Microsoft’s hardware business has always felt like something of an also-ran, with the notable exception being the Xbox of course. It’s not that the products were bad per se, indeed many of my friends still swear by the Microsoft Natural ergonomic keyboard, more that it just seemed to be an aside that never really saw much innovation or effort. The Surface seemed like an attempt to change the perception, pitting Microsoft directly against the venerable iPad whilst also attempting to bring consumers across to the Windows 8 way of thinking. Unfortunately the early years weren’t kind to it at all with the experiment resulting in a $900 million write down for Microsoft which many took to indicate that the Surface (or at the very least the RT version) weren’t long for this world. The 18 months that have followed however have seen that particular section of Microsoft’s business make a roaring comeback, much to my and everyone else’s surprise.
The Microsoft quarterly earnings report released today showing that Microsoft is generally in a good position with revenue and gross margin up on the previous quarter of last year. The internal make up of those numbers is a far more mixed story (covered in much better detail here) however the standout point was the fact that the Surface division alone was $1.1 billion for the quarter, up a staggering $211 million from the previous quarter. This is most certainly on the back of the Surface Pro 3 which was released in June 2014 but for a device that was almost certainly headed for the trash heap it’s a pretty amazing turn around from $900 million in the hole to $1.1 billion in revenue just 1.5 years later.
The question that interests me then is: What was the driving force behind this comeback?
To start off with the Surface Pro 3 (and all the Surface Pro predecessors) are actually pretty great pieces of kit, widely praised for their build quality and overall usability. They were definitely a premium device, especially if you went for the higher spec options, but they are infinitely preferable to carting around your traditional workhorse laptop around with you. The lines get a little blurry when you compare them to an ultrabook of similar specifications, at least if you’re someone like me who’s exacting with what they want, however if you didn’t really care about that the Surface was a pretty easy decision. So the hardware was great, what was behind the initial write down then?
That entirely at the feet of the WinRT version which simply failed to be the iPad competitor it was slated to be. Whilst I’m sure I’d have about as much use for an iPad as I would for my Surface RT it simply didn’t have the appeal that its fully fledged Pro brethren had. Sure you’d be spending more money on the Pro but you’d be getting the full Windows experience rather than the cut down version which felt like it was stuck between being a tablet and laptop replacement. Microsoft tried to stick with the RT idea with the 2 however they’ve gone to great lengths now to reposition the device as a laptop replacement, not an iPad competitor.
You don’t even have to go far to see this repositioning in action, the Microsoft website for the Surface Pro 3 puts it in direct competition with the Macbook Air. It’s a market segment that the device is far more likely to win in as well considering that Apple’s entire Mac product line made about $6.6 billion last quarter which includes everything from the Air all the way to the Mac Pro. Apple has never been the biggest player in this space however so the comparison might be a little unfair but it still puts the Surface’s recent revival into perspective.
It might not signal Microsoft being the next big thing in consumer electronics but it’s definitely not something I expected from a sector that endured a near billion dollar write off. Whether Microsoft can continue along these lines to capitalize on this is something we’ll have to watch closely as I’m sure no one is going to let them forget the failure that was the original Surface RT. I still probably won’t buy one however, well unless they decide to include a discrete graphics chip in a future revision.
Hint hint, Microsoft.
