Microsoft Surface: Where does it go from here?

Microsoft Surface: Where does it go from here?

Summary: Digging beneath the Surface, here's what the numbers tell us so far, plus why the slowing tablet market might actually be a good thing for Microsoft's tablet.

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Microsoft's Surface Pro 3 tablet PC still has a mountain to climb. Image: Microsoft

The latest version of Microsoft's tablet PC, the Surface Pro 3, goes on sale in the UK, the rest of Europe, and Asia later this month. While the new model has seen some good reviews, it still has a mountain to climb.

Microsoft built its own tablet at least in part to prove that Windows could live perfectly happily on the slate form factor. But so far the device hasn't made the breakthrough that Microsoft will have hoped for on the sales front.

Gartner calculates that around 600,000 Surface tablets were sold in the first quarter of this year. "In terms of the market that's still very small," said the analyst's research director Ranjit Atwal. "It's struggling to make real inroads in the market."

In contrast, Apple sold 16.3 million iPads over the same period, along with just under three million MacBooks (the Surface is pitched somewhere between the two).

Looking into Microsoft's financial reporting sheds more light on the story. While in its most recent quarterly numbers Microsoft didn't break out the 'cost of revenue' for Surface (which includes the costs of manufacturing and distributing the devices), it has historically cost Microsoft more to build and sell the devices that it made in revenue from them.

In the previous quarter, for example, Microsoft generated $494m in Surface revenue but spent $539m in order to do so — an overall loss of $45m for the line.

Of course, creating, manufacturing, and marketing a new type of computing device takes big bucks, and Microsoft has deep pockets. Spending billions in order to generate demand for a new product format isn't trivial for a technology company, but it's also not that surprising.

What the Surface set out to prove is that there's a new, and so far largely unaddressed, way of using tablets. The launch of successive models has given the concept of the hybrid tablet a boost (at least on Windows 8 if not Windows RT), with a number of hybrid devices being due out this year from Microsoft's hardware partners — companies that have been criticised in the past for a lack of innovation.

If the existence of Surface can help make those partners more ambitious around Windows tablets and hybrids, that's a potentially big benefit for Microsoft because it will boost Windows even if it doesn't show up in its Surface sales figures.

"The market did need someone to go out and show it could be done. Microsoft may be one of the few who could take the losses as well in the near-term whereas the PC vendors really can't, they have to be more certain because of the margins that they work on," Atwal said.

Another issue for Microsoft is that Surface sales — at least according to the available figures — have been largely flat in recent months, after a promising start. Over its last four quarters financial quarters, starting with the most recent, Surface revenue was $409m, $494m, $893m, and $400m. However, it's still something of a step up compared to the previous financial year, when Microsoft said Surface revenue hit $853m in total.

So apart from one bonanza quarter where sales hit $893m, Surface revenue didn't break the $500m barrier in any quarter over the past financial year — making it hard to see any clear momentum behind the device.

There are plenty of reasons for this: confusion around Windows RT put off some buyers of the consumer model of the tablet, Windows 8 put off others, as did the high price of the devices, and not forgetting the strong competition from well-entrenched iPads and Android devices.

To be a viable long term platform Surface has to start selling millions of the devices, said Atwal. The latest iteration, the Surface Pro 3, has won praise from several quarters, so Microsoft's next set of sales figures will be carefully scrutinised for any signs of growing Surface demand.

Microsoft also faces another complication from the dynamics of the tablet market as a whole. While Microsoft has been finessing Surface, the once white-hot tablet market has been cooling — there just aren't that many first-time buyers out there anymore. So has Microsoft (which has a long history of building tablets) missed the boat again?

Perhaps not – the first big tablet replacement cycle is just kicking off as owners tire of their three- or four-year-old tablets, and that could actually be an unexpectedly good thing for Microsoft. It means that tablet owners have now had long enough to understand what they do and don't like about their devices and the form in general, meaning the Surface's bigger screen and keyboard may find some new fans, especially among those looking to replace a tablet and a laptop around the same time.

Surface won't in itself make or break Microsoft — it's only one small product among many. But if Surface doesn't start building momentum soon, it will send a powerful message to the market — if Microsoft can't build a Windows tablet that people want to buy, then who can?

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Topics: Mobility, Microsoft, Tablets, Windows 8

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123 comments
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  • Surface 3 is excellent

    I had the chance to use one recently and I was very impressed. It can absolutely replace a Laptop or Macbook. Every college kid I know seems to want one. What I have heard from people is that other tablets like iPad and Nexus are just too similar to phones, where as the Surface is more of a real computer. I agree.
    Sean Foley
    • Best tablet

      that no one buys
      FrankInKy
      • Ummm, ok...

        That no one buys... no one's that have bought nearly $2.2 billion worth of them over the past year. No, the Surface isn't selling like iToys, but to say no one is buying one betrays a pretty ignorant bias on your part.

        I've used iPads, and I bought an Android tablet. It was not money well spent, as it (they) do little to nothing more than my phone does. I subsequently bought a Surface Pro 2, and use it every single day, for everything from typical entertainment tasks (movies, games, etc.) to reading the news, to doing real work.

        Some people don't need those capabilities, and for them, Android and iPads would serve their needs just fine. But for people who do, the Surface is a fantastic system.
        PC987
        • M$ Surface loss now at $1.7 billion

          Look it up
          FrankInKy
          • There are reasons for that

            Look them up. And if you need a hint, exactly zero of them have to do with the pro 3, which is the best seller and very well-received by users.
            dricht1
          • Actually...

            The $1.7 in losses does have a lot to do with the SP3. But that is a good thing. A lot of the development costs of the SP3 were expensed in the last quarter. The next couple of quarters will be the real test of whether the Surface line will actual start making money or not.
            toph36
          • Maybe if they made it in brown, sales would increase...

            ...oh, wait, that was Zune, never mind.
            FrankInKy
          • Actually...

            Most new technology products lose money on their first iteration; after you factor in the initial R&D, marketing, analysis, etc it can take several years and further releases until you get the formula right and break even...

            Troll...
            mattyvx
          • Not first iteration "surface Pro 3"

            By your third attempt you should make money. iPad made profit from day 1.

            The big question is really this:

            Should tablets run a different OS than Laptops.

            MS needs to put laptop components in to the surface pro, so the cost of manufacturing will be high but the potential will also be high. The problem is that legacy applications don't translate directly to touch. The surface Pro tries to walk the line and Apple forces developers to take sides.

            If Apple is correct and touch devices are just different than laptops, this will translate into a huge advantage for them. MS is right and tablets are just the evolution of the laptop, they will have the advantage.

            Today, Apple is enjoying the benefits of a huge library of apps redesigned for small touch screens. We will see what the future holds.
            DougPetrosky
          • I see. So R&D loss, ect is not counted as a loss

            unless it's MS.

            Your logic allow G$$gle and Apple get a pass because they're not MS.

            You're a troll. Look it up.
            William.Farrel
          • Ouch!

            cu reabtha strikes again
            FrankInKy
          • It is the cost of doing business in a highly competitive ...

            ... technical environment. Microsoft/Nokia is (a distant) #3 in smartphones (BlackBerry is #4).

            Microsoft is losing money on the Surface but it's only high-volume competition is Apple, Samsung, and MAYBE Amazon and Google. No one else is a contender in the tablet space.

            It may take Microsoft awhile ... and maybe the Surface will never "catch-on" but as long as Microsoft is the #1 player in the cloud, they are a force to be reckoned with.
            M Wagner
          • The others are making a profit.

            The surface line is not.

            It really is that simple.

            The research is counted. Whether MS likes it or not.
            jessepollard
          • First off...

            Why use a $ sign to denote Microsoft. Are they not suppose to make a profit for their investors and a living for their hundred thousand employees? Should we start labeling Googl€ or Appl€ the same?

            Second, "look it up" the only thing you would be able to look up are people's guesses. But just like Amazon did not make a profit on their business model for almost a decade, why do you think Microsoft needs to be profitable as a OEM in such short order? Heck, it took over 6 years of billions in R&D to get Azure off the ground and it is now Microsoft's next cash cow.

            Heck, why do you even care if it makes profit? Google blows half a billion on a barge that no one steps foot on and no one blinks an eye. Surface Pro 3 is a excellent product that is generating great buzz and PR for the company and is capturing some of the high-end lime light Apple owned for years.
            Rann Xeroxx
      • ...no one buys because...

        it costs too much! While the entry-level x86-powered model has a good price point, it should include an i-5, 128GB SSD, 8GB RAM and the type cover. The top-of-the-line i-7, max SSD and max RAM price is insane for the consumer market. Price is but one reason why sales figures are expressed in thousands instead of millions.

        There's another reason they aren't selling as well as Microsoft had hoped. Any ad for a service or new product that has an app shows Apple and Google options. Why would consumer's buy a TABLET that doesn't have the apps for new services and products? Answer: They wouldn't. That means folks would buy the Surface to do classic Windows stuff -- i.e. laptop stuff. Now we're back to the price problem because there are now a lot of really good 2-in-1, ultra-portable laptops from OEMs that are a far better value.

        Windows is on the outside looking in as Mac and Linux were when Windows always had an app for everything. Remember when Mac and Linux folks would still have to have Windows for some apps? Now the tables are reversed and Windows folks are using options like Blue Stacks so they can run Android apps.
        robradina@...
        • The price is high...

          The price is high, but it's where it needs to be for Microsoft to walk the fine line between promoting/proving Windows as a viable tablet OS and not damaging their OEM partner relationships (any more than is necessary).

          I'm actually fine with the cost of the device itself, as it's right in-line with comparably equipped ultrabooks, and the overall build/material quality is second to none. I do think they're hurting themselves by pricing the keyboard covers and other accessories so high though.

          That said, I've bought both a Touch and Type Cover and a dock for my SP2, and think the overall setup is easily worth the price when one considers the broad range of it's capabilities and utility. If I didn't need high-power workstations for my day to day work, the Surface would easily handle all my computing needs in a single device.
          PC987
          • The surface costs a lot...

            Simply because it costs a lot to make.

            Nobody else makes them because it is too expensive.
            jessepollard
          • I agree that bundling the Type Covers (~ $100) ...

            Would be more attractive to buyers. Then offer the tablet only for $100 less and the Touch cover for $50 more. That would make price-conscious buyers more comfortable about paying $800 for a baseline device.

            That said, it is a premium device and it should be priced that way. After all, it is not hard to pickup up a Core i3 Windows notebook with 4GB RAM for around $350. You are paying for mobility (low weight, long battery life, a fast drive, and fast memory) in a well-built product.
            M Wagner
        • The price of Microsoft's offering is high but look at other manufacturers'

          There are LOADS of alternatives to the Surface. Microsoft probably doesn't want to tread on the toes of the other manufacturers. It's just showing what "can" be done. Look at the 2 in 1 / hybrid as well as tablet offerings from HP, Lenovo, Dell Asus, Acer etc. etc. etc. Most of these ARE MUCH CHEAPER then Microsoft's offering. You get what you pay for as has been the case since one had a choice between "an IBM PC" and an IBM (non-Compaq) clone almost 20 years ago.

          I personally am using an Asus T100. These VERY cheap Bay Trail devices are extremely powerful. (£345 for my U.S. 64GB version as they only sell the 32GB version in the UK) I'm a software developer and whilst it's too slow building a large C++ project to be a total replacement for my Lenovo T410 it does everything else any normal person wants, extremely quickly! I chose this device because a) in "laptop mode" it IS a proper laptop, i.e. keyboard supports the "tablet" when docked so you can type on it's nice keyboard when it's perched on your lap, and b) it has a "full" USB 3 port on the keyboard which allows me to plug it into my docking station and run 1GBb Ethernet at a full 100MBytes/s and 2 large monitors displaying video at the same time (because I'm using one of the devices from Plugable). My T100 cost just £350 inc tax and is a FULL laptop replacement as well as being a tablet.

          If people want an I5, buy a Dell, Lenovo, HP or whatever. There are so many options ranging from VERY CHEAP to simply "cheaper" than Surface but I strongly suggest people try the Bay Trail powered devices because unless you're a "power user" you probably don't need anything else. Add a 128gb micro SD card (which I deem permanent and use Sellotape to ensure it stays that way!) and even a 32GB version + 2GB RAM is good enough for many people. Add an external large hard drive, and a portable one like my Samsung M3 can be powered from the USB 3 port so can be used on the move and it's brilliant on the move. Try doing that on most tablets!
          106600.3363@...
          • They Shouldn't Think That Way...

            I have a Win tablet with Bay Trail that's a really nice piece of hardware but it's quirky as hell. Why? It wasn't done right. Some of the drivers haven't been updated in over six months and complaints go unresolved. If Microsoft is showing what's possible but price them beyond what typical consumers are willing to spend, the consumers go with a cheaper OEM option that makes them think Windows sucks.

            Microsoft needs take off the gloves if it wants to keep the Windows ecosystem relevant. They need to create a "reference" device at all price points to show consumers that it's possible to have a decent piece of Windows hardware that's solid, reliable, without quirks. There are just too many Windows alternatives for Microsoft to rely on their sloppy OEMs. In fact, their crappy hardware and lack of innovation for the past decade is why Microsoft is in the hardware business in the first place. Why on Earth would Microsoft not remove the gloves?
            robradina@...