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But Microsoft's dusty inventory of Surface devices shows how difficult the integrated hardware-software market can be, as computing shifts from being device-centric to being centered on software, data, services and user experience.
Unfortunately, the alternative for Microsoft in mobile is equally hazardous: Keep relying on OEMs seduced by the popular and free Android. It's not as if Samsung and HTC are clamoring to pay a Windows license fee so they can make mobile devices most people don't want.
Steve Ballmer's successor will have to decide whether to stick with the "devices and services" model Ballmer set up just before announcing his retirement. Don't expect much to change. Microsoft isn't about to bring in a cowboy that will abandon the company's new business model and its $7.2 billion acquisition of Nokia.
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However, with Windows revenue falling and Windows Phone a distant third behind Android and iOS, with roughly 3% of smartphone sales, can this hardware quest possibly end well?
Commodization Of PCs And Tablets
The PC market has been on a downturn since the iPad was introduced in 2010. Research firm IDC predicts that PC shipments will shrink by 9.7% year-over-year in 2013 and that tablet sales will surpass PC sales for good in 2015.
Microsoft's Windows 8 Surface ultrabook-tablet hybrid devices are an attempt to assert some control over the diminishing PC market while establishing the company as a tablet player … all with the same device! Surface RT, Surface Pro and Windows 8 all landed with a thud this year despite sincere efforts to create a unique hardware and user interface experience. Surface devices account for just 3.7% of tablet sales, according to IDC. Surface 2 devices, announced last week, offer hardware improvements such as an adjustable kickstand and a touch cover keypad that enhances battery life, as well as 200 GB of free SkyDrive storage.
Out of the gates, the Surface 2 device (the ARM-based, cheaper, more "tablety" Surface that runs Windows RT) scored big when Delta announced that Surface 2 tablets will replace paper document flight bags for 11,000 pilots; this would normally be a job for iPads and is an indication of enterprise opportunities for Surface and Windows 8.
But down here on earth, Surface prices are still unrealistically high given the lack of demand from consumers and businesses (the 64-GB Surface Pro 2 is $900 and the 32-GB Surface 2 is $450).
Microsoft positioned Surface to inspire PC makers to improve ultrabook hardware. But that market is contracting, and inspiration is in short supply. As such, ultrabooks keep getting cheaper, thanks to more consumers buying inexpensive tablets for light computing tasks.
Both Surfaces offered the tablet-loving public more than it needed. The Surface Pro's 10.6-inch screen is too big, the price too high, the battery life too short and the selection of apps too scant to be considered a tablet, as the market has been defined by the iPad, iPad Mini, Samsung Galaxy Tab, Google Nexus and Amazon Kindle Fire. Consumers were also thoroughly confused by Surface Pro's operating system, Windows 8.
These days, being a laptop/tablet hardware maker is an uphill climb if you can't reap profits from the software and services inside. And so far, the embattled Windows 8 isn't providing the app and ecosystem perks Microsoft needs to lock itself into a hardware-software package.
Apple has been able to win -- at least with high-end consumers -- by designing all the hardware and software components of PCs, tablets and smartphones.
Google has dabbled with hardware-software unity with its Nexus tablets and by purchasing Motorola Mobility last year. Yet Nexus doesn't feel like a "Google hardware product" (it says "Asus" right on the back), and Google's Motorola purchase was mostly for patents. Google, like Amazon and unlike Microsoft, understands that you don't win by investing big in hardware; it's just a means to get eyeballs on your high-margin software and services.
Also unlike Microsoft, Google provides Android to mobile OEMs for free. Google can do this because it saw early on that Android could be a platform on which it could make money from Google mobile services, apps in the Google Play store and, most of all, mobile search ads. What it needed was scale -- lots of phones, lots of users -- and it got it. Android phones now own 52% of U.S. smartphone market share, according to comScore.
OEMs can mold Android as they see fit, and they like that -- even if this doesn't always work out for the user as complaints of fragmentation, where different versions of Android end up on different phones, are common.
Phone and tablet makers have no such flexibility with Windows, and they have to pay for it. No wonder they're turning their backs on Microsoft, with some PC makers even eyeing free-to-license Chromebooks over Windows 8 ultrabooks. Of course, Microsoft could follow Google and give Windows away to excite phone and tablet makers and motivate developers. But that's not going to happen as Windows is still too fat a cash cow.
Instead, Microsoft wants to emulate Apple, which explains its Nokia acquisition. Even before the purchase, Nokia was making 80% of all Windows Phones. Lumia Windows Phones are selling well worldwide, but they have stalled badly in North America, shipping only 500,000 units in the second quarter, a 16% decrease year-on-year. Low-end Windows Phone maker Nokia has yet to crack the U.S. market in any significant way. Will Americans be able to look at a "Microkia" Windows Phone as anything other than an iPhone copycat?
Microsoft Software Everywhere
Microsoft must accept its mobile reality and customize more of its world-class application software to run on non-Windows devices. The upside, beyond more revenue, is keeping Microsoft's products in front of the droves of young iOS and Android users.
The first step is to acknowledge the elephant in the room and create a full, native version of Office to run on iPads and Android tablets. Microsoft's revenue from putting Office on the iTunes App Store alone is estimated at $2.5 billion for the full 2014 year. The urgency has only increased now that Apple has made its iWorks productivity suite free on new iOS devices and Google has made Quickoffice, its tool that imports and edits Microsoft Office docs, free on all iOS and Android devices for those with a Google account.
Microsoft hinted at its recent meeting with financial analysts that it's working on an Office version for iOS and Android. It should extend that work to all Xbox services, Office 365 (and not just a watered-down mobile version) and Windows Intune. Giving away the Windows OS to hardware partners might not be in the cards, but as Microsoft has done with Skype, SkyDrive, Lync and OneNote, its new CEO should keep going where the people are and share full Microsoft software products on all mobile platforms.
At the very least, it's a good contingency plan for when Microsoft wakes up from its hardware dream.