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Microsoft tablet confirms low expectations

Microsoft representatives hold a new Surface tablet computer as it is unveiled by Microsoft in Los Angeles, California, June 18, 2012.

David McNew/REUTERS

If you're like most people, you're probably rolling your eyes at the news of Microsoft Corp.'s just-announced tablet, called Surface. A lot of the details – price, launch-date, for example – were left out of the unveiling on Monday evening. But the unveiling was mostly about showcasing the tablet's main feature, a fold-down keyboard that doubles as a cover.

Yes, that makes this tablet look like a laptop. And yes, Microsoft is late to the tablet game anyway, trailing Amazon.com Inc., Research In Motion Ltd., Samsung Electronics Co. Ltd. and just about every other technology company. In fact, some companies have already called it quits after failed launches, making you wonder what sort of market share Microsoft thinks it can carve out here.

The market doesn't seem overly enthusiastic. Microsoft shares were up 3.4 per cent on Tuesday in midday trading – but the shares fell prior to the secretive event on Monday, when rumours pointed to a tablet launch. And even though Microsoft shares have risen 19 per cent this year, mostly because of enthusiasm surrounding the company's upcoming Windows 8 operating system, they remain stuck in a tight trading range. The current price of just over $30 is in line with the average price over the past 12 years.

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This is still a stock and lives and breathes the company's bread-and-butter software operations. Windows generated $19-billion (U.S.) in revenue in 2011. That's about double the sales from Microsoft devices (mostly Xboxes), but very close to the sales that Apple generated from iPads in 2011. The new tablet would have to be monumentally successful to cause much of a shift in any of these numbers.

Apart from the market, some of the early commentary on Surface has been scathing, though from gut reaction rather than any hands-on experience. Blogger Kid Dynamite had this to say: "To me, the tablet market is owned – Apple owns the premium market (iPad, duh), Amazon owns the cheap-skate market (Kindle – disclosure – I own one). You really think that Microsoft is going to change the game? Why? How?"

Some of the voices at Engadget also expressed reservations about the success of Surface, even as they embraced the technology: "Part of me wonders how many consumers will still be around to care about this when it ships in six months." They also raised the issue of whether Microsoft will simply cannibalize software sales it would have made to its hardware partners, who are also producing tablets.

And finally, you have to consider Microsoft's muddy track record for producing hardware. Though Xbox has been a success, it's the outlier. Indeed, most people think of the Zune – the failed music player – when they think of Microsoft's forays into gadgets.

But perhaps these low expectations are Microsoft's greatest advantage. As far as built-in expectations go, there aren't any – the shares trade at just 11-times trailing earnings and the share price has gone nowhere for more than a decade, even as earnings and revenues have increased. That leaves plenty of upside potential with not much risk on the downside – which is a lot more than you can say about most other technology companies.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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