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Microsoft tablet draws cautious cheers

SAN FRANCISCO (MarketWatch) -- Microsoft Corp. drew praise from Wall Street on Tuesday for its first forray into the fast-growing tablet market -- though analysts caution that many unknowns remain.

Late Monday, the software giant announced a new family of tablet devices under the brand name Surface. The tablets are expected to hit the market later this year with the market launch of Microsoft's (MSFT) Windows 8 operating system; pricing of the devices will be announced closer to launch, though the company said it expects the prices to be "competitive" with other tablets and so-called Ultrabook laptops in the market.

Shares of Microsoft were up nearly 4% to $31 in early trades on Tuesday.

"Based on the brief demonstration we saw today, we think Surface has a chance at achieving some commercial success, though many details have yet to be announced," wrote John DiFucci of J.P. Morgan in a note to clients.

Microsoft showed off the Surface tablets at a media event in Los Angeles that was run by CEO Steve Ballmer. The devices feature an integrated kickstand as well as what's called a Touch Cover -- a magnetic cover that doubles as a keyboard that attaches to the bottom of the tablet.

The company will sell two versions of the tablet; one running on an Intel(INTC) chip running Windows 8 Pro, and another using an ARM-based processor from NVIDIA(NVDA) . Few apps were announced at the event, save for Netflix, which will make its streaming app available for the Windows 8 ecosystem.

In his note, J.P. Morgan's DiFucci noted that while pricing details remain uncertain, the company's plans suggest the Surface tablets could price in the range of $700-$1,000. The cheapest iPad from Apple(AAPL) starts at $499.

"We would have expected Microsoft to be more aggressive on price given its late entry to the tablet market," he wrote.

Walter Pritchard of Citigroup called the Surface tablet "compelling," in that it addressed some concerns around the launch of Windows 8, given that the computing market is shifting to mobile devices and away from standard desktop PCs.

"While the devil is always in the details / execution, the product addresses the issue of price and differentiation vs. iPad, two concerns we've had around Win8 at launch," Pritchard wrote.

However, one concern expressed by several analysts is the potential effect on Microsoft's PC manufacturing partners who play a key role in the company's broader Windows business. Shares of Dell (DELL) were down 1.6% on Tuesday morning, while Hewlett-Packard (HPQ) was up about 0.5%.

Rick Sherlund of Nomura wrote that while Microsoft "is borrowing a page out of Apple's playbook" in making its own hardware, he expects the company will continue to work with its other partners, "encouraging them to innovate with new hardware form factors and 'prime the pump' around Windows 8."

Pritchard believes that other hardware makers are limited in how well they can compete with Apple, given the tightening economy and lower margins offered in tech hardware.

"As a result, Microsoft needs to be in the market today (as its OEMs can't be price competitive) to ensure its ecosystem can compete long-term against Apple," he wrote.

Shaw Wu of Sterne Agee noted that Microsoft has had a "mixed track record" in producing its own hardware, with successes like the Xbox 360 and Kinect motion controller offset by duds like the Zune digital music player and Kin smartphones.

"We will need to see how the customer response is," Wu wrote, adding that he expects Apple and Google's Anroid operating system to continue "consolidating share" in the mobile market.