Narrative: Microsoft's Hardware Push
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Narrative: Microsoft’s Hardware Push (Jan 24, 2017)
Written: January 24, 2017
In 2012, Microsoft launched its first Surface devices, and in 2014 it closed its acquisition of Nokia’s devices business. These two moves marked Microsoft’s first serious foray into computing hardware outside of the gaming space, with entries in the laptop/tablet and smartphone markets. Both flowed from Steve Ballmer’s Devices and Services vision for Microsoft, which in turn was a recognition that software might be eating the world, but fewer and fewer people were paying for it anymore. Devices and Services would be the business models that would pay in the coming years, and Ballmer felt that meant Microsoft needed to be a device vendor in key categories.
Looking back now, the Surface strategy has panned out pretty well, delivering a useful little revenue stream for Microsoft while also pushing OEMs to create more compelling hardware of their own. The Nokia acquisition has of course not worked out nearly so well. It may have earned Windows Phone a temporary reprieve, but the trajectory of the phone hardware business was inexorably downward almost from the moment the acquisition closed. Neither renewed investment in the hardware nor the Windows 10 convergence of PC and mobile operating systems has done anything to stem the decline. a little under three years after the acquisition, there’s basically nothing left to show for it – the feature phone business was sold off and the smartphone business has dwindled to nothing.
With hindsight, it’s arguable that Microsoft might have been better served giving up on Windows Phone and pursuing an Android strategy, either with or without Nokia on board, though given the struggles of the major Android vendors, it’s not entirely clear that would have worked out better, especially given the tensions between the Google services baked into Android and Microsoft’s own. Another strategy, which the company has essentially embraced several years later, is to become an agnostic provider of apps for all mobile operating systems rather than trying to own either a major mobile OS or smartphone vendor. In some ways, that strategy has now worked out well, with several Microsoft apps popular on both iOS and Android, though most of them aren’t monetized at all, raising the question of how Microsoft will make money from all this.
At the same time, Surface revenue is heading for its first period of revenue decline – something that should be confirmed when Microsoft reports its earnings later this week. That’s because it didn’t update the Surface Pro, by far the best seller in the line, this fall, while the minor bump to the Surface Book and the release of the more niche Surface Studio won’t make up the difference. There is an ongoing question about the role of the Surface line now that OEMs are stepping up their efforts and producing more compelling machines of their own – should Microsoft step back and allow OEMs to take over, or should it continue to pursue this market opportunity? If the latter, how does it justify its continued presence given its original rationale or prodding OEMs to do better?
Microsoft here faces the same inherent tensions as Google with its hardware push (see the relevant narrative here): its OEMs are its customers and partners and yet it has chosen to compete with them. In Microsoft’s case, my sense is that the focus of the Surface is narrow enough that it doesn’t present a broad threat – it’s targeted at creative professionals who value stylus input, rather than at the mainstream laptop user (or at least that’s the theory – I’m not sure it holds up in practice given those I’ve seen using Surfaces). In both cases, though, these erstwhile OS sellers are now targeting the most lucrative and profitable end of their respective OEMs’ markets with their own hardware. Microsoft is definitely going to have to gauge its strategy here carefully to ensure that it doesn’t put a smallish hardware revenue stream above the interests of its OEMs in the long term.
Microsoft Exec Debunks OEM Rumors About Killing Off Surface (Oct 10, 2017)
A bizarre story did the rounds last week based on executives from several Windows OEMs saying that Microsoft would likely kill off its Surface line at some point in the near future. It should have been obvious on the face of it that (a) these OEMs compete directly with Surface and likely rather resent the way it’s quickly gained lots of positive attention in the premium segment, and (b) Microsoft has just this year expanded and updated the Surface line, an odd thing to do if it’s thinking of killing it off. And yet the rumors persisted to the point where Panos Panay, who runs hardware at Microsoft, felt the need to specifically address and debunk them. One of the reasons the OEM execs gave for Microsoft’s likely exit from the space was poor margin performance, but of course low margins characterize almost the entire consumer electronics industry and PC vendors are no exception. Microsoft hasn’t commented on Surface margins for a while now, but did say on an earnings call in January this year that its Surface gross margin dollars had grown, and it had said previously that the business was gross margin profitable. Now, none of that it to say that this is a scale business or that it’s an enormous contributor to Microsoft’s business overall – it’s just 5% of revenue and likely a tiny fraction of profits – but it’s clearly strategically important to Microsoft and performing well enough financially to be worth the continued investment.
via Business Insider
This feels more like a confirmation of how I think many of us were already thinking about Microsoft’s approach to Windows 10 Mobile, but we do now have official confirmation now from one of the erstwhile champions of Windows Phone and Microsoft’s smartphone hardware that the platform is essentially dead in terms of future development. Yes, there are companies that have deployed devices on the platform, and Microsoft will support them, but that’s about it. Notably, Joe Belfiore, an exec in the Windows team and for quite some time the face of Windows on mobile devices, says he’s now using an Android device. This outcome has seemed inevitable for a long time now, and Microsoft arguably took far too long to make it official, giving a small number of fans false hope that the platform would somehow live on. The actual number of users must be absolutely tiny at this point, while Microsoft’s main focus in mobile for the last several years has been making or acquiring really good apps that could run on iOS and Android, albeit without an obvious strategy for monetizing most of them.
via Windows Central
In the second somewhat controversial decision by Consumer Reports in the past year, it has withdrawn its recommendations from several of the Microsoft Surface hardware products for reasons of projected reliability. Though it rated those products highly in its reviews and recommended both a couple of Surface Laptop and a couple of Surface Book models, a recent survey among owners of older Surface products suggested a 25% hardware fault rate within two years of purchase and that’s what led to the yanked recommendations. Last year, Consumer Reports somewhat controversially failed to recommend Apple’s new MacBook Pros over battery life issues that turned out to be caused by somewhat unusual testing conditions combined with a rogue script, something that it eventually reversed itself on, but there’s little prospect of a similar reversal here.
Though Consumer Reports has long used reliability of past car models in projecting the same for newer models on the basis that they often share platforms and components, that approach feels flimsy when applied to consumer electronics, and especially different models from the same company, given the frequent changes in components. If past reliability took a hit from a single component and that component isn’t present in the new devices, it would be completely irrelevant, but the lack of transparency here from Consumer Reports makes it impossible to know what’s really going on. Given the small share of the total PC market Surface captures, I also wonder just how much data CR has and how representative it really is. Overall, this feels rather like Consumer Reports trying to get attention for itself much as it did with the MacBook Pro issue, where it failed to provide adequate insight into its testing process until pressed by Apple. It’s clearly bad news for Microsoft, whose Surface hardware has generally been very well reviewed in the last couple of years, though most corporate buyers won’t be checking Consumer Reports for reliability ratings and will instead go by their own experiences, which as far as I can tell have generally been fine. Consumers, on the other hand, might lean more heavily on these ratings.
Update: Also worth noting are the overall reliability numbers for PCs, which are available within CR’s laptop ratings section: there, Microsoft comes last of all, but only by one percentage point, while it says differences of five points or less are not meaningful, and that spread covers six PC vendors including market leaders HP, Lenovo, and Dell. So it’s not that Microsoft’s reliability is massively worse than other PCs, but that there’s now enough evidence (by CR’s reckoning) to indicate it isn’t as good as it appeared to be.
via USA Today
Microsoft has today announced a leasing and upgrade program for its Surface line, offering a 24-month payment plan for the devices, and an option to trade in for a new device after 18 months rather than paying it off over the full 24 months. The program is called Surface Plus and there’s also a version for business customers, though it seems like a missed opportunity not to call it Surface as a Service… We’ve obviously seen the installment and leasing models become the default for smartphones on US carriers over the past few years, and there are already examples of hardware vendors getting into the game directly, notably Apple’s iPhone Upgrade Program. So this is both a familiar model and a smart move for Microsoft, which recently began to offer bundled Windows and Office subscriptions to business customers and can now offer a single bundle of Surface hardware and those two software packages for businesses. But it’s also a great way to lower the barriers to entry for what are fairly pricey machines for the most part, as Microsoft has stayed firmly above the fray with its Surface line, in contrast to the much lower overall average selling prices of Windows PCs. The Surface Pro starts at $799 (or $33.29 per month over 24 months), while most of the models are over $1000. Reducing that to $40-60 per month for many models should make it much more affordable and predictable as a cost for both individuals and businesses. We’re going to see lots more of this, with hardware vendors packaging up access to one or more devices on a subscription basis with additional subscriptions to software, content, or other services layered on top.