Microsoft becomes friend and foe to PC partners

  • Posted: Wednesday, October 17, 2012 2:15 p.m.

LOS ANGELES — With the launch of its Surface tablet computer, Microsoft is becoming a genuine “frenemy” – part friend, part enemy – to its longtime manufacturing partners.

Since its founding 37 years ago, the Redmond, Wash., company has had a mutual understanding with makers of computer hardware: Microsoft creates software. Companies such as Dell, HP, Acer and Lenovo pay Microsoft a licensing fee to place the Windows operating system on the desktop PCs, notebooks and other gadgets they market to consumers.

Now, Microsoft is complicating the cozy relationship by making and marketing its own tablet computer. The company announced Tuesday that the Surface will start at $499 when it goes on sale Oct. 26. The new tablet is set to invigorate an already hotly contested market for touch-screen computers. But for first time, Microsoft will be in head-to-head competition with partners that help generate sales for its $14 billion-a-year Windows software business.

Microsoft is no stranger to manufacturing hardware, but it usually does so in businesses that are sideshows to its mainstay computer software. It has made the Xbox game console since 2001, for instance.

CEO Steve Ballmer insists Microsoft Corp. must move into manufacturing to bring consumers “delightful, seamless experiences” that they can enjoy “right out of the box,” according to a letter he wrote to shareholders recently.

Of course, it’s not just for the sake of consumers. The strategy could pay off for Microsoft, too. The company is coming out with a new version of Windows next week. Every time it sells a Surface, Microsoft will record some revenue for the Windows 8 operating system. Manufacturers that build competing Windows 8 tablets will pay Microsoft a fee, estimated between $30 and $80 per device.

That’s a big expense, especially considering that manufacturers are allowed to use Google Inc.’s Android operating system for tablets and smartphones for free. The extra cost of making Windows 8 tablets could put Microsoft’s partners at a disadvantage in a cut-throat tablet market.

“It’s always tough when you’re competing with your partners,” said Shaw Wu, an analyst with Sterne Agee. “That’s what Microsoft has decided to do.”

In the past few months, Google Inc. and Amazon.com Inc. have undermined tablet leader Apple Inc. with 7-inch-screen tablets using Android. The cheapest goes for $159. It’s a price that Amazon CEO Jeff Bezos has acknowledged barely covers manufacturing costs.

Apple, too, is expected to downsize its iPads with a mini version that might also give consumers a price break ahead of the holidays.

Having a product that is priced well above these smaller offerings will give Microsoft’s partners a better chance to make a profit. The downside? They may be too expensive to become a popular stocking stuffer this Christmas.

Microsoft’s Surface has a 10.6-inch screen. Surface also has the ability to run Office and other Windows applications.

That, plus its optional touch keyboard cover for $100 more, may enable the devices to cross the productivity gap between tablets and PCs.

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