Microsoft's Surface strategy: As long as it takes

Microsoft's Surface strategy: As long as it takes

Summary: Time may be on Microsoft's side when it comes to the prospects for its Surface tablet PC initiative.

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A Surface Pro tablet. Image: Microsoft.

Next week, Microsoft is expected to launch a Surface Mini, and perhaps another, larger Surface device to add to its tablet PC portfolio. The idea of Surface Mini certainly makes sense; smaller slates are seeing growth, so a seven- or eight-inch model could potentially capitalise on that nicely.

The arrival of the third-generation of the Surface (perhaps a Surface Pro 3) would also help Microsoft's tablet prospects in another way: it usually takes tech companies three versions of any new device to fix all the flaws spotted in the product.

The first-gen Surface RT and Surface Pro tablets were released in October 2012 and February 2013 respectively. Their successors, the Surface 2 and Surface Pro 2, arrived in October 2013. But sales remain low, probably somewhere around two to three percent of the worldwide tablet market.

The numbers Microsoft has released about the Surface tell part of the story. Microsoft reported Surface revenue of $494m in its most recent third quarter report, but the costs associated with generating that revenue (which include manufacturing and distribution of the devices) hit $539m.

The same thing happened in the previous quarter, covering the three months to December 31 last year: Surface revenues hit $893m, but at a cost of revenue of $932m. In Microsoft's Q1, Surface revenue stood at $400m and the cost of revenue at $645m (before that Microsoft reported Surface revenue of $853m in its Q4 2012 — along with a $900m write-down on Surface RT inventory).

According to these numbers, Surface is still costing more to make and distribute than Microsoft is making from selling it.

So how long will can Microsoft continue to build 'tablet PCs' that are snubbed by consumers? The answer is probably as long as it takes.

Surface is interesting — and important — because it embodies nearly all the challenges that Microsoft faces in trying to reinvent itself for the post-PC world: the rise of new types of hardware, the need to rethink Windows, and the race to the cloud.

Replacing the Ballmer-era unofficial definition of Microsoft as a 'devices and services company' with new CEO Satya Nadella's 'mobile-first, cloud-first' slogan might at first glance have spelled bad news for Surface. But with Nadella rumoured to be presiding over the launch of new Surface devices, it looks like the line will remain key for the company in the future.

That doesn't mean it's going to be getting any easier. Microsoft is late to the ecosystem game played so well by Apple and Google, as its own financial report notes: "Our competitors in smartphones and tablets have established significantly larger user bases. Efforts to compete with the vertically integrated model will increase our cost of revenue and reduce our operating margins."

Another potential headache, in Microsoft's own words: Surface competes with products made by Microsoft's manufacturing partners "which may affect their commitment to our platform".

But for all sorts of reasons it would be a huge blow for Microsoft to step away Surface — it has to prove, through Surface, that Windows makes sense on a tablet.

And it may have time on its side here. There is some demand out there, particularly from business, for a Windows tablet, and so Microsoft will probably find an enterprise market for Surface as an Ultrabook-style laptop upgrade if it can convince corporate customers it is committed to the product in the long term.

As such, we're likely to see market share gradually increase over the next few years for Windows tablets in general. It might not be the enormous success that Microsoft wanted, but don't expect it to back down any time soon.

ZDNet's Monday Morning Opener is our opening salvo for the week in tech. As a global site, this editorial publishes on Monday at 8am AEST in Sydney, Australia, which is 6pm Eastern Time on Sunday in the US. It is written by a member of ZDNet's global editorial board, which is comprised of our lead editors across Asia, Australia, Europe, and the US.

Previously on Monday Morning Opener

Topics: Windows, Microsoft, Tablets, PCs

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116 comments
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  • So long as they're happy to subsidize them, fine by me ...

    ... but it's pretty sad plan, don't you think?

    And what a horrendous drain on their software profits.

    Do M$ fans *really* believe this is a sensible policy?
    Heenan73
    • yes, they are on the right path

      The fact that both iOS and Android are trying to make their tablets as productive as Windows by scaling up the OS, Microsoft has proven its approach was right.

      Instead of pushing phone OS to work on tablet, Microsoft has a full desktop OS optimized for tablet. This and its universal apps will help them establish as strong player.

      At this time there is no tablet OS that is multi user, multi window, touch-keyboard -mouse friendly, device support than Windows period.

      Best part is , in 15 months they have 200 millions users of the OS. Apple took 4 years to reach that number. This seems to be conveniently forgotten by tech writers.
      soulxfer@...
      • That Number

        200 million users of "the OS."

        Apple took four years to sell 210 million iPads, which run iOS. iOS is also the operating system of the iPhone. The iPhone took longer than four years to get those numbers. Perhaps you're right that Microsoft hit 200 million faster with, what you vaguely call, the OS.

        I find myself incredulous that there would be 200 million mobile devices sold by Microsoft in the last 15 months and they appear so low in the mobile os market share charts.

        So where do you get your number? Are you adding in desktops? That's fine. You could be clearer about that. But your cheery "It's all swell" post is tempered for this reader as you take the success in the sector Microsoft owns and has owned for decades and project those successes in order to prove Microsoft mobile is a-ok. I daresay Microsoft would be at about 160 million to 180 million Windows 8 and 7 users in 15 months if you subtracted out the phones and Surfaces.

        We should also keep in mind that Microsoft primarily licenses (and books revenues) for blocks of licenses bought by OEMs. Those pcs may not have been manufactured yet, let alone sold, thus representing an active user. And I may be mistaken about this, but I don't think Microsoft is very specific about the number of customers who acquire a current license and request the prior os.

        The way Microsoft keeps saying "And... now you'll like it" with the updates to Windows 8 suggests to this user that they are disappointed with Windows 8's adoption.

        In reference to your first paragraph, I would have assumed that Apple and Google would have been scaling up their operating systems (and hardware for the tablet makers) any way, regardless of the specifics of the first two generations of Surfaces. Indeed, if "Office" is what brings productivity to the sector, then Microsoft just improved Apple's tablet and Apple's burden in competing with Surface regarding productivity, such as it was, is so much lighter.

        It seemed to me that the interface ideas Microsoft put into Windows 8 and on the Surface came from their phone os. I expect the kernels are extremely similar. So did Microsoft not do the smart thing and expand from Windows Phone rather than stripping out from Windows Desktop?

        Isn't your suggestion that "pushing [a] phone OS to work on a tablet" is bad completely countered by what actually happened and how it worked out? You do recall that the first tablet OS was Microsoft's and it was a variation on XP Professional. How did that work out for them? Okay but slightly disappointing, until somebody did that big iPod Touch thing, and made Microsoft's time and expense developing the tablet os very, very disappointing.

        Microsoft is committed to rebuilding its mobile business. Everyone else is committed to keeping the business they have (and took from Microsoft.) Maybe the os is the key. I heartily doubt it. App counts may have been a key, but that's a temporary advantage as at some point there are enough apps.

        Read the numbers above: they are losing money on Surface. (And Nokia lost money on the phone business they transferred it to Microsoft in late April.) Will the tolerance of losses be perpetual? I doubt it. Tolerated for the rest of the decade? Very possible. Microsoft lost money on the Xbox. Eventually it became profitable. Microsoft loses money on Bing. It's a cost of doing business and having the infrastructure for future platforms. Microsoft lost money on its challengers to QuickBooks and PhotoShop. These are extinct products. Which way will this go? I don't know. But I do know that the number of folks who have Windows licenses has so little relevance to this game that it might as well be not in left field, not in the parking lot, not even in the same city, but in a different state.
        DannyO_0x98
        • 200M Users of OS

          All the guy said was 200M users of the OS. Not 200M mobile devices. The number is likely based on Microsoft quarterly reports -- which includes sales to value-added resellers. That doesn't necessarily mean there are that many Windows 8 users in the wild but there could be.
          robradina@...
          • 200M Users of OS

            Obviously it's not just Surfaces. It would include all Win8 laptops/desktops sold, as well as Win8 tablets sold by Dell, HP, etc. and Win8 phones too.
            trybble1
          • Um... uh... yeah....

            If the statement "200M users of the OS" NEEDs more context, then yes. All those things are implied.
            robradina@...
          • Downgrade Rights

            Don't forget they count a machine sold with Windows 8 that is downgraded to Windows 7 (i.e. most businesses) as a "Windows 8" sale.
            rbgaynor
        • Do you think many will read your book you wrote???

          There is no point making a reply comment that is 10 Paragraphs of disrespect to another persons comment! The whole point is everyone gets to have an opinion and the readers can verify the facts for themselves.
          Don't waste your time - I gave up reading after the third paragraph and skipped to the next comments.
          pethers
      • What's wrong with Windows 8

        There are several issues with Windows 8. About 80% of the apps in the app store is free, making it virtually impossible for ISVs to make money from the store, since free and cheap apps pull prices way down. Microsoft has not shown it has any intention of fixing this problem. None of the software MS provides in the app store makes any serious money. In fact most are free, and help drive down the prices of software for ISVs. So MS through its actions, doesn't seem to even believe the Windows 8 app store is economically viable. It will be interesting to see what happens when its Metro Office apps are released.

        The lack of economic viability of Windows 8 apps is a significant inhibitor to the uptake of Windows 8 touch based systems, in particular, the more expensive systems. If MS could make the Windows 8 app store economically viable, it could promote it to both developers and users, and make a lot of money from its 30% cut. MS however doesn't do this. It instead mimics what Google does, instead of reinventing what it has on the desktop. So you have all these free apps which attract users who want the lowest costing systems, who want nothing but free or low costing stuff. Windows 8 is not the ecosystem of value, it is the ecosystem of cheap, and I'm not sure how much of a future it has.
        P. Douglas
        • Keep Windows 7 or go the Linux way?

          I have to admit to drinking the Windows cool-aid, and upgrading soon after to the 'next best thing' (thankfully I skipped Visa!). But the release of Win 7 & then 8 soon after has me thinking of going the Linux route. The continual cost of upgrades and the increasingly short life spans of Microsoft products has me rethinking what OS my business will use. Now add in security vulerabilities and other issues because they shortened the develop time to get the product on the shelves.
          thatguy242
          • Linux

            Really. Let me know what is the name of your business so I can avoid it like the plague.
            Blogsworth
          • Bogsworth in the bogs

            You're definitely an MS shill...and an ignoramus
            ramsamba
          • "Lass' sie nach Munichen kommen"

            (I just stole that from JFK)

            Search articles on "Munich and Linux". You'll see that it is possible and logical, done the right way. (There's a wrong way, too.)

            Mint is coming out with a 5 year release in a couple weeks. I suggest you have a look. It's been my favorite at work (among Windows users) for a few years. You talk to any Linux convert, and they will usually say "...and I never looked back."
            james.vandamme
          • What?

            Short life spans? XP is just now losing support and its +14 years old! You will not find any Linux desktop distro with that kind of long support cycle.

            And security? If you are running as Standard User and auto patch on Windows Vista or above then what security issues do you think you will have? What security vulnerabilities can you point to with W8x and Microsoft's new rapid release cycles?

            If you want to run Linux, go for it, there are plenty of use cases for the OS and its a great solution for many people. But your reasons stated are just FUD.
            Rann Xeroxx
          • Linux is great

            A few days ago, I installed Linux Mint 16 on a friend's old Windows XP laptop. After several frustrating minutes with XP, which reminded me why I loathe Windows, I installed Mint, which took about 15 minutes. The last Linux install I did was in December, and I had forgotten how much I liked Linux, especially Mint. Everything worked as soon as the install finished, which did not prevent me from exploring customization options for the next couple of hours. The only time I used the command line in this migration was to run chkdsk on Windows, before installing Linux. Needless to say, my friend's old laptop runs a lot faster, and is more secure, on Linux.
            S_Deemer
        • What's wrong with the Windows 8 app store and MS intentions

          I agree that MS needs to incentivise the app developers for the store if it wants to see a future for Modern apps.

          I don't see MS making inroads into the consumer market which Ios and Android primarily serve but I suspect they think that free or cheap apps will help them penetrate that market.

          If so, I think they are wrong. I think they should recognise that their best chance is to get businesses signing up for Windows tablets and when they offer the best of both worlds with x86 tablets being capable (with attached monitor keyboard and mouse) of being both a PC replacement and a tablet, even if they are using the cheaper Bay Trail chips.

          I'm always reading that you can't use desktop programs on small tablets. That's right, BUT the fact that you CAN run them on the move, even if awkwardly, is a major draw for a lot of people because it means that they can be ABSOLUTELY CERTAIN that they can do whatever they could have done on a PC / laptop.

          I think the future's brighter now that MS have stopped promulgating their nonsense that desktop apps are all "legacy". e.g. they are now increasingly offering practical Azure solutions for real world current solutions. You can now even run ANY app as a Remote App (preview only), hosted on an Azure VM without the hassle of end points and lack of licensing they forced on you before.

          Let's now see them encourage the development of proper Modern apps which businesses will be happy to pay for.
          106600.3363@...
        • Seriously???

          P. Douglas - I have downloaded probably 500 apps on my iPad and only 1 was paid for. If there is a paid app you can bet that there is probably a free competitor out there regardless of the platform\OS. I think most people have about 10 or 20 apps that they use regularly (and I'll bet none are paid for) on any tablet so I don't believe your argument is accurate. People don't develop for windows 8 because of market penetration. If windows 8 mobile devises get above 15% market share then you will see more devs come to the platform.
          Richard Callaway
      • Of course they are...

        You say Apple and Google are trying to make their tablets as productive as possible... its like saying Kia and Hyundai are trying to make their cars as comfortable as possible. Yeah, no kidding but you point is what most call "common sense". Why wouldn't they want it that way?

        The more important factor is that with devices like Chromebook, Android no longer requires expensive hardware to give users what you claim they want... keyboard, mouse, multi-window, etc. I own a Win 8 laptop in which I install "Classic Shell" to get it to look like Win 7. I also own an iPad Air and Galaxy Note 8 tablets. For the tablet experience I prefer the Samsung Galaxy line, but that's just my opinion.

        MS made the fatal mistake with Win 8 by having one OS for all devices. HUGE mistake. Microsoft assumed consumers would prefer to have everything in one device rather than buying separate devices. They were very wrong.

        Now they are in a bad position but they can certainly wiggle their way out of it as they did with the horrific Vista OS. Microsoft should stick with laptops and ultrabooks running a Win 7 variant and Win 8 on a tablet. The problem is they were waaaaayyyy late in the tablet/mobile game. No excuse from such a large player who is now vulnerable on all fronts. Microsoft flat out blew it.
        ryork272
        • I disagree...

          MS' "mistake" was not one OS for all devices, but one GUI for all devices. A touch-centric GUI is not the best match for a desktop device.

          IMO Windows 8.1 update 1 has gone a long way towards correcting that "mistake".
          brian@...
          • Whatever...

            OS... GUI... whatever. You know what I mean. They happen to be one and the same on Win 8 devices. You are saying the same thing just nit picking the context.
            ryork272