate direct success for the holiday shopping season. I don't think that's Microsoft's intent either, and it probably just wants to spread awareness about the product above all else.

Microsoft wants most consumers to remember the Surface exists as an option next time they shop for a tablet six months or a year from now.

The IDC report also shared this view, stating, "[W]e expect shipments to remain low for the fourth quarter as high prices and consumer confusion around these devices will limit their appeal."

Microsoft sounds confident about its RT tablet, however, as rumors from Asian component suppliers claim Microsoft has placed orders for 3 million to 5 million tablets for the fourth quarter, according to the Wall Street Journal.
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