Will a New 7-Inch Surface Help Microsoft Compete With the iPad Mini?

Microsoft (NASDAQ:MSFT) is reportedly working on a new line of Windows 8-powered Surface tablets that includes a 7-inch version, which would help the company compete against other smaller tablets like Google’s (NASDAQ:GOOG) Android-powered Nexus 7, Amazon’s (NASDAQ:AMZN) 7-inch Kindle Fire, and Apple’s (NASDAQ:AAPL) 7.9-inch iPad mini.

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According to a Wall Street Journal report, a person familiar with the situation said that 7-inch tablets were not part of Microsoft’s product plans last year, but that executives have realized they need to respond to the growing demand for smaller, more affordable tablets.

Unfortunately, Gartner analyst Michael Gartenberg noted via Twitter today that a smaller tablet would pose some usability challenges to Microsoft’s full Windows OS, which means a “Surface mini” would have to run on Windows RT. However, the RT operating system still takes up a significant amount of a device’s memory. A 32-gigabyte Surface RT currently has only 15GB of storage available for user content, out of the box, which means roughly 17GBs are taken up by the operating system. At that size, Microsoft won’t be able to create a comparable competitor for Apple’s 16GB iPad mini…

Even if Microsoft can figure out the operating system for the new device, it will still struggle with the same adoption woes that have plagued the larger-scale Surface tablets. Sales have been mediocre thus far — a report from March estimated that only 1.5 million units of the two Surface tablets had sold since the Surface RT launched in October 2012. The Surface Pro, which went on sale in February 2013 and runs a full version of Windows 8 and Microsoft refers to as a “laptop in tablet form,” accounted for less than a third of those sales…

However, its thinking is spot-on. As PC sales continue to wane — research firms Gartner and IDC on Wednesday said sales of PCs fell by double-digit percentages in the first quarter of 2013 — tablet sales are booming, particularly sales of smaller-scale, lower-priced tablets. In fact, IDC reported that half of all tablets shipped in the fourth quarter of 2012 were smaller than 8 inches.

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This time around, Microsoft might want to think about how to competitively price its tablets — when given the choice between a $499 iPad and a $499 Surface RT, it seems customers are still overwhelmingly choosing Apple’s tablet. A smaller Surface with the same price as the competing iPad mini would likely fare just as poorly as its big brother.

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