Is Windows 7 Tablet-Only Edition On The Horizon?

From Acer to Asus, Samsung to LG, Sony to HP, everyone is readying an iPad rival.

As the tablet market is getting crowded each day with more and more devices, time is ripe for Microsoft (NasdaqGS: MSFT) to unveil a new operating system exclusively for tablets.

The software giant has done it for smartphones by launching Windows Phone 7 in October, but it needs to release a tablet version too to exploit the ever-growing tablet market.

Currently, Microsoft offers only Windows 7 for tablet manufacturers that is also being used in PCs, laptops and netbooks.

Meanwhile, Credit Suisse has said it expects software giant Microsoft to release a version of Windows 7 specific to the tablet form factor in the first half of 2011, which will be based on the Windows 7 kernel but with a new, tablet-optimized user interface (UI).

Specifically, we anticipate 'Windows 7 Tablet Edition' to be more touch- and tablet-friendly with a new UI shell (based on Windows Media Center and/or Metro as opposed to the traditional Taskbar interface of the currently default Explorer.exe) on top of existing Windows 7 'piping', analyst Philip Winslow wrote in a recent note to clients.

Much like the Windows Phone 7, analyst Winslow believes that Microsoft will implement hardware requirements for tablet manufacturers (e.g., capacitive touch with 4 or more contact points, accelerometer) to instill confidence in application developers that their apps will run as intended on all 'Windows 7 Tablet Edition' devices, which is in contrast to Android.

Along these lines, we expect Microsoft to eventually ship Windows with Windows Marketplace as the company's version of Apple's App Store, Winslow said.

Microsoft's strategy has generally been to integrate same kind of chips to work for its operating systems. For instance, Windows Phone 7 works closely integrated with Qualcomm chips like its earlier integration with Intel in PCs. And now, Microsoft is said to integrate Intel's Oak Trail chips for its tablet version OS. Intel is developing Oak Trail chips specifically for netbooks and tablets.

This kind of strategy has both ups and downs. Microsoft's approach will take away the onus of integrating the OS with the chip from the OEMs. This bodes well for low-cost assemblers who do not possess the expertise to effect such integration.

However, such an arrangement dissuades differentiation and ushers in a PC-like culture whereby most of the devices are similar in configuration with minor differences in memory, design and screen etc.

On the other hand, this type of arrangement will allow OEMs to lower the prices of their devices, compared to Android devices, which are little bit expensive as the cost of integration is pushed towards the OEMs. Meanwhile, Apple has its own A4 chip for iPads.

Analyst Winslow expects Intel's Oak Trail chip will improve power consumption on Windows 7 tablets, potentially extending battery life on Windows 7-based devices from about 5 hours to about 7.5 hours. Market leader iPad boasts a battery life of about 9-10 hours and Samsung's galaxy tab claims a battery life of about 7 hours.

In addition to a new user interface, the analyst sees Oak Trail as critical to the medium-term success of Windows 7 tablets, as he expects more users would be willing to tradeoff the greater processing power and app ecosystem of a Wintel tablet with improved touch functionality for slightly shorter battery life than the iPad or Android tablet.

But it is not easy for Microsoft to launch an exclusive tablet operating system and grab market share right away as Apple's iOS and Google' Android have already captured a major chunk of the market, while HP is developing its own webOS operating system, courtesy its acquisition of Palm.

As tablets hold a growing market, Microsoft still has a chance and it should launch a decent tablet OS up and running by the middle of 2011 to avoid losing any momentum gained from Windows Phone 7.

Meanwhile, studies conducted by several market research firms indicate that tablets are eating in to the sales of PC, which has been Microsoft's forte. About 90 percent of the PCs around the world are run on the company's windows operating system.

Technology research firm Gartner said personal computer sales worldwide were on track to set a new record in 2010 but Apple's iPad is taking a bite out of the sector.

The research firm revised its forecast for worldwide PC sales for 2010 to a total of 352.4 million units, up 14.3 percent over last year, but down from prior forecast it made in September of a 17.9 percent growth for the year.

Gartner now estimates worldwide PC sales in 2011 to touch 409 million units, up 15.9 percent over 2010 but down from its earlier forecast of an 18.1 percent growth in 2011.

The research firm added that over the long term, media tablets are expected to displace around 10 percent of PC units by 2014.

Meanwhile, FBR Capital Markets expects 70 million tablets to be sold next year, with 40 million of those coming from Apple (AAPL) alone. FBR also estimates that every 2.5 tablets sold negates the sale of one PC.

Jefferies also expects tablet shipments in 2011 appear to be shifting more toward 50 million units.

We remain more bullish than market expectations regarding tablet adoption due to tablets' superior browsing experience and form factor, analyst Peter Misek wrote in a note to clients.

If the above predictions prove true, Microsoft's tablet operating system could come in handy for the Redmond, Washington-based company if its revenue from PCs takes a hit in the future.

Much of Wall Street remains concerned about the tablet's impact on Microsoft's Windows franchise. However, we believe that Microsoft will have a more meaningful position in tablets in 2011 than the market appreciates based on a more tablet-friendly UI and improved power consumption, which we believe will serve as a catalyst for the stock, Winslow said.