Microsoft steers same strategic course in Surface do-over

Isn't budging from strategy to push own devices to business first

Microsoft's refreshed Surface 2 tablets, which the company unveiled last week and will start selling Oct. 22, illustrate that Microsoft has not changed its ongoing strategy in mobile, analysts said.

While some pundits called for Microsoft to radically overhaul the Surface -- which has struggled to the point of a $900 million write-off in July -- Microsoft instead stayed the course.

"They're sticking to their original strategy," said Ezra Gottheil of Technology Business Research, of the new tablets. "This is a reference design to show what can be done with the platform. They're not after a large amount of market share, but simply to show [Windows 8.1] is a viable platform."

On Sept. 24, Microsoft revealed its Surface 2 and Surface Pro 2 tablets -- replacements for 2012's Surface RT and early-2013's Surface Pro -- and trumpeted the new devices as better versions of their predecessors, with faster processors, longer battery life and other, less substantial tweaks. The form factors remained the same -- 10.6-in. screens with a 16:9 aspect ratio that encourages landscape mode use -- as did the prices for the Surface Pro 2.

Microsoft will begin selling the new models in three weeks at prices starting at $449 for the Surface 2 and $899 for the Surface Pro 2. The keyboard covers, which the Redmond, Wash., company aggressively promotes, even struts in its head-to-head comparison advertisements that mock Apple's iPad, remain separate purchases at prices from $79.99.

Even before Microsoft trotted out the Surface 2 tablets and disclosed their prices, bloggers, pundits and analysts had tossed all kinds of unsolicited tablet advice at the company. Among the advice was for Microsoft to slash prices, sell a smaller Surface "Mini," give up on Windows RT and the Surface RT, now called the Surface 2, and even forget tablets entirely because Windows is a distant third in, at best, a two-horse tablet OS race.

Microsoft didn't take those calls.

"They're plugging away," said Patrick Moorhead, principal analyst at Moor Insights & Strategy. "That's what they do. Zune and Xbox lost a ton of money, but they kept plugging away with Xbox to break even today. Sometime that works, like Office and the browser," Moorhead added, diving deep into the past, when Microsoft beat the likes of WordPerfect and Netscape into the ground, "and sometimes that doesn't. Their social endeavors have not."

Microsoft has a reputation for continuing projects and backing strategies after years of failure, hoping to turn a flop into a financial windfall. Bing, for instance, has failed to unseat Google or even threaten Google's majority share in search, even after running through billions of dollars.

There's nothing wrong with sticking to guns, Moorhead said, pointing out Microsoft's successes as well as its failures after stubbornly maintaining a strategy. "But there's a difference between a promise you make and the execution you deliver," he said. "The [Surface] idea is good and makes sense, but it's not been executed well."

In the larger scheme, Microsoft is committed to the Surface concept because it has committed to a strategic pivot where "devices and services" will replace packaged software as its revenue generator. Minus Surface, Microsoft would have no first-party devices until it wraps up the acquisition of Nokia early next year.

"Our strategy will focus on creating a family of devices and services for individuals and businesses," CEO Steve Ballmer wrote in a memo that outlined the switch. "We will design, create and deliver through us and through third parties a complete family of Windows-powered devices." [emphasis added]

But while it refused to give up, even on Windows RT -- which only Microsoft now supports -- nor did the company expand the potential market for its tablets with the revamped Surface 2s, analysts argued.

Strategically, Microsoft still considers the Surface as first a PC in disguise, and only second as a tablet. "If you think of the Surface line as creating a continuum of products that spans from tablets to what we historically think of as PCs, Surface in general skews more towards that PC sensibility," said Ross Rubin, founder of Reticle Research and formerly an analyst with the NPD Group. "They probably don't care too much about the iPad market per se, but they do worry about tablets cannibalizing traditional notebooks. And they're certainly not going to be in the $150 commodity product market, the pure consumption market."

Microsoft showed that part of its strategy -- which it hewed from before the launch of the first-generation Surface -- at the Sept. 24 rollout event, when Panos Panay, the general manager who leads the Surface team, spent considerable time talking up the Surface 2's and Surface Pro 2's productivity and business chops. The former comes with a Windows RT-specific version of Office, including the new addition of Outlook, Microsoft's email client. The latter can run the real Office suite, albeit not one explicitly designed for touch. The unveiling of a $199 docking station, set to ship in early 2014, was another pointer to the it's-an-ultralight-notebook pitch Microsoft's long used.

Rubin saw the Surface Pro 2, and Microsoft's constant drumbeat that the device is actually a top-tier ultralight notebook, as consistent with the company's strategy to press on the enterprise front over the consumer. And for once, it's timing is spot on.

"Microsoft is looking to position its devices in a place where it can ride what it believes will be a rising tide," said Rubin, of a model where tablets are as capable as a dedicated clamshell-style laptop, and can, when the need arises, migrate from mobile to portable to desktop usage cases.

"I don't think they're too early this time," Rubin said.

Historically, Microsoft has had a premature problem. Critics have cited everything from smart watches (2004) and tablets (2000) to mobile phones (2003) and smart TV (as early as 2000) as examples of Microsoft prematurely pitching a product that ultimately was popularized by others years later.

"It gives Microsoft a sensible place in the tablet space," said Gottheil of Microsoft's two-in-one strategy. "If you need a device that does PC things, then this is excellent at that. It's a very elegant solution."

Like Rubin, Gottheil saw Microsoft's reiterated Surface strategy as more concerned with stemming the desertions from traditional PCs -- long the foundation of its Windows business, and leverage for the rest of its biggest money makers, such as Office, Exchange and Windows Server -- than in directly competing with Apple's iOS and Google's Android in tablets. "This keeps PCs from erosion from other OSes," said Gottheil, referring to Microsoft's thinking.

He wasn't as willing to join Rubin on timing. "I think the Surface is too early," Gottheil said. "And the poor messaging by Microsoft and price resistance hasn't helped."

Like most outsiders, the analysts had a much tougher time digesting the Surface 2, and what it meant in the context of Microsoft's larger strategies. Part of the reason was the visible rejection of the Surface RT evidenced by the $900 million write-off. But they had other questions.

"They have a lot more work to do building out the apps," noted Rubin, repeating a refrain of many since last October. "The dilemma is that the Surface 2 retains the mainstream price point and some advantages [over rival tablets], but all those relative advantages have stayed the same."

In other words, after the failure of the Surface RT, Microsoft's plunging ahead with a product that's little changed from its predecessor, begging for a repeat.

Not surprisingly, Microsoft's Panay didn't see it that way last week. He trumpeted the 10-times increase in the "Modern" nee "Metro" app count over last year, and claimed that the Surface 2's new quad-core Nvidia Tegra 4 processor boosted performance by three to four times that of the original tablet. He also said the Surface 2's battery life had been extended to 10 hours.

The analysts agreed that Microsoft's Surface RT/2 strategy was easiest to describe as what it wasn't, not what it was.

"I think it's more about playing defense of the erosion of the PC as opposed to driving volume," said Moorhead.

Rubin echoed that. "If their number one goal [was volume] they would have done a $250 7-in. tablet," he said.

Microsoft's not. Although rumors circulated earlier this year that it would, those plans are now reportedly for 2014, perhaps deep into the year, according to longtime company watchers like blogger Paul Thurrott.

Microsoft may have shied away from a "Mini" Surface for good reason, having enough insight to realize that its tablet strategy was inimical to direct competition with the iPad and Android devices.

"What they didn't expect was tablet makers to fundamentally shift in 15 months," said Moorhead. "The Nexus 7 came out [last summer], and everything changed. Now 80% of tablets are seven to eight inches. And Windows is optimized for an 11-inch tablet, so how do you squish a UI designed for 11 inches into seven inches?"

He also pointed out that a key advantage Microsoft's used -- and continues to use -- may play little if any role in a smaller tablet. "The value proposition will be much harder, because Office doesn't bring much of anything to an eight-inch tablet. People are not going to create content on something that size."

Moorhead was the least optimistic of the analyst trio that Microsoft's "same-as-it-ever-was" strategy with Surface would work. "Microsoft is trying to fight Apple at one end and Google at the other," he said. "The problem with that strategy is that very few have fought a two-front war and been successful."

Rubin challenged that, seeing Apple in the center of the tablet market, Android playing at the bottom. That leaves room for Microsoft.

"Android is trying to attack the iPad from below, Microsoft is trying to attack from above with larger screens, more features, more options in terms of a hybrid," Rubin said. "Microsoft clearly has an opportunity."

This article, Microsoft steers same strategic course in Surface do-over, was originally published at Computerworld.com.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed . His email address is gkeizer@computerworld.com.

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