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Microsoft Corp. (MSFT) has stepped into the intensely competitive tablet market with the launch of its Windows 8-based tablet named "Surface." This segment is already crowded with tablet makers such as Research In Motion Ltd. (RIMM), Hewlett-Packard Co. (HPQ), Dell Inc. (DELL), Samsung and Cisco Systems Inc. (CSCO), to name a few. Of course, Apple Inc. (AAPL) leads the pack in terms of unit shipments with the iPad. Surface tablets will be available in two versions: Windows 8 RT version and Windows 8 Pro model.

The consumer-focused Windows 8 RT Surface is the first version which has a 10.6 inch screen, is 9.3 millimeters thick and weighs 1.5 pounds. This is similar to Apple's iPad, which sports a 9.7-inch screen, is 9.4 millimeters thick and weighs 1.44 pounds.

Surface will be available in 32GB and 64GB memory sizes and is built on Nvidia Corp's (NVDA) chip designed by ARM Holdings (ARMH). In addition, the tablet comes with a magnetic cover and a full multi-touch keyboard and trackpad. Microsoft said the keyboard is twice as efficient as typing on glass and only adds about 0.11 inch to the thickness.

Other features include dual multiple-in, multiple-out (MIMO) Wi-Fi antennas, a built-in camera, dual-array microphones and HDMI port. The pricing details were not provided.

The Window 8 pro is the second version of the Surface, sharing the same design principles as the RT Surface but is a little thicker at 0.55 inches and weighs less than two pounds. This Surface, which will be available in 64GB and 128GB memory sizes, is aimed at the new generation of lightweight laptops called "ultrabooks," built on chips from Intel Corp. (INTC) .

Microsoft expects Surface to be available this Christmas season. The tablet will be sold online and through Microsoft's new brick-and-mortar stores in the United States.

We view Microsoft's decision to manufacture its own tablet as a defensive move, designed to protect its share of the consumer PC spend, which has come under great pressure from Apple's iPad.

Microsoft makes most of its money from Windows and Office but this move could bring Microsoft into direct competition with its closest hardware partners such as Samsung Electronics Co Ltd, Dell Inc. and Hewlett-Packard Co, straining their relationships. But the benefits of an integrated approach to hardware and software cannot be overlooked, going by Apple's success in recent years.

So far, Apple has managed to maintain its leadership position in the tablet market.  Further, Apple has strengthened its position with new features introduced in iPad 3 and the company's decision to reduce the prices further on the iPad 2, according to market research firm IDC. Based on robust growth and strong demand for media tablets, IDC increased its overall market forecast to 107.4 million tablets for 2012, up from the previous estimate of 106.1 million units.

Analysts expect the trend to continue in the second half of 2012 and thereafter. For 2013, they increased their forecast from 137.4 million units to 142.8 million, with sales jumping to 222.1 million by 2016. The analysts expect the numbers to increase after the upcoming release of Microsoft's Windows 8 operating system, which will offer not only touch-screen capabilities but also run on non-x86 systems, such as tablets powered by system-on-a-chip (SoC) architectures from ARM Holdings.

According to IDC, Apple and its iPad will be the primary beneficiary of tablet market growth. For 2012, IDC predicts the iPad and its iOS operating system to hold a market share of 62.5%, up from 58.2% in 2011, while Google's (GOOG) Android-based tablets slip from 38.7% in 2011 to 36.5% in 2012. Struggling BlackBerry-maker Research In Motion will hold the remaining market share of 1% in 2012, down from 1.7% in 2011.

We believe that Microsoft's current investments are supported by its strong balance sheet and expect these to drive the next growth phase, improving prospects of market share gains and renewing its strong position in the PC market.

In the near term however, we expect growing optimism and believe that positive estimate revisions could raise the Zacks Rank from the current #3, which implies a Hold recommendation in the short-term (1-3 months).

 
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