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Surface of the numbers: How Microsoft reinvented the PC



Video: Microsoft Goes For iPad With Low Cost Surface Go

Microsoft has metamorphosed several times in its business life, but one move has remained consistent all the time. When the company decides to enter a market, it is relentless in its efforts to get a resilience.

It was true in the 1980s and 1990s when Bill Gates and his lieutenants managed to reach a market position so dominant they lost a landmark antitrust attempt.

And it is still true in the Satya Nadella era, as evidenced by the surprising success of the Microsoft Surface Division.

Microsoft only closed the books in the 201

8 fiscal year. As usual, it has not broken out unit sales or revenues for the Surface division, but after reviewing the last four quarterly reports, I could calculate that the division had a total revenue of around $ 5 billion.

Nobody in their right mind would have put an effort on that number five years ago. At the end of FY2013, Microsoft had to take a one-off $ 900 million to calculate the spectacular error in Surface RT.

Many companies would have given up at that time, but not one of Steve Ballmer, who famously described Microsoft's approach as "long-term, firm and partner-centric."

When he once told an arena full of partners, "We do not go home. We continue to come and come and come., Standing, Patient." (As Ashlee Vance noted when transcribing these comments to New York Times "The man likes to talk for three years.")

In fact, while PC transfers have generally been flat or down in the past four years, Surface business has grown at an annual rate of over 22 percent per year.

  Surface Revenue-fy2014-2018.jpg

Data from Microsoft SEC Archive

To put it in perspective: In less than six years, Surface business has grown to around 20 percent of Apple's entire Mac- business. Apple brought in $ 25 billion in revenue during the fiscal year ending September 30, 2017. Composite annual growth since 2014 is 2.4 percent.

And this trend will last in 2018. For the last two quarters, Apple reported that Mac revenue was 5 percent and flat respectively.

Similarly, Microsoft's Surface business was 25 percent and 32 percent in the last two quarters. (In fairness, Microsoft's SEC archives note that the comparative figures last year were "affected by the product's life cycle dynamics.")

So what does this steady success mean in a market where other OEMs struggle? In a word, good products.

After the surface RT disaster, Microsoft did not have much luck with its first two Surface Pro models, which were big, quirky, and unlike anything the market had ever seen. (Being a showcase for the unprotected Windows 8 did not help either.)

And then Surface Pro 3 came on sale a few days before the start of Microsoft's fiscal 2015. At the end of the current fiscal year, the company found In its official SEC filing, "Surface revenue increased 65 percent to 3.6 billion dollars, mainly due to Surface Pro 3 units sold."

(I noted with interest that the FY2015 Annual Report was the only time Microsoft has revealed its annual surface income, instead of hiding it in a number of arithmetic issues during four quarterly reports.)

The success of Surface Pro 3 was due to solid engineering , as reviewers who had scoffed on previous models, the slim, well-balanced newcomer generally gave good reviews. (For a sampling, see "The Ultimate Surface Pro 3 Evaluation.")

The device group, of which the surface is part, had a terrible FY2016 when Microsoft began its painful output from the smartphone industry. The surface was the only bright spot, with an increase of $ 486 million or 13 percent. The company emphasizes the October 2015 release of Surface Pro 4 and Surface Book as the main driver for that growth.

In FY2017, surface operations had a turnover of about 2 percent from the year before, reflecting product launches that were solid but not spectacular: Surface Studio (a low-priced product targeting a narrow market segment), an updated Surface Pro and Surface Laptop, which was saddled with the weird Windows 10 S.

For the past year, my calculations have reached about 17 percent thanks to the well-reviewed Surface Book 2 and a well-stocked commercial channel that apparently has been successful in getting corporate customers to buy Surface-labeled products in volume.

By 2019, Microsoft is attempting to extend its winning tension for a year with a bold move.

The recent announcement of the Surface Go product line is a big change from playbook that has worked so well in recent years. Instead of targeting premium products at premium prices for well-hardened professionals, Surface Go aims at a price of $ 399.

It's all in the segment where the original surface RT failed so miserably.

At that price, I would normally be inclined to reject Surface Go out of hand. But given the quality of the products that Microsoft has provided under the Surface brand lately, I'm fascinated.

Can Panos Panay and his team work the same magic with this market segment as Surface Pro and Surface Book made too high? Ask me again after the accounting year ends June 30, 2019.

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