Surface do-or-die moment? Not so fast

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."

In particular, analysts see promise in the Surface Pro line, the second-generation tablet, called Surface Pro 2, and a rumored third-generation that may be unveiled next week.

"Surface Pro is making some headway in corporate environments," said Ross Rubin, an independent analyst at Reticle Research, in an email reply to questions. "The big improvements we saw in the Pro 2 in terms of performance, thickness and battery life made it a much more appealing offering, although it seems that much of the adoption is still in verticals such as healthcare."

Powered by Windows 8, and able to run not only the newer "Metro" apps but also traditional Windows software, the Surface Pro line has been touted by Microsoft as a 2-in-1, a device able to function alternately as a tablet and a notebook replacement.

The jury is still out on the viability of 2-in-1s, although some researchers, Gartner especially, are bullish on the concept.

But the high price of the Surface Pro has been a big barrier. The least-expensive 64GB model currently costs $899, with another $130 for a keyboard. Those prices are far higher than comparable tablets, higher, too, than a typical notebook, and closer to premium ultra-lights like the MacBook Air, which recently got a price cut to bring its entry-level 128GB model down to the same $899, keyboard included.

To make any headway, Microsoft must price its Surface, particularly the anticipated 7- on 8-in. Surface Mini, more aggressively, said Moorhead. "I expect a premium price point [for the smaller Surface] but it has to be less than Apple's," said Moorhead. "The question is, what features will they take out to make this a competitive device?"

Apple prices its Retina-equipped iPad Mini -- a 7.9-in. tablet -- at $399, and 2012's first-generation iPad Mini, which sports a lower-resolution screen, at $299.

"Microsoft has to take market share away from Apple, but if they price [the Surface Mini] like other Surface products, that won't happen," said Moorhead.

No matter what Microsoft shows off on Tuesday, analysts expect the company to stick with tablets. "I get the sense that they're thinking long term and in innovative ways about how [the Surface] can leverage their platform and services," said O'Donnell. "We have to start thinking about this as a big hardware business that consists of multiple pieces, everything from keyboards and mice to tablets and smartphones, all under one hardware division."

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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