Microsoft Admits Surface Play Carries Risk

Shortly after clearing up rumours that the Surface tablet won’t, in fact, cost $1000, Microsoft has been hit with another serious challenge: an uncovered admission that in the company’s view the Surface tablet is ultimately a risky play.

Buried in an annual report submitted to the SEC on Thursday, Microsoft candidly admits that the Surface tablet could chill relations with OEMs and weaken support for Windows within the PC industry.

“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,” Microsoft reported in its annual 10-k report. “In addition, our Surface devices will compete with products made by our OEM partners, which may affect their commitment to our platform.

For Microsoft, the Surface tablet represents an incredible dilemma. The company, as it admits elsewhere in the report, faces incredible pressure from tablet and smartphone manufacturers that control both the hardware as well as the software (read: Apple), but attempting to emulate that structure would endanger the Windows/P.C ecosystem of established but separate hardware and software manufacturers.

To compound Microsoft’s troubles, the company realizes that the P.C world is shrinking while the tablet and smartphone world grows.

“We derive substantial revenue from licenses of Windows operating systems on personal computers. The proliferation of alternative devices and form factors, in particular mobile devices such as smartphones and tablet computers, creates challenges from competing software platforms,” Microsoft acknowledges in its report. “These devices compete on multiple bases including price and the perceived utility of the device and its platform. Users may increasingly turn to these devices to perform functions that would have been performed by personal computers in the past.”

Microsoft needs to make inroads into the tablet market, specifically the enterprise tablet market. A successful integration of the Windows ecosystem into the tablet market could solidify future growth for Microsoft, but this needs to be done delicately to not off balance Microsoft’s relationships with OEMs.