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Surface do-or-die moment? Not so fast

Gregg Keizer | May 19, 2014
Next week's new tablets may be important to Microsoft's hardware dreams, but it's still in it for the long haul, analysts believe.

Microsoft's scheduled unveiling of new Surface tablets next week is not a last-chance moment for the company's hardware dreams, analysts said today, countering a theme popular on the Web.

While some have portrayed the event — slated for Tuesday and expected to highlight one or more new tablets, including a smaller 7- or 8-in. device, perhaps a third-generation full-sized Surface Pro as well — as make-or-break, others rejected that idea.

"I don't see them giving up anytime soon regardless of the details [of the devices launched next week]," said Bob O'Donnell, principal analyst at Technalysis Research. "We'll continue to see an evolution of the product line."

"No, I don't think this is make-or-break," echoed Patrick Moorhead, principal analyst at Moor Insights & Strategy. "But they have to be successful in a smaller format to drive scale. You have to have scale to buy cheaper components. Microsoft doesn't have the scale to be profitable or to hit interesting price points."

That's true. While Microsoft has been selling Surface tablets since October 2012, it has yet to drive enough volume to turn a profit. In the March quarter, Surface posted a $45 million loss on revenue of $494 million.

"They need scale," Moorhead continued. "This is the time where we'll see Microsoft either doing something serious or just having a hobby."

The do-or-die theory has been widespread, as has the idea that the rollout will be a big test of new CEO Satya Nadella's "mobile-first, cloud-first" interpretation of Microsoft's long-stated strategy to pivot to a "devices and services" business model.

"From my perspective, this is pretty much the make-or-break announcement for the Surface line," said Hal Berenson, whose opinions carry weight because he is a former Microsoft manager and engineer. "Whatever we see on the 20th [will be] the first devices that could have been seriously impacted by what Microsoft learned from the Windows 8 and Surface launch experience."

The general consensus is that Microsoft's Surface strategy has been a failure so far. Sales have been tepid. Observers have criticized the company's confused marketing of the dual line, which features a more-or-less pure tablet powered by Windows RT and a 2-in-1 hybrid fueled by Windows 8. And there's no sign that Microsoft's efforts — its own or those of its OEM partners — have made meaningful strides against devices running Google's Android or Apple's iOS.

But Microsoft won't throw in the towel, at least not anytime soon.

"Microsoft wants to have a position in hardware as an enabler for their software and services," said O'Donnell. "The bigger picture is to provide a better-quality service on their own devices, and that will continue to be the case. They'll continue to use Surface as their model for some of that."


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