Microsoft Surface Book 2: the best product that never should have existed

In the end, while generally building a product as a parts supplier (any tier) is a bad idea, Surface and Hololens both showcase that every rule can have valid exceptions.

Microsoft Surface Book 2
Microsoft

The Surface product line is fascinating in that it resulted, much like the Microsoft phone and Zune, from a problem that the firm was having that should have been resolved another way.  But, unlike those other two products, the Surface products have been surprisingly successful — while both the Zune and Microsoft Phone are showcase examples of why those that supply parts shouldn’t sell solutions in the same space. 

Now the problem in all three cases was that Microsoft was upset that the OEMs couldn’t compete with Apple, that Microsoft believed it could do a better job, and that Microsoft was wrong in the first two instances because they couldn’t.  So, I’d like to look at two things, why this generally doesn’t work, and why Surface (and later Hololens) uniquely worked while Zune and the Microsoft Phone were massively expensive failures. 

By the way this is in the shadow of the Surface Book 2 which is arguably the most desirable of the 2-in-1s currently in market.  (I’ll touch on that too).

Why you don’t compete with partners

In my community I’m a tad famous for one time sitting in the back row of a presentation by a tier one supplier who was building one of the best MP3 players in market and, after the presentation, telling them they were going to have to kill the product.   My peers thought I was an idiot, and when the firm called a few months later to tell me they were going to kill the product they made me swear I’d never take credit. 

The reason why this is a bad idea is leverage.  When a company like Microsoft goes up against a company like Apple one of their biggest advantages is their partners.   This played out powerfully with Windows.  You could certainly argue that the MacOS was better in many ways and the solutions more trouble free and integrated, but the combination of every single PC OEM and all their individual channel partners and sales people easily overwhelmed Apple and, at the end, Apple was left with something like 3% of the market for PCs.  Granted it was the most lucrative 3% but they basically went from being the PC market to having a toe hold.  

That’s the power the big Tier Ones have.  But when you choose to compete with your partners that reduces your resources to just your own, and it pisses off those partners who then may decide to buy from competitors or exit the segment.   So, Plays For Sure, which was Microsoft’s channel effort for MP3 players was doing poorly so Microsoft brought out Zune and not only killed Plays For Sure but failed at Zune because, alone, they were overmatched by Apple rather than the other way around. 

I’ll add two more things, because a supplier generally doesn’t sell to end users, they often don’t factor in all the costs of doing so particularly on the demand generation side, and they must set up redundant sales and marketing organizations to supply the services the OEMs had been supplying.  All told this means they generally massively underestimate the cost of the effort and with both Zune and Microsoft Phone, Microsoft spent around 10% to 30% of what was needed to overcome Apple.

It is interesting to note that Google succeeded with Android largely because they followed Microsoft’s old Windows strategy, creating an iOS clone that would move through OEMs, and not the strategy Microsoft used for Zune or the Microsoft Phone.

Surface

So, why did Surface work when Zune and the Microsoft Phone didn’t?  Largely because it was both targeted at an area where the OEMs performed poorly, and the lower marketing requirements and Microsoft’s marketing budget were close enough so that success was possible.   Certainly, it helped that everyone seemed to execute well, and it was in a market, PCs, that Microsoft knew as well as most.  

You see both Zune and Microsoft Phone were broad market products, but Surface specifically targets Apple in a segment that Microsoft, not Apple, dominates.    In PCs, Apple owns something like 90% of the high-end luxury PC market (if you don’t include gaming PCs).   The PC OEMs don’t do well in this segment because they mostly don’t get that you really need tightly targeted marketing, execution, and, when possible service.  Dell has the closest to this with Alienware but, Apple’s effort is more luxury (like Cadillac), while Alienware is more performance (like Corvette). 

There was a decent case on this in automotive.  Honda, Toyota, and Nissan created luxury brands Acura, Lexus, and Infinity while Mazda just created a line.   Mazda was the only vendor not successfully able to compete with BMW and Mercedes as a result.   Surface became Lexus and likely should have been from an OEM, but no OEM wanted to do it, so instead it came from Microsoft and was successful.  As a targeted effort and because the OEMs don’t have a good choice when it comes to an alternative to Windows, Surface has been extremely successful.  Not the least of which it really is arguably the best, virtually only line that, particularly when sold through the Microsoft Stores, can provide something almost identical to an Apple experience.

Surface Book 2

In the Surface line the Surface Book 2 is the top.  This product attempts to lead on design, functionality, and range over any other product sold and it is designed to be the equivalent of a MacBook Pro + iPad Pro in the same product.  It’s biggest shortcoming is that it has poor battery life as a tablet but since these things are rarely used as tablets that hasn’t yet been a major sales problem (and, I expect, a future product will have the tablet component use an ARM processor to close that performance gap).  

This is the only product that can go from functional business tablet to near workstation performance in a notebook (with the discrete graphics option).  Like Apple this product is relatively expensive, even more exclusive, and design forward.  By design forward, I mean it is designed to be first and functional second.  This is often a keystone element in a luxury product.  Mainstream products compete mostly on price and specs, so function outranks design in their creation, people buy luxury products largely based on how they look placing design first and resulting in far more attractive offerings.  

The Surface Book, and now Surface Book 2, remain one of the prettiest products in market.  Top of the line is a 15” product at $3.3K that gives you a 1 TB drive, NVIDIA GeForce 1060 Graphics, and 16GB of graphics.

Wrapping up: lessons learned

I think there are three lessons in this.  The first is that the problems Microsoft was having with OEMs should have been addressed as a partner problem and the reasons the partners (OEMs) weren’t executing should have been sized and fixed.  Second a parts vendor going after a broad market served by OEMs will virtually always end badly for the parts vendor even if they are one of the most powerful companies in the segment.  And, three, the luxury market requires both products and services coupled with a distinct brand to succeed.  Ideally a company within a company like Acura or Lexus.   If you are going after a luxury vendor like Apple is, they you must have a tightly coupled focused approach with a brand and line consistent with the firm you are targeting.  Surface was tightly targeted at Apple and included enough of the Apple service like promise, particularly in stores, to be successful while the similar OEM efforts have largely failed.  

Now I should add there is one legitimate reason for a Tier One supplier, which is what Microsoft is with Windows, to do a complete product and that is if no one else wants to build it.  So, for instance, the Hololens, this is product that no OEM would be willing to take a chance on, yet it is one that could evolve to replace the iPhone (and potentially PCs), so here Microsoft both was right to create and sell the product but would be wise to pass it to channel and license it once they get to something close to critical mass or it pivots to address the current iPhone or PC markets.  

In the end, while generally building a product as a parts supplier (any tier) is a bad idea, Surface and Hololens both showcase that every rule can have valid exceptions.   Given the Surface Book 2 is the best Surface Product that makes it the best PC product (that I can currently think of) that never should have existed.  I’m putting PC as a qualifier in because it hit me that the Tesla S is arguably truly the best product that shouldn’t have existed but for a whole bunch of very different reasons but that’d be a whole different column.

[Disclosure:  Microsoft is a client of the author]

 

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