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While Microsoft Windows 8 tablets have generally been sized at 10.1-inches or larger, the company is rumored to be working on a smaller Surface tablet. That would mean it relaxed the hardware requirements an allow for a device such as the W3, which will offer an optional keyboard to help with text input. Will the market support these smaller slates?

I’m not sold on the full Windows 8 Pro experience on such a small device. Yes, the formerly-known-as-Metro touch interface should be fine — quite good, in fact — on the Iconia W3; after all, the same design is great on smaller screens using Windows Phone 8. The bigger challenge is the Windows desktop and legacy app support, which is one of the three major points Acer calls attention to: “The Iconia W3 comes with Microsoft Office so you can edit Word, Excel and PowerPoint docs on the go,” for example.

With the 1280 x 768 resolution, running Office and other apps designed for Windows will present a challenge to most. The smaller screen and relatively lower resolution means smaller touch points, for starters. For maximum productivity in the desktop environment, a mouse will be the better option because the Windows 8 Desktop environment is similar to the Windows desktops of yesterday. Simply put, while Metro has evolved for touch and smaller screens, the Windows desktop hasn’t.

I could be wrong about this, but I do have a few years of experience that tells me it’s not likely. I used 7-inch touchscreen tablets running Windows XP and 7 on several UMPCs, often as a full-time computing device.

It took a ton of patience to make the systems work because apps weren’t designed to fit and run on them. These were the precursors to netbooks, and to a degree that’s what the Iconia W3 reminds me of: A cross between a modern UMPC and a netbook. Like those devices, Acer is using an Intel Atom to power the W3.

I’m sure to hear contrary opinions on this, but what would make the W3 more appealing would be for the tablet to run only the Metro interface and apps. (Ironically, none of the W3 product images even show the desktop, which I think is telling.) Of course, Microsoft doesn’t offer a Windows 8 license with just that part of the platform. I wish it did and did so at a reduced price since one would give up access to legacy Windows apps. In that case, and at the right price, I’d be far more interested in the W3.

Sure, one could buy the device and simply ignore the desktop completely. But you’re paying for it in the product price, which includes the cost of a Windows 8 Pro license. If Microsoft wants to allow partners to make small tablets, a better strategy would be to go Metro only at a lower license cost and truly embrace the touchscreen tablet market.

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Tami Reller, Microsoft CMO.

Reller did not provide much more detail around when customers can get the OS upgrade, but said Microsoft is “very aware” of the holidays and would like to have the OS preloaded on hardware for that selling season. But that desire notwithstanding, buyers can get any Windows 8 device and be assured that 8.1 will be an easy update from the start button  screen, Reller told attendees of the JP Morgan Technology, Media & Telecom Conference.

She also characterized 8.1 as an update, more than the usual product tweaks deliverable online, but less than a full new release.

Earlier remarks by Reller in the Financial Times seemed to indicate that Microsoft was rethinking Windows 8 broadly, in response to user feedback, but today 8.1 was positioned as an easy, seamless update. No new interface perks were mentioned.

Windows 8 and RT, which Microsoft launched last fall to put Windows on new form-factor and touch devices, have met mixed reviews. But Reller said it’s met its objectives — running lots of innovative devices including “detachables” where the keyboard can be snapped off to leave a touch-device; convertibles which can shape-shift from laptop to touch device; and plain old traditional laptops and PCs.

Reller also said that Microsoft’s ability to sell into enterprise accounts remains strong and is actually getting stronger. And, for all the angst around Windows 8, the company on its last earnings call said it expects to reap nearly $4 billion in Windows-related licensing revenue this fiscal year. That’s a big number even Windows bashers would have to respect.

This story was updated at 8:31 a.m. PDT with more information about Microsoft enterprise sales and again at 11:34 a.m. PDT to correct the record — Reller talked about updates being easy from the Windows start screen, not the start button.

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Microsoft VP Tami Reller told the Financial Times that “key aspects of the software will be changed when Microsoft updates the OS this year.  She referred to “difficulties” many users have had with the software. “The learning curve is definitely real,” she told the FT.

The story set off a flurry of comments and speculation as to what the changes will be and comparisons to Coca-Cola’s “New Coke-Classic Coke” fiasco.

As GigaOM’s Tom Krazit wrote in February, Windows 8 was one of the company’s most important launches in years — it represented a huge attempt by the company to make its OS relevant on tablets where Apple’s iPad was eating Microsoft’s lunch.  That move was represented by its “radically overhauled Metro user interface”  borrowed from the latest Windows Phone. It’s a touch friendly look and feel that was, and still is, alien to many Windows desktop users.

A huge re-do now will no doubt turn up the heat on Microsoft CEO Steve Ballmer, who has been the subject of considerable negative press over the past few years. But it’s really unclear just what changes will be made. Many folks will immediately assume that Microsoft will nuke the Metro interface in favor of classic windows to get the installed base over the hump. Far more likely is it will offer a choice of interfaces.

Here’s the thing: When it comes to radical change that consumers may demand, Microsoft is damned if it does, damned if it doesn’t. The cool Metro interface won good reviews on the smart phone but was seen as way too much of a change for Windows-savvy workers who’ve been on the platform for ten or 20 years.

For that huge installed base, change is not a good thing. It’ll be interesting to see how Microsoft navigates this tricky course. For it’s part, Microsoft suggests that Windows 8 sales aren’t hurting. On Tuesday, Reller noted on the Windows blog that 100 million licenses have been sold, which is on par with the copmany’s prior Windows 7 launch.

Update: A Microsoft spokeswoman contacted for comment responded via email:  “It is unfortunate that the Financial Times did not accurately represent the content or the context of our conversation about the good response to date on Windows 8 and the positive opportunities ahead on both Windows 8 and Windows Blue.” And she referred to the aforementioned blog.

This story was updated at 11:32 a.m. PDT with Microsoft comment.

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The new A1 is targeted to budget-conscious shoppers. Similar to the HP Slate 7 at the same price, the A1 cuts corners that keeps it from using premium components. Acer is keeping costs down with a 1.2 GHz quad-core chip from MediaTek and includes only 8 GB of internal storage capacity. Customers can expand storage through a micro SD card or spend $50 more for a 16 GB model. The 7.9-inch display uses the same 1024 x 768 resolution of Apple’s iPad mini; it also has the same 4:3 aspect ratio.

Even with a lower range of specs, the A1 has all the features you’d expect in almost any useful Android tablet: Wi-Fi 802.11 b/g/n, GPS, Bluetooth 4.0, a 5MP rear-facing camera that can capture 1080p video at 30fps, a front-facing camera, micro USB 2.0 and microHDMI ports. Acer says the battery is rated for seven hours of use, which is a little light for this category, but not awful either.

I’m more intrigued by the Aspire P3, partially because I liked the Acer Aspire W510 Windows 8 tablet. That was powered by an Intel Atom, but the new P3 has your choice of either an Intel Core i3 or i5 processor for improved performance. Of course, there’s a hit in battery life — I saw a good 12 hours from the Atom-based units; more with the keyboard dock — but Acer says six hours of run-time is possible. I expect that will rise a bit when the next-generation of Core chips, called Haswell, arrives in June.

The 3.06-pound Aspire P3 has an 11.6-inch IPS display with HD resolution. Instead of a traditional keyboard dock, the slate slides into a hinged case. That allows the screen to be propped up while also offering a standard chiclet keyboard. Unlike the dock of the W510, there’s no secondary battery in the P3 dock. Overall, the device looks like a large iPad in a keyboard case.

Acer says the price of the new P3 is $799.99 for the Core i3 model, which is available now.

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All things considered, however, Microsoft had a pretty good quarter — with profit of $6.06 billion, up a healthy 18.5 percent from a year ago. Not bad for a company that’s been slammed for missing the smartphone and tablet revolution. It shipped Windows 8 in November as part of its bid for credibility in these new form factors, but the OS met with mixed reviews. On the call, Microsoft CFO Pete Klein (who will leave the company at the end of the fiscal year) noted the challenge:

“There is no doubt that the device market is evolving. Consumers and businesses are increasingly shifting their focus to touch and mobility, and as a result, they want touch-enabled computing devices that are ultrathin, lightweight, and have long battery life. While Windows revenue has been impacted by the transition from the traditional PC to a new era of computing devices, the overall addressable markets are growing, and we are excited by the opportunities ahead of us.”

He reiterated that it is moving to an “accelerated pace for updates and innovations” starting with Windows 8 to meet the challenge.” Klein also said Microsoft’s big investment in cloud is starting to pay off with broader adoption of Office 365, which delivers including Word and Excel functionality as a service. “One in four of our enterprise customers now has Office 365, and the business is on a $1 billion annual revenue run rate,” Klein said.

Some on Twitter noted that in a dismal economy Microsoft managed to post pretty impressive profit growth. Maybe that means folks will stop calling for Microsoft CEO Steve Ballmer’s head. But then again, maybe not.

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To be sure, I am not saying that Microsoft and Intel are going to go away tomorrow. Their fiscal muscle is enough to put even Popeye to shame. And monopolies (even quasi-monopolies) take forever to fade.

But for the first time they are facing a challenge that is much more profound and broader than they have ever faced in their monopolistic lives: competition and changing tastes. How they deal with these changes is going to write the next chapter of their corporate history.

PC sales horror show

But let’s take a step back. The signs of crumbling came last week when research companies like IDC and Gartner shared data that showed double digit percentage declines in PC sales during the first quarter of 2013. To be sure, the first ninety days of the year are relatively slow for sales of consumer goods, considering that people go on a buying binge during the holiday season, but still a 14 percent year over year decline during the quarter is not something to skim over. It was so bad that even downward trend defying Apple PC sales are expected to head south.

Many media reports blamed the Windows 8 operating system for this debacle, but this is the fourth quarter in a row we have seen PC sales sagging; we can’t blame the new operating system. The reason why media and analysts continue to make that correlation is because we have in the past made that correlation: new Windows equals big PC sales, almost like clockwork every three or four years. Except now it is not true because our relationship with PC (as we knew it) has changed.

The new personal

It has been just about six years since Apple’s iPhone launched and changed our expectations of computers and our relationship with technology. It became more intimate and personal than either Intel or Microsoft had imagined. It wasn’t as that the companies were unaware of mobile phones, or that iPhone was the first smartphone — Nokia and Palm had been selling them for quite a few years — but the iPhone and later Android phones became truly “personal.”

They made us spend less and less time on our PCs. They were always there, and even when the PC sat on the table, the phone in your hand was more fun and easy to use. And then three years ago came the iPad (and later other tablets) to take away even more of our attention from the PC. And when the iPad launched, I knew my PC was going to become less important. The iPad was my slate of imagination.

In the end, an increasing number of people are finding that they don’t need a whiz-bang PC anymore and they don’t need to upgrade because they can do a lot of things on their iPad or Kindle Fire or Samsung Android tablet.

The signs of this change were obvious to anyone who was paying attention. When Apple dropped “computer” from its name, the late (and then chief executive) Steve Jobs pointed out that it was a sign of the times and where the world was going. Here is what I wrote then:

Apple is making the phone do all things a computer does – surf, email, browse, iChat, music and watch videos. Nary a keyboard or mouse in sight, and everything running on OS-X. While I am not suggesting that this replaces our notebooks or desktops for crucial productivity tasks, the iPhone (if it lives up to its hype) is at least going to decrease our dependence on it.

The future is here

Six years later, the world has really changed for the twin gods of the PC. Unlike Apple and Google, who have hitched their bandwagons to wireless devices, Microsoft and Intel are still weighed down by the legacy of their past. I mean, it is hard for Microsoft to look beyond the profits from Windows and Office. It will always look at the future through the lens of those two products. I have been suspect of Intel’s ability to come out ahead as well.

Intel, too, is so married to the idea of selling more expensive PC chips and silicon for servers that it doesn’t know how to readjust its focus and its fiscal models around a world that wants lower priced chips for a different and always shifting market. Since then the world has embraced the little pocket marvels with amazing speed and that in turn has unleashed a new cellphone economics. The mobile chips are getting faster and faster. And thanks to demand that far strips the demand of classic PC devices, they are getting cheaper.

The mobile phone market is so big that it has attracted all sorts of chip makers into the business: Qualcomm, MediaTek and Nvidia are some of the players in the mobile chip business that are relentlessly flooding the market with faster, cheaper and more powerful chips. They are being helped by ARM Holdings, which keeps beefing up its chip technology and expanding its possible uses by focusing on not making chips, but instead licensing chip designs to others like Qualcomm.

Intel has to react to these guys; not to Advanced Micro Devices, the perennial also-ran that was always weighed down with an anemic balance sheet and an inability to compete even when it had better chips. And we all know, Qualcomm is no AMD. MediaTek knows how to play the mobile chip game better than anyone else. What does Intel have to show for its mobile efforts?

Change is hard

A lot of noise – press releases, product releases and a handful of devices. Sorry, but I remain resolute in my belief that the company’s DNA is making this transition to anywhere computing very difficult. That inability to change is reflected in the company’s current dilemma over the chief executive position. In an article this week, The New York Times detailed the likely replacements for outgoing CEO Paul Otellini.

Analysts say the two top contenders to be Intel’s next C.E.O. are Brian Krzanich and David Perlmutter, who are close to Intel’s core business. Mr. Krzanich, Intel’s chief operating officer, oversees its fabrication facilities. Mr. Perlmutter, the chief product officer, oversees chip design. Renee James, the head of Intel’s software group, is considered a more remote chance to run what has long been a hardware company. And Stacy Smith, Intel’s chief financial officer, is well liked inside and outside the company, but like Mr. Otellini, lacks an engineering background, which diminishes his prospects.

Regardless of who becomes the new Intel chief, the problem is that they were all weaned on the classic PC business, one that is changing with the rise of smartphones and tablets and lower power anywhere-computing devices.

That said (and as my wise colleague Kevin Tofel continues to remind me), Intel is doing relatively well with its Atom lineup of chips and he feels it is one of the reasons why Microsoft RT on ARM devices is facing challenges.

The full Windows 8 tablets that run on Atom processors priced at the same price as RT devices (and with the similar battery life) should give Intel some hope. However, their addiction to the PC-style model and hefty margins that come from being almost monopolistic are going to challenge Intel in the future. As I wrote in the past, companies are defined by their corporate DNA and that determines their outcome.

Microsoft too has similar challenges as it grapples with the idea of competition and a world it doesn’t and can’t control anymore. More on that another day, but in closing, I would like to repeat what I said at the start of this piece: the companies that spearhead the talk of disruption and innovation are the ones who are afraid to disrupt themselves.

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Anyone remember the UMPC?

If the report is true — and I suspect it is — this won’t actually be the first time we’ll see 7-inch slates running Microsoft Windows. I know because I still have a few old UMPCs, or ultra mobile portable computers, from a half-dozen years ago. Microsoft didn’t make the devices, but worked with hardware vendors to improve touch support for the operating system. Tablets hit the market from vendors such as TabletKiosk, OQO, Acer, Samsung and Asus to name a few. In fact, the Asus model ended up spawning the Eee PC netbook and starting a whole new market.

These small slates were chunky, only ran for three or four hours on a charge, and used inefficient resistive touchscreens. But there was niche appeal to geeks like me that valued mobility. I actually used a Samsung model paired with a 3G phone and folding Bluetooth keyboard as my primary computing device for months. Long before the tablets of today, I was able to get work done anywhere and I didn’t have to tote a large laptop with me. Remember, this was long before the light and thin laptops we have today.

What was wrong with those small slates

While the solution worked for me, it had definite downsides, many of which Microsoft is now in a position to overcome. Look at Microsoft’s Surface hardware and you’ll see great design in a thin package. Capacitive touchscreens have replaced junky resistive options. And instead of dealing with Windows XP crammed into a screen size it isn’t meant for, Microsoft’s Windows 8 touch interface could be a joy to use on a 7-inch tablet.

That last point may be the most important because the idea behind UMPCs are much the same as the tablets of today: a touch-friendly portable computer with access to hundreds of thousands of software titles. Microsoft and its hardware partners couldn’t deliver on that promise back in 2006, however. Hardware limitations were part of the problem, but the bigger issue was one of user experience: the Windows of yesteryear simply wasn’t designed for a low-resolution small screen.

The new Windows could address much of what was wrong with UMPCs

The “modern” — or what used to be called Metro — interface can work on a 7-inch tablet, however. That’s evidenced by Windows Phone 8, which uses the same interface on smartphones that are even smaller.

And that makes me think that a small Surface tablet has much to do with the Windows Blue effort, which is meant to bring more unification to Windows 8 and Windows Phone 8. It’s even possible that Microsoft will opt to use Windows Phone 8 for a small slate, given that it will support 1080p resolution screens in the future. That’s an outside chance, though: I’d expect the Surface RT software on a 7-inch tablet.

What took you so long, Microsoft?

If Microsoft does create a 7-inch Surface, I’ll surely be interested; after all, I’m a fan of the UMPC concept as well as an early evangelist for the 7-inch slate size. But it’s disappointing that Microsoft is only just now realizing what some of us did in 2010: there’s a potentially big market for small slates. Again, from the WSJ report:

” … 7-inch tablets weren’t part of the company’s strategy last year, but Microsoft executives realized they needed a response to the rapidly growing popularity of smaller tablets like Google Inc.’s 7-inch Nexus, which was announced last summer, and the 7.9-inch iPad Mini introduced by Apple Inc. last October.”

Microsoft had the right idea with UMPCs, but it didn’t tweak the user interface enough. Sure, the devices were expensive and built with typical PC hardware, not components optimized for tablets. That barrier is long gone now, though. Had Microsoft put some serious effort into its new touch interface in a small form factor Surface sooner, the tablet market — and maybe even the PC market — might look different today.

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On Thursday, Goldman Sachs downgraded Microsoft shares to “Sell” from “Neutral” and Nomura Securities cut its call to “Neutral” from “Buy.” The moves came a day after  IDC called the first quarter of 2013 “the worst quarter” ever, with PC sales down 14 percent from the year-ago quarter. (Gartner numbers were slightly better: it had PC sales only off 11.4 percent year over year for the quarter.)

“At this point, unfortunately, it seems clear that the Windows 8 launch not only didn’t provide a positive boost to the PC market, but appears to have slowed the market,”  Bob O’Donnell, IDC Program Vice President, Clients and Displays said in a statement. (Full IDC statement here.)

Long-time Microsoft watcher Rick Sherlund at Nomura Securities wrote that the combination of “sluggish” Windows 8 adoption and the “lack of compelling new hardware is disappointing with no relief likely” until later this year when Intel releases the new Haswell notebook processor.

As if on cue, the Wall Street Journal (subscription required) reported that Microsoft plans a new 7-inch Surface tablet to come later this year.

Updated: To be fair, for the first quarter, IDC also acknowledged that industry darling Apple also faded. While it did better than the overall U.S. market, IDC said shipments of Apple PCs  slipped 7.5 percent — apparently because more people are opting for iPad tablets as PC replacements.

MSFT data by YCharts

This story was updated at 6:54 a.m. PST with Apple PC share decline.

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The 76.3 million PCs that did ship between January and March this year were down a whopping 14 percent from the same quarter a year ago. It’s leading the analysts at IDC, who have been monitoring the PC market since 1994, to call it “the worst quarter” it’s seen.

And, no, it’s not a blip: it’s the fourth quarter in a row that PC shipments have declined.

The numbers show that people still buy PCs, but not in the quantities of the past. Instead, many people — both businesses and individual consumers — are making the purchase of cheaper, more portable tablets their priority right now.

All the big PC makers are affected. Lenovo, which is the second-largest PC maker by volume, was the only one of the top 5 firms who didn’t see double-digit units sales declines during the quarter — it pulled even with the same quarter a year ago. Not terrible, but certainly not good.

Even Apple, which was able to buck the industry trend of the last year and grow Mac sales until the last quarter of 2012, is seeing its laptop and desktop shipments drop off. IDC doesn’t release global numbers for Apple, but in the U.S. its shipments dropped 7.5 percent from the same quarter a year ago. (However, if you look at data from competing analyst firm Gartner, it shows U.S. Mac shipments on an opposite trajectory during the quarter — up 7.4 percent year over year. The reason for the discrepancy isn’t clear; its PC numbers overall weren’t as far off: down 11 percent versus IDC’s 14 percent.)

What Apple has going for it is its prescience in seeing this shift to smaller mobile computing coming (and of course helping it along). So when people are opting not to buy a more expensive laptop or desktop, it has the iPad to offer.

Apple competitors in the PC business have been slow to adjust to this new reality. And even for those who are trying to offer a good tablet experience, it’s not going that well. Microsoft’s attempt to stanch the bleeding with Windows 8 is faring poorly, IDC says:

“At this point, unfortunately, it seems clear that the Windows 8 launch not only didn’t provide a positive boost to the PC market, but appears to have slowed the market,” said Bob O’Donnell, IDC Program Vice President, Clients and Displays. “While some consumers appreciate the new form factors and touch capabilities of Windows 8, the radical changes to the UI, removal of the familiar Start button and the costs associated with touch PCs have made PCs a less attractive alternative to dedicated tablets and other competitive devices. Microsoft is going to have to make some very tough decisions moving forward if they want to help reinvigorate the PC market.”

This post was updated with details from Gartner’s report at 5:11 p.m. PT.

Image courtesy of Flickr user Alyssa L. Miller via Compfight cc

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