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Could Windows 8.1 help Microsoft drive low-cost tablet and laptop sales?

HardwareAnalysis
by Tim Bajarin, 28 May 2013Analysis
Could Windows 8.1 help Microsoft drive low-cost tablet and laptop sales?

I first got wind of Windows Blue from my contacts about four months ago. As I have explained in a previous article, Windows 8.1, as it's now officially called, extends this new touch-based OS to tablets in the 7 to 11.4in range. It's also being used on what are called “ultramobile” laptops, or laptops that specifically use an Intel Atom processor or a new low-voltage chip from AMD called Temash.

The push to add Windows 8 to smaller tablets comes as no surprise as this is a market that Microsoft has ignored until now, even though tablets in the 7 to 8in range will represent as much as 65 per cent of all tablets sold worldwide beginning this year. That is because these smaller tablets tend to be cheaper – you can pick up a Kindle Fire for £129, for example. These smaller tablets are clearly being used for content consumption, not productivity, but apparently Microsoft also thinks that tablets in the 10.1in range are also media consumption devices and do not cross over to productivity.

But there is something odd about Microsoft's approach to tablets and Windows 8.1 is notable for a couple of reasons. Firstly, it can be used on smaller tablets. Secondly, when used on tablets or laptops that sport Intel's Atom chip or AMD's Temash processor, the OEM price for Windows 8.1 is about $30 (£20) compared with its price on laptops and PCs with more powerful processors where the license fee ranges from $65 to $85 (£45 to £55) per machine.

But here is the twist: Microsoft has decided that on tablets up to 10.1in running Windows 8.1 and using these lower-end processors from Intel and AMD, it will throw Microsoft Office in for free. If I am not mistaken, Office is productivity software. So the company appears to be saying that tablets up to 10.1in are mainly consumption devices, not used for productivity, yet it is giving them Office for free. Go figure! To be fair, this probably has something to do with getting new users familiar with Office and trying to move them to an Office cloud subscription at some point. Still, on the surface it still seems like a strange move.

While that is interesting, perhaps the Windows 8.1 ultramobile laptops coming out soon will have the most significant impact on the market this autumn.

As I stated above, OEM vendors can get Windows 8.1 for about $30 (£20) as long as they use these new low-voltage chips from Intel and AMD, and these can be implemented on screens from 7in to as large as 13.3in. However, these machines are clearly for productivity so Microsoft does not bundle Office for free. When the OEM vendors heard that they could get Windows Blue for $30 (£20) if they used Atom or Temash and could use it on touchscreens up to 13.3in, they jumped at the chance to make lower cost ultramobile laptops. While they realise that making touch-based laptops in the $399 to $549 (£265 to £360) range is somewhat risky since it could eat into the sales of more expensive Ultrabooks, all OEMs have still embraced this opportunity and will soon offer such ultramobile laptops.

These lower-end ultramobile laptops are obviously designed to go after the Chromebook market that is picking up. In fact, NPD analysts said that Chromebooks comprised 25 per cent of all laptops sold in retail under $300 (£200) last month. Our contacts at a local US retailer tell us that they get 12 Chromebooks per week and that they are all sold out within 48 hours. Although these ultramobiles could be priced at a $200 to $250 (£130 to £165) premium over Chromebooks, they do have full Windows app compatibility and people who have invested in the Windows environment over the years may find this extra cost tolerable. Also note that American consumers tell us the highest price they will pay for a laptop or PC is $599 (£400).

An emerging trend suggests that people favour low-cost laptops. Our research continues to confirm that consumers can handle about 80 per cent of their computing needs on a tablet, and the remaining 20 per cent must still be done on a computer. Consequently, when considering a new PC, they either decide to extend the life of their current model, or buy a cheap model knowing that it is only needed for about 20 per cent of the things they do (such as home finances, managing media collections, or other heavy lifting tasks).

The industry's biggest concern is that these low-cost, touch-based laptops not only become wildly popular, but that they establish what we call "the new normal." This means that while we will still sell laptops above $599 (£400), the shift in consumer demand will increase the volume sold at lower price points. The profit margin on these cheaper laptops is much smaller than on expensive machines and if they take off, they could diminish the demand for higher priced laptops, which have been the bread and butter of the PC industry for decades.

Windows 8.1 will actually be an important version of Windows 8 because of this big push with lower cost, touch-based laptops. I believe that they will be a huge hit come the back-to-school season and Christmas. A more difficult question to answer is whether Windows 8.1 will find any demand when it comes to the small tablet market. It is up against iOS and Android, which both have app stores boasting more than 800,000 apps. And while we could see some 7in Windows 8.1 tablets as low as $249 (£165) by Christmas, Windows-based tablets will have an uphill climb given the existing competition.

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