Microsoft's quarterly results advanced many stories out of Redmond, from the continuing success of its commercial cloud services, to a $7.5 billion dollar write-down after the purchase of Nokia's devices and services section. Forbes' Aaron Tilley looks at the quarterly numbers, but I want to zero in on one of those stories.
Microsoft was proud to announce the increased revenue from the Surface device business. Does that mean that Microsoft can now regard the Surface adventure as a success?
It's certainly a qualified success, as I'm about to show, but there are a number of issues that CEO Satya Nadella and the rest of Microsoft needs to keep in mind before they crack open any champagne.
On the positive side, the Surface business is in the enviable situation where it is not losing money in terms of the hardware revenue. While there are likely additional costs, especially around marketing, the Surface team has the financials moving in the right direction in respect to the design and manufacturing. There will also be additional revenue flowing through Microsoft's cloud services (including OneDrive and Office 365).
While the revenue has dropped back from earlier quarters this year when it passed the one billion dollar mark, the 117% growth from the equivalent 2014 quarter shows a healthy product line - and of course this year Microsoft did not have to take a $900 million charge because of excess inventory (which was the case in 2014 with the Surface RT).
The biggest win for Microsoft, and why I think that Microsoft can use the word success, is that Redmond has proven the market for a convertible device, and one with a larger screen at that. The twelve-inch Surface Pro 3 has led this charge and proved that there is a market for a tablet/laptop hybrid. That should give manufacturers the confidence to explore the space with their own designs.
Given the PC market last year sold three hundred million units, it's unlikely that the Surface family of devices marketshare is going to be significantly higher than one percent. That should not represent a threat to the manufacturers (unlike smartphones, where the vast majority of Windows Phone sales were made by Redmond).
But there is still a long way to go before the Surface family can think 'job well done'. It may well have improved on its own sales, but that 117% growth is less impressive when you consider the low base that Microsoft is growing the Surface from. If the same levels of growth continue over the next few years, then there's something to write home about. At the moment it's all about the potential.
Surface sales are still far behind the leading tablet manufacturers, with IDC reporting over 47 million tablets were sold in the first calendar quarter of 2015 - and Apple taking 26.8% of that market with the iPad.
While every manufacturer deals with spikes in sales around the launch of a new product, the established players are able to smooth out that curve between major releases. Microsoft is not yet in that position, and the sales pattern of the Surface units are focused heavily around the launch periods. The increased coverage when the hybrids are announced is not sustained throughout the year. More promotional work is needed if Microsoft want to reduce the spiky nature of the sales graph.
How big does Microsoft want the Surface range to be? It represents around 4% of Microsoft's total revenue, hardware rarely exhibits high profit margins, and it's arguably not a major part of the 'cloud first mobile first' strategy that Nadella is championing.
Yet the Surface family has shown the world Microsoft's vision of what it believe a modern computer could be. It has proven that a hybrid format is viable in the marketplace both in terms of user acceptance and in terms of costs. And it is tightly tied to Microsoft's cloud services, arguably showing the way forward for Microsoft as a company.
That is what success for the Surface looks like. Mature and desirable hardware, a strong reference design that leaves space for partners to innovate around, and all in step with Microsoft's current cloud strategy.
