Can 7in tablets salvage Microsoft's Surface?

Microsoft is widely expected to release a 7in version of its Surface tablet this winter, after the larger versions failed to take off.

Microsoft's Surface Pro and Surface RT are struggling compared to other tablets, according to figures from research company IDC. Android devices make up 56.5% of the tablet market - pushing Apple's iPad into second place on 39.6% - but Microsoft Windows 8 devices have only a 3.3% share, with the company's ARM-based Windows RT OS grabbing 0.4% of tablet shipments.

Microsoft has to do something, and the rumours are that the company could launch a 7in version as soon as June, in a bid to follow the success of budget tablets such as the Google Nexus 7.

Smaller is better - especially with price

While Apple kickstarted the tablet market with the 10in iPad, sales have since shifted to smaller, lower cost devices, such as the iPad Mini and Nexus 7.

By the time Microsoft had caught up with the first wave of tablets, its competitors had already moved on to smaller, cheaper versions.

"Apple is showing this trend in its iPad numbers, with iPad Mini representing about 60% of total iPad sales in 1Q13," said Carolina Milanesi, an analyst for Gartner. "Our forecast for 2013 shows about 70% of overall sales being 7in as consumers will look for lower prices and a good fit for content consumption."

The price point is key, according to Gartner. If Microsoft is to make a mark in tablets, Microsoft's own 7in Surface RT, as well as rival manufacturers' tablets running Windows RT, will need to drop prices dramatically from their £400 launch prices.

"I do expect others to follow with 7in devices, as this is the only way we see RT playing a role in the market," said Milanesi. "But only as long as the price is competitive with Android 7in devices, which means $199."

New revenue areas

To cut costs and spur sales, Microsoft could look for revenue outside its traditional licensing fees for software. According to analysts, Microsoft may have to tighten margins on Surface hardware, and look to generate income from advertising and content revenue.

"Microsoft has to make a decision as to whether it can start selling the hardware at cost to build traction for Windows on tablets – it's hugely important," said Geoff Blaber, director of devices and software platforms at analyst firm CSS Insight.

"When you are competing against very capable and heavily subsidised devices from Amazon, Barnes & Noble and Google, those companies are using other core business models to reduce the price on the hardware," Blaber said. "Microsoft's in a big transition - it has the assets from other businesses, such as Bing, to justify extensive subsidisation of the devices, but it's still heavily reliant on the licence revenue."

Focus on Windows 8

While the initial 7in version of Surface is expected to run Windows RT and therefore be ARM based, Microsoft could also target businesses with a 7in tablet running full-blown Windows 8.

"There's no reason Microsoft can't release a 7in running Windows 8, although the main reason to launch a smaller device is to get costs down because the screen is a big part of cost," Blaber said. "What we're seeing from Intel, particularly in the second half of the year with the next Atom chips is that we're going to see much more competitive chips compared to ARM that will enable smaller form factors and that's significant."

Blaber also said the power-to-performance gap enjoyed by ARM processors compared to Intel would also diminish, making a smaller Surface Pro a possibility.

"It's no longer the big, big issue," he said. "That's a significant factor - although Intel is still struggling to get any traction in handsets it will push into tablets in the next twelve months and that works to Microsoft's advantage."