Surface revenue does a U-boat, and dives

Microsoft blames line's age and tough competition for its biggest year-over-year beating

Revenue generated by Microsoft's Surface hardware during the March quarter was down 26% from the same period the year before, the company said yesterday as it briefed Wall Street.

For the quarter, Surface produced $831 million, some $285 million less than the March quarter of 2016, for the largest year-over-year dollar decline ever.

Microsoft blamed the portfolio's age and increased competition from hardware partners for the fall-off. "Our Surface results fell short of expectations impacted by end-of-product-lifecycle and increased price competition," contended Satya Nadella, Microsoft's CEO, in the Thursday earnings call.

The Surface Pro 4, the portfolio's top seller, was introduced in October 2015, and has not been refreshed since then.

Analysts accepted Microsoft's reasons for the downturn.

"There is competition that is lower-priced," said Carolina Milanesi of Creative Strategies in a Friday interview. "There's not just more of the same, but a lot that are positioned in the same space are cheaper. And there were expectations that we would have seen a [product] refresh that we haven't seen yet."

Jack Gold, principal analyst at J. Gold Associates, echoed Milanesi on the age angle. The revenue decline "indicates that the aging product needs a refresh badly," Gold wrote in a note to clients today. "Price cutting and competing vendors' products will continue to create declines until new product is released, rumored for later this year."

Microsoft threw cold water on any significant changes to the Surface line before June, forecasting that the current quarter will also post a revenue decline.

Initially, Surface was pitched by Microsoft as a kick-in-the-pants to its partners, the OEMs, or "original equipment manufacturers," which until 2012 had had a lock on the Windows hardware market. Microsoft meant to show the OEMs what a cutting-edge, premium-priced device could do, and how it could best demonstrate the power of Windows.

Milanesi rejected the idea that the quarter's revenue decline signaled retrenchment by Microsoft, that the company considered the line's mission fulfilled by the rise in 2-in-1s from partnering OEMs.

"Surface as a revenue segment is important; it's not just a reference design," said Milanesi, using the term bandied when Microsoft first entered the personal computer hardware space.

One reason why Surface carries weight at Redmond, said Milanesi: The 2-in-1, tablet-slash-notebook mostly sells to enterprises, or to employees who buy it themselves for work. That plays to Microsoft's own company-wide emphasis on corporate customers. It also brings the usual advantages earned by courting enterprises, including less price sensitivity and, unlike the consumer market, a steadier calendar that doesn't rely on high seasonal sales at the end of each year.

Even so, Milanesi thought Microsoft was missing an opportunity by focusing on business sales of the Surface, particularly the Surface Pro. "Microsoft needs to do more than just the enterprise -- such as looking at higher ed students, people who may have picked a MacBook Air -- and see what they can do in that space," she argued.

Join the newsletter!

Or

Sign up to gain exclusive access to email subscriptions, event invitations, competitions, giveaways, and much more.

Membership is free, and your security and privacy remain protected. View our privacy policy before signing up.

Error: Please check your email address.

Tags microsoft surface

More about CreativeCreative StrategiesMicrosoftWall Street

Show Comments
[]