Is The Surface A Microsoft Success Story?

Microsoft’s quarterly results advanced many stories out of Redmond, from the continuing success of its commercial cloud services, to a $7.5 billion dollar write-down after the purchase of Nokia’s devices and services section. Forbes’ Aaron Tilley looks at the quarterly numbers, but I want to zero in on one of those stories.

Microsoft was proud to announce the increased revenue from the Surface device business. Does that mean that Microsoft can now regard the Surface adventure as a success?

It’s certainly a qualified success, as I’m about to show, but there are a number of issues that CEO Satya Nadella and the rest of Microsoft needs to keep in mind before they crack open any champagne.

Microsoft Surface Pro 3 (image: Ewan Spence)Microsoft Surface Pro 3 (image: Ewan Spence)

On the positive side, the Surface business is in the enviable situation where it is not losing money in terms of the hardware revenue. While there are likely additional costs, especially around marketing, the Surface team has the financials moving in the right direction in respect to the design and manufacturing. There will also be additional revenue flowing through Microsoft’s cloud services (including OneDrive and Office 365).

While the revenue has dropped back from earlier quarters this year when it passed the one billion dollar mark, the 117% growth from the equivalent 2014 quarter shows a healthy product line – and of course this year Microsoft did not have to take a $900 million charge because of excess inventory (which was the case in 2014 with the Surface RT).

The biggest win for Microsoft, and why I think that Microsoft can use the word success, is that Redmond has proven the market for a convertible device, and one with a larger screen at that. The twelve-inch Surface Pro 3 has led this charge and proved that there is a market for a tablet/laptop hybrid. That should give manufacturers the confidence to explore the space with their own designs.

Given the PC market last year sold three hundred million units, it’s unlikely that the Surface family of devices marketshare is going to be significantly higher than one percent. That should not represent a threat to the manufacturers (unlike smartphones, where the vast majority of Windows Phone sales were made by Redmond).

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