Microsoft Furthers Tablet Plans - Analyst Blog

Microsoft Corp. ( MSFT ) plans to launch a 7-inch Surface tablet later this year to catch up with its rivals, according to The Wall Street Journal.

The company launched its 10.6-inch screen Surface tablet in October last year with a price tag of $499.0, which made it comparatively larger and more expensive than Apple 's ( AAPL ) 7.9-inch iPad mini, Google 's ( GOOG ) 7-inch Nexus 7 and Amazon 's ( AMZN ) 7-inch Kindle Fire tablet HD.

Microsoft's initiative to increase its share in the tablet market comes in the wake of declining desktop and laptop sales due to strong demand for smartphones and tablets.

According to a recent report from research firms Gartner Inc. and International Data Corp (IDC), PC sales fell at double-digit percentage rates in the first three months of 2013 compared to the prior year. IDC estimated that first-quarter shipments of PCs fell 14% worldwide from last year, the steepest quarterly drop since 1994. Gartner also pegged a decline of 11% for the same time period.

Though the company has not disclosed any details about the new 7-inch product, we are expecting it to be less expensive than the Surface tablets launched last October. At this point, where Microsoft has a negligible share in the tablet market, pricing of the device is very crucial to attract customers. The company has no choice but to keep the price of the device competitive. Also, Apple will soon launch its next-generation tablet iPad 5, making the overcrowded tablet market even more competitive.

According to IDC, Apple's iPad is leading the competition with 22.9 million units shipped in the fourth quarter of 2012. In the process, Apple captured 43.6% share of the market. Samsung's Galaxy tablets with a 15.1% share were next in line, followed by Amazon's Kindle Fire with 11.5% and others making up the rest. Microsoft is way behind its competitors and scaling up its market share substantially is going to be a uphill task.

Further, IDC is predicting that tablet shipments may reach 350 million by the end of 2017. It is predicting that lower screen size i.e. 7 inch tablets may become more popular as consumers prefer smaller devices for their daily usage. IDC expects Windows 8 to grow from 1% in 2012 to 7.4% in 2017 and Windows RT to remain below 3% during the same time period.

Though Microsoft is taking drastic measures to keep itself relevant in the industry, the company is battling the slump in the PC market just like all other PC makers. The company launched its first touch-based operating system, Windows 8 late last year. But to add to its woes, the launch of Windows 8 could not provide a positive boost to the PC market. In fact, IDC stated that Windows 8 was partly responsible for the steep drop in PC sales in the last quarter.

Although Microsoft has been a laggard in the tablet space, there is still time to create its own niche. Combining the functionality of a tablet and laptop, Microsoft tablets can create interest and attract new tablet users by adding new features and keeping the price of the device affordable.

We believe Microsoft is one of the best positioned software vendors but the company will have to explore ways to recover from the current situation.

Currently, Microsoft has a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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