Microsoft acknowledges Surface may trigger OEM hostility

Computerworld - Microsoft yesterday confirmed what most analysts and company watchers had concluded last month when the firm unveiled its own tablet, that it risks alienating the computer makers which account for the bulk of Windows sales.

In a document submitted Thursday to the U.S. Securities and Exchange Commission, Microsoft acknowledged the potential problem.

"Our Surface devices will compete with products made by our OEM partners, which may affect their commitment to our platform," Microsoft said in the 10-K filed for the second calendar quarter of 2012.

The New York Times' Bits blog first reported on Microsoft's SEC filing.

The statement appeared in the section dedicated to risk factors, where Microsoft also noted that smartphones and tablets -- device categories dominated by rivals Google and Apple -- threatened its business.

"Users may increasingly turn to these devices to perform functions that would have been performed by personal computers in the past," the filing stated. "Even if many users view these devices as complementary to a personal computer, the prevalence of these devices may make it more difficult to attract applications developers to our platforms."

It was the first time Microsoft described the competitive hazards of mobile devices in such blunt language.

Some might see Microsoft's statement as an after-the-fact admission of reality.

PC sales have stagnated -- IDC and Gartner recently said second quarter numbers were down 0.1% from the same period in 2011 -- and the consensus is that the flat sales can be partly attributed to buyers shifting their dollars to tablets and smartphones.

Although Microsoft has publicly sidestepped the chance that the Surface might antagonize OEMs (original equipment manufacturers), analysts assumed as much almost immediately.

How OEMs will react, however, has remained mostly a mystery.

On the day Microsoft unveiled the Surface, Carolina Milanesi of Gartner said, "With Surface, Microsoft has just made it even harder for every ODM [original design manufacturer) out there to compete in the tablet market -- except for Apple, that is."

But other analysts, like IDC's Tom Mainelli, said an estrangement was unlikely. "Partners aren't going anywhere," said Mainelli in a June interview. "Most of them have tried Android tablets, but without any success. So although this might irritate them, Microsoft knows that [the OEMs] need them."

In fact, Microsoft CEO Steve Ballmer has continued to praise OEMs and their role rather than to admit any fear that they may shun either Windows or the Windows tablet market because of the Surface.

At the Worldwide Partner Conference (WPC) in Toronto two weeks ago, Forbes publisher Rich Karlsgaard conducted a staged interview with Ballmer where the chief executive claimed Surface was simply a "design point," or guide for OEMs, not a replacement for what they might design and sell themselves.

"Surface is just a design point. It will have a distinct place in what's a broad Windows ecosystem," Ballmer said. "And the importance of the thousands of partners that we have that design and produce Windows computers will not diminish."

Microsoft has not yet disclosed important facts about the Surface tablets, notably the price of the two models it will sell, one powered by Windows RT, another by Windows 8. The Surface RT, as many have come to call the former, will rely on an ARM processor and will launch the same day as Windows 8, Oct. 26. The Windows 8 Surface, based on an Intel processor, will ship in late January 2013.

In the WPC presentation earlier this month, Ballmer said the company "may sell a few million" Surface tablets, but did not put that into a timespan context.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, or subscribe to Gregg's RSS feed . His e-mail address is gkeizer@ix.netcom.com.

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