In Part 1 of this topic I mentioned that Microsoft is going after “areas where they can identify scenarios and user requirements that are going unmet by both competitors and the OEM community”.  So what are some of those areas and how might Microsoft address them?

Let’s start small.  I’ve long seen a gap in Microsoft’s strategy around a portable gaming console which I last wrote about back in November when Xbox Surface rumors appeared.  At the same time it is clear that Microsoft needs to have something in the 7″ tablet space, and an XBox Surface meets the criteria I described in Part 1.  Moreover, it is a design center that is more amenable to a subsidization strategy than the 10.6″ Surface.  Take a look at my subsidy argument back in August 2012 when rumors that the Surface would be priced at $199 were rampant.  It turns out the Surface positioning wasn’t as entertainment-focused as I’d then expected, which likely explains the lack of a subsidy model for it.  But the proposition for a 7″ device isn’t going to be around a keyboard and MS Office (though both could be offered), it is going to be around entertainment.  Microsoft’s unique asset in this case is Xbox.  And that is a business where subsidizing the hardware has been part of the strategy since 2001.  There isn’t much more to say here as you can read the previous postings for my thoughts.

Going a little smaller is the possibility of a Surface Phone.  I’ve been a skeptic of this idea unless it is part of a larger reset of their mobile efforts.  I covered the latter in discussing a Plan B.  Microsoft will definitely continue with reference design work, as they’ve been doing since WP7, but I’m not holding my breath for a Surface Phone.  First, Microsoft has ramped up direct marketing of Windows Phone eliminating one of the purposes of having its own device.  Second, Windows Phone sales are indeed accelerating though it is still a little early to make a call on the success of Windows Phone 8.  And third, if they were going to pursue Plan B I would have expected to see them combine the Windows Phone and Skype divisions into a single business unit by now.

If Microsoft does do its own phone this year than what I expect is to see a Skype Surface phone from the Skype division, not the Windows Phone division.  Basically Skype will become an OEM (and carrier).  It won’t strategically be the Plan B I talked about, but it will look a lot like what I described in that blog posting.  The important thing to point out here is that it is Skype and video calling that represents the differentiation that Microsoft would use in a phone.  OEMs won’t go this route because they build devices to meet carrier requirements and be sold by the carriers.  Oh they love Skype as a feature, but “Skype as Carrier” doesn’t fit their business models.

Jumping to the other end of the spectrum is a large screen device that uses the Perceptive Pixel technology and is aimed at the telepresence market.  Microsoft has long seen the need and potential for enhancing how people work together from remote locations.  The Lync product has been at the center of its software efforts, and of course they acquired Skype.  They’ve also made attempts at innovative hardware such as the Roundtable (now the Polycom CX5000).  The Roundtable was an attempt to move traditional videoconferencing towards an IP-based telepresence experience at a cost more than two orders of magnitude less than traditional telepresence systems from Cisco and HP.   Even the cameras in the Surface/Surface Pro are optimized for video calling/conferencing and not (as is the case with rear cameras on other tablets) for taking pictures.

Microsoft Research has done tremendous work in telepresence/telecommuting while individuals and groups within Microsoft have also been working on this problem in order to meet their own needs.  When Distinguished Engineer Kim Cameron moved to Paris he created his own telepresence solution between his home office there and his office in Redmond.  Whenever Kim is in his Paris office he is in his Redmond office.  You can walk by, stick your head in, and chat while you sip your morning coffee.  When you meet with Kim it is pretty close to him actually being there; the main thing missing is you can’t shake his hand.  The Xbox team built (with MSR) a customized solution for individuals to have a face to face conversation between two of their facilities.  The SQL Server team put together a solution optimized for discussions between their teams in different geographies.  I made heavy use of Lync/Roundtable/etc. between my Denver office and my teams in Israel and Redmond, and was considering cloning the SQL Server setup at the time I left Microsoft.  Microsoft IT has more recently deployed a corporate telepresence system in various major facilities, using technology from HP (I believe).  Like other corporate telepresence systems this is a limited resource that must be scheduled, requires travel to special telepresence rooms, etc.

Telepresence, and the collaboration it brings, is the next huge advance in the information worker experience.  Microsoft knows this from both its own internal needs and customers.  I expect we are going to see one or more devices from Microsoft aimed at taking telepresence to the next level, both in terms of collaboration capabilities and price point.  Microsoft wants to bring telepresence to every conference room and every Information Worker’s office.  So something like a 60″ Perceptive Pixel-based device seems like a good bet in 2013.

While we’ll very likely see updated Surface and Surface Pro devices in the next twelve months, will we see other devices in the tablet/tablet crossover/Convertible/Ultrabook/Tablet categories?  A 12-13″ Surface Pro makes a lot of sense to me as an addition to the lineup.  It would have the same general scenario positioning as the current Surface Pro.  The Surface Pro has great specs, and its biggest limit is that 10.6″ screen (and keyboard dimensions to match).  Going up one size class would retain much of the Surface Pro’s portability while offering a screen size more appropriate for heavy Information Worker activities.  And it could allow for a true full-sized/full travel keyboard cover as well.

I’m not convinced we’ll see anything else in these portable device categories in the near term.  While a true Ultrabook or Notebook kind of device that combines Kinect-based gesture control and telepresence features would be sufficient differentiation to justify a Surface device, it might also be too much of a shot at the heart of Microsoft’s OEM’s business.  So I think they’ll pass on this area unless and until OEMs fail to sufficiently participate in Microsoft initiatives to spread this technology.  I have to say I won’t be shocked if I’m wrong and Microsoft brings a 13-15″ Information Worker-focused clamshell Ultrabook-type device to market in the next twelve months.  But I’m just not seeing the need in the short run.

That leaves one real market segment to consider, the desktop or All-in-1 market.  While it seems like Microsoft needs to put something into this segment in order to fill out its product line I’m not so sure.  Again this is a strong area for OEMs, and actually may represent one of the areas where they are doing their best work.  Microsoft will want to see Kinect-based gesture support in future models, but OEMs are probably more than willing to accommodate them.    So where would a Surface All-In-1 be targeted?  Is it the uber IW telepresence/collaboration desktop?  Or is it an attempt to revitalize the market for home desktops through a combination of video call capabilities, unique photography and videography capabilities, participation in the gaming ecosystem, etc.?  My problem thinking through this one is that I’m not seeing the “ah hah” scenario.  But Microsoft might have one in mind.

Finally, I do expect both Xbox “720” and a related streaming media device to appear this year.  So we probably will see 5-6 new devices out of Microsoft in 2013, with a more speculative possibility for the family to grow to 7 or 8.  That’s a lot of growth, perhaps too much growth in an 18-month overall window, for what was previously a software company with some niche hardware.  And I didn’t even touch on the possibility of someone wanting to do more server appliances.  I have no inkling that such a thing is in the works, though I’m sure somewhere teams who had proposals rejected years ago have reconsidered the option in light of the company’s “Devices and Services” refocus.

Let me close by saying that I feel for Microsoft CFO Peter Klein.  Every few weeks someone must come into his office with a proposal for some new hardware device.  I’m sure he puts his head in his hands for a moment, takes a deep breath, then proceeds to listen to them explain just how they are going to make money in a business known for low margins.  As Dell, HP, HTC, other OEMs, and hundreds of companies who are no longer with us have learned this is not easy.  Hardware is a much more complex business than software, with grand opportunities for losses that balloon out of control and far greater probability anything you do will be commoditized in short order.

To Klein, every hardware proposal carries the risk of a significant and prolonged hit to Microsoft’s margins.  So while we can all speculate on how Microsoft could do a cool Z device or Y device I’m sure Klein (and Ballmer) are trying to keep things focused on opportunities with both unique (often disruptive) strategic value and the potential for eventually achieving good margins.  And that will argue against some of the devices that you or I might otherwise hope to see out of Microsoft.