Microsoft Surface Pro 2 Fail: Now What?

Source: http://www.flickr.com/photos/jfingas/

Source: http://www.flickr.com/photos/jfingas/

On October 26, 2012, Microsoft (NASDAQ:MSFT) brought its Windows 8 operating system and original Surface tablet to market. Windows 8, of course, was a highly anticipated event, as it represented the first major software release out of Microsoft in three years. Prior to the launch, an upbeat David Goldman and CNN Money lauded Windows 8 as a “game changer.” The Microsoft Windows 8 concept was designed to integrate traditional personal computer, tablet, and smartphone features together beneath one modern or metro interface. The Microsoft Surface machine came to fruition as an attempt to bridge the technical gaps separating PCs and tablets. Still, numerous analysts went on to rip the Windows 8 movement as a “failure [and] disaster,” despite superfluous hype out of Redmond.

Microsoft ultimately went back to the drawing board, and made Windows 8.1 available for public consumption on October 17, 2013. Shortly thereafter, Microsoft launched its Surface Pro 2 tablet on October 22, 2013. Most likely, Microsoft will make software upgrade available for free to Windows 8.1 and Surface Pro 2 users this spring quarter. Still, Adrian Kingsley-Hughes has already dismissed the Windows 8.1 update as “meh.” In his recent ZDNet piece, Kingsley-Hughes argued that an awkwardly misguided Microsoft appears convinced that Metro is the future, rather than scrapping the concept altogether. Disastrous Surface Pro 2 sales may confirm that Microsoft cannot be everything to everybody.

Surface Pro 2 Specifications

Microsoft Surface Pro 2 prices range between $899 for 64GB in storage and $1,799 for the 512GB model. The Surface Pro 2 competes directly against the Apple (NASDAQ:AAPL) iPad and MacBook Air. The 16GB iPad Mini with Wi-Fi connectivity does begin at $299. From there, the top-of-the line 128GB iPad Air with Wi-Fi and cellular connectivity retails for $929. Apple’s 13-inch MacBook Pro with Retina display featuring 8GB of memory alongside 512GB in storage also retails for $1,799. Intel Haswell, or Core i5, chips power both the Surface Pro 2 and MacBook Pro. Last year, Apple sold 71 million iPads, which generated $32 billion in fiscal 2013 revenue. Microsoft, for its efforts, actually took a $900 million charge on Surface RT inventory write-offs in 2013. Surface Pro 2 sales will remain especially weak through 2014.

Microsoft Surface tablets are notable for billfold casings, functional keyboards, and attached kickstands that enable the portable machine to fold out into a functional workstation. The Surface Pro 2, of course, was billed as the premium Microsoft tablet; its tablets weigh in at 2 pounds and stand 10.81 inches tall by 6.81 inches wide. The Surface Pro 2 tablet and its 10.6-inch screen display graphics in 1920 X 1080 pixel resolution. It can also convert into two separate 720-pixel cameras, and its battery life now approaches eight hours of use, which is a sharp improvement above the 4-5 hour battery work times of the first iterations of the Surface tablet.

The Tablet Duopoly

Microsoft Windows may emerge as a third wheel, at best, beside the Apple iOS and Google (NASDAQ:GOOG) Android tablet duopoly. Again, the Surface Pro 2 tablet is very much overmatched against the Apple iPad and MacBook Air at premium price points. Both Forbes Magazine and Mashable have mocked Microsoft for being “confused” in its attempt to hawk Surface Pro 2 tablets to the marketplace. Certainly, prospective buyers may have difficulty differentiating between the Surface Pro 2, Surface RT, Windows 8, and Windows 8.1. Microsoft may actually do further damage to its brand if it continues to stand behind the Surface name and movement.

On January 29, 2014, research firm IDC released data summarizing the size of the global tablet market through the fourth calendar quarter of 2013. The lead into the IDC report cites “significant slowing” of the table market. For Microsoft, the “meh” response to Windows 8.1 and the Surface Pro 2 tablet may prove disastrous amid a maturing and consolidating industry.

According to IDC, Apple (33.8 percent) and Samsung (SSNLF.PK) (18.8 percent) combined to control 52.6 percent of the Q4 2013 tablet market. IDC listed out Apple, Samsung, Amazon (NASDAQ:AMZN), Asus, Lenovo, and “Others” as tablet vendors. As such, Microsoft shipped fewer tablets than fifth-place Lenovo, which sold 3.4 million tablets through Q4 2013. Wayne Williams and Beta News would thoroughly rip these results as “pathetic.”

The Bottom Line

Microsoft will be set to close out its $7.2 billion acquisition of Nokia (NYSE:NOK) device and service businesses over the next two quarters. Last year, Nokia launched its very own Lumia 2520 tablet running Windows RT software. The Nokia tablet can only add to the aforementioned confusion associated with the Windows brand. Going forward, Microsoft shareholders are likely to be on the hook for hundreds of millions of dollars to shut down this Nokia Lumia 2520 tablet unit. These inevitable charges will cast further light upon Microsoft’s failed foray into mobile.

Last quarter, Microsoft folded its Surface sales into its Devices and Consumer Hardware division. Microsoft Devices and Consumer Hardware tallies also included the popular Xbox gaming console. Still, Devices and Consumer Hardware generated a mere $411 million in gross margins off $4.7 billion in Q2 2014 operating segment revenue. Be advised that Microsoft closed out its second-quarter of fiscal 2014 on December 31, 2013. Apple collected $11.5 billion in net sales off the iPad platform during its Q1 2014, which also coincided with the holiday season.

Going forward, prospective Microsoft investors must be willing to hitch their wagons to a shrinking personal computer business. Again, Microsoft shareholder returns may be described as “meh,” at best. Ongoing upgrades to the Surface lineup will fail to right the ship back towards real growth at Redmond.

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