Yesterday Microsoft announced the Surface tablet. Is Microsoft really entering the computer hardware business? Yes. Success on the tablet is crucial to the success of Windows 8. Microsoft has to ensure a well executed, competitively priced platform, and isn’t going to trust OEMs to execute it alone. If you’ve yet to see the Surface, watch the introductory video below:

The original Google Nexus phone was born of a similar need. It was introduced to compete against the iPhone. Android was crucial to Google’s success in the mobile market. Unimpressed by what OEMs had done, Google introduced the Nexus as their flagship Android phone. In a very short time, other manufactures began introducing phones with similar, or better specs than the Nexus. While the Nexus was never a dominant player like the iPhone, it’s mission was successful. Resulting Android phones and their adoption rates were much improved. Google continues to release new phones, and while they aren’t typically best sellers, they continue to help shape the Android landscape.

Like the Nexus phone, the Microsoft Surface has some compelling features that leverage perceived weaknesses in the Apple product. A 16:9 HD screen ratio is more suited to watch HD video than the iPad’s 4:3 SD ratio. Surface’s addition of a full-size USB port is huge, allowing easy, cheap addition of memory, and peripheral connectivity (printers, cameras, etc). The keyboard built-in to the cover is pure genius, combined with a trackpad and stylus it indicates this is a device suitable for serious content creation, not just consumption.

Can fragmented OEMs offer a competitive advantage to Apple in the tablet market? While Microsoft would be thrilled if the Surface inspired OEMs like HP, Dell, Acer and others to introduce similar and improved designs like the Google Nexus did, Microsoft faces a competitive disadvantage. Google is an advertising company and gives away its operating system to earn advertising revenue. Apple is a hardware company and gives away its operating system earn hardware revenue. Microsoft is a software company, and can not give their Windows operating system away for free. However, Microsoft could give away the hardware to earn revenue on the operating system. OEMs can’t. Microsoft needs to charge OEMs $80-85 for the operating system. Paying for the Windows operating system handicaps Microsoft OEMs from competing with Apple and Android devices on price.

Apple also enjoys tremendous supply chain efficiencies, for which CEO Tim Cook is responsible. These efficiencies allow an envious 45% margin on Apple products. With $58 billion in cash, Microsoft certainly has the resources to compete against Apple. It remains to be seen if they can be successful as a hardware manufacturer, and match the supply chain efficiencies to offer tablets with great build quality, at a competitive price. Microsoft has a mixed track record in manufacturing. Big hits with Xbox and Kinect. Big misses with Kin and Zune.

There will be two versions of Windows tablets, the Microsoft Surface, and the Microsoft Surface Pro.  While the two models will differ in their hardware and software, their success will largely depend on their price. The Surface is the closest competitor to the iPad. It will run Windows 8 RT on an Arm platform. In layman’s terms, it will offer great battery life, but won’t run “legacy” Windows applications, only new Metro apps. However, it will include a Metro version of Office. Since it includes Office and a keyboard, it will command a premium price. It should be priced at $599 or less.

Windows Surface Pro will run Windows 8 Pro on an Intel platform, and features a higher resolution screen. Most likely the Surface will feature 720P resolution, and the Surface Pro will feature 1080P resolution. Most importantly, Surface Pro will offer full support for existing legacy applications, as well as Metro apps. While it will be priced higher than the iPad, it will compete more directly with Ultraboooks, and the Apple Macbook Air. It should be priced at $999 or less.

Windows Surface Pro appears on the surface, to be by far the most compelling offering. While the iPad has never been a notebook replacement, the Surface Pro could be. It’s actually two devices in one. A tablet, and notebook with integrated keyboard. Surface Pro is a device powerful enough to run all your legacy applications, as well as the convenience of Metro apps with a touch interface. Developers will be excited about the prospect of running full Visual Studio on a tablet, Graphic designers about running full versions of Photoshop, and road warriors about full featured Office. While Windows 8 never translated well to the desktop, the Surface Pro tablet clearly illustrates Microsoft’s vision.

When will they be available? Probably not until at least October. Why announce them so early? It could be a bow to OEMs, allowing them time to develop their own platforms. It could be to provide some momentum behind the Windows 8 launch, which until now has not been well understood or received.

Finally, it’s remarkable that Microsoft has been working on these devices for 3 years, and kept them a secret until the announcement yesterday. The also hinted that other Surface devices would be announced. What other secrets do they hold? Is it possible we’ll see Microsoft notebooks, desktops, a Surface phone, maybe even a Surface Xbox?