Microsoft's Surface: Critical to Windows 8 launch as PC hedge

Morgan Stanley analyst Adam Holt expects Microsoft to move 3 million Surface units in 2012 and 9 million in 2013.
Written by Larry Dignan, Contributor

Microsoft's Surface tablet is more than just some side project to push partners to design better hardware. The Surface is Microsoft's biggest and best hedge against a declining PC market.

How good of a hedge the Surface becomes remains to be seen. However, analysts are expecting the Surface to at least offset what could be weak PC sales.

For instance, Morgan Stanley analyst Adam Holt expects Microsoft to move 3 million Surface units in 2012 and 9 million in 2013.


Holt said in a research note:

Win 8 /Win RT is Microsoft’s first concerted effort in the tablet market and we are cautiously optimistic that the tablet-oriented OS, Office integration, and enterprise-friendly features will help Microsoft gain share in the tablet and hybrid market—which will still be incremental to consensus estimates, and possibly the multiple. Our survey in May 2012 of 7,500 consumers suggested that 25% of consumers expect to buy a Windows tablet at any price and 30% would buy a Windows tablet at parity with an iPad. While Intel has said it expects over 20 Win 8 tablet designs based on its architecture, recent news suggests that the release of x86-based Win 8 tablets will be delayed...Surface is promising, with its innovative Touch Cover keyboard, light casing, USB ports and Office but distribution and consumer adoption is still largely a wild card.

Despite those wild cards, Holt is expecting Microsoft's Surface along with an army of tablet partners can give it 14 percent of the tablet market in 2013, up from 4 percent in 2012.

Also: Microsoft's Windows 8 biggest wild card: The hardware | Microsoft: Radical shift to devices, risk ahead of Windows 8 | Windows 8 pricing for system builders said to be roughly the same as Windows 7 | All Windows

Holt is also betting that Surface gross margins will be 9 percent.

Those gross margins may be a bit dicey. Why? Microsoft's tablet gains will almost solely ride on the Surface because hardware partners are pricing high on Windows 8 devices.

ThinkEquity analyst Yun Kim said that enterprises want to go with Microsoft's mobile platform, but price will matter to Surface sales. Kim said:

Given that all OEM versions of Windows RT-based tablets are priced well above $500, we believe initial success of Windows RT will be determined by the pricing of Microsoft's Windows RT-based Surface tablet. In our view, MSFT is facing a pricing dilemma with its Surface tablet. We are maintaining our thesis that lower priced Surface tablet could result in revenue growth materially lagging unit growth, while higher priced Surface could see lackluster unit sales.

Bottom line: The Windows 8 launch will be critical, but all eyes should be watching Surface sales.

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