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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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MINYANVILLE ORIGINAL AllThingsD reported this morning that Apple (NASDAQ:AAPL) announced it will host an invitation-only special event on October 23, where it is expected Apple will reveal the iPad Mini.

The October 23 date places the event (likely intentionally) three days before Microsoft's (NASDAQ:MSFT) launch of Windows 8 and its Surface RT tablet.

Microsoft will release Windows 8 in New York City on October 25 and begin selling Windows 8 and its Surface RT tablet, which runs Microsoft Home and Student 2013 RT, on October 26. Windows RT is the ARM version of Windows 8; it's a simplified version of Windows 8, which will support app-style versions of Microsoft Office. The tablet will use an ARM processor like the iPad, and it will have Wi-Fi accessibility.

As for competition with the iPad Mini, the Surface tablet will probably struggle in the fourth quarter against existing competitors whether or not a new Apple tablet hits the market. Yun Kim, an analyst with ThinkEquity, said in an interview, "Overall, I'm not expecting any great things from the Surface in the consumer market for the upcoming holiday shopping season." Further crowding of the tablet market by an iPad Mini will only make it more difficult for the Surface to attract buyers.

Microsoft lacks brand awareness as a tablet provider, and "the only thing going for the Surface initially is that it has the Microsoft Office RT." However, for consumers this reason is "not that compelling."

Kim explains why to investors:

The PC market had a good run from 2005 to 2008, driven by the consumer market. Individuals would buy a second or third PC for their household. However, these second and third PCs are being replaced by tablets, driving the decline of PC in the consumer market. This is why Microsoft obviously needs to get involved with tablets.

Second and third PCs are not necessarily used for productivity purposes, though, like using Excel for accounting and business work. These PCs are used as devices for tasks such as accessing the Internet, multimedia content, and email. With tablets replacing these computers for these purposes, I don't know how compelling Microsoft Office RT for tablets will be for the consumer market.

I think initially the consumer market will be very tough to break into for Microsoft with the Surface tablet. Especially with an iPad Mini being introduced, I don't see how they can compete on price.

The price of the Surface makes it more expensive than its counterparts. According to ZDNet, Microsoft briefly revealed on its website today the prices of the Surface tablet before pulling down the information.

The Microsoft website listed the 32GB base model of the Surface RT tablet at $499. Tablets with the black multi-touch TouchCover keyboard feature increases the price to $599, and the 64GB tablet with a black TouchCover keyboard costs $699. The iPad Mini will likely have a price tag of $299. However, the 32GB Surface RT is cheaper than Apple's 32GB Wi-Fi iPad, which sells for $599.

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.

Microsoft aired its first Windows 8 TV commercials on Sunday. You can view the advertisement here at ZDNet.

What About the Surface as an Enterprise Device?

Even though the Surface tablet will take an extended period of time to gain acceptance in the consumer market, Kim has "big expectations" for the Surface Pro. He believes it will perform well as an enterprise device when Microsoft releases it in the first quarter of 2013, 90 days after the Surface RT release.

The Surface Pro, designed for businesses, is a separate tablet device from the Surface RT tablet. It runs the Windows 8 Pro operating system and contains an Intel (NASDAQ:INTC) Core i5, which is the same processor used for an Ultrabook. While the cost of the tablet hasn't been revealed, it will be be priced in the same range as Ultrabooks. It can hold either 64GB or 128GB of storage.

The tablet is positioned to capitalize on the transition from desktops to a greater use of mobile devices in the workplace. The availability of Office integration, the Windows server, and the management console on the Surface will go a long way toward businesses adopting the Surface Pro.

The enterprise market could also open a "backdoor" for Microsoft to enter the consumer market in a larger way.

Kim said:

Individuals may use a Windows 8 product in their work environment, like it, and then purchase a Windows 8 tablet for their household needs. This transition will likely take one to two years to occur, though.

Whether or not Microsoft can leverage its Window 8 products in enterprises to gain a foothold in the consumer market will act as a better indicator of success than the initial performance of the Surface tablet in the consumer market.

Microsoft working through the enterprise market seems like the best plan for Microsoft given the competition in the consumer market.

(See also: Microsoft Says No to Bargain Bin for Surface, Aims to Fight iPad Head-On and Tech News: Microsoft Leaks Prices for Surface RT.)

Twitter: @ChrisWitrak

Position in MSFT.
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