Microsoft (NASDAQ:MSFT) released its Surface line of tablets last year. However, despite price cuts, the company had to write down $900 million in Q2 2013 due to unsold inventory. The company is now gearing up to launch two variants of the tablet and has completely revamped its next-generation offering. The new devices are thinner, lighter and have longer-lasting battery compared to their predecessors. Additionally, Surface 2 tablets have improved speed and graphics performance.
While the launch of tablets coincides with the release of Windows 8.1, it remains to be seen whether these devices will fare better than their precursors or not. In this article, we will look at the specification of these tablets. Additionally, we will also explore the factors that could affect Surface 2 sales.
The New Surface Tablets
While Surface 2 uses Nvidia’s Tegra 4 processor to run Windows 8.1 RT, Surface Pro 2 uses Intel’s i5 “Haswell” processor to run full version of Windows 8.1. Both the Surface 2 and Surface Pro 2 share the same 1,920×1,080-pixel-resolution screen. Unlike the earlier version, the new Surface tablets also provide supports to both, Modern UI touch apps and desktop software. Microsoft claims that both these tablets are faster than their predecessors. The Surface 2 starts at $449 while the Surface Pro 2 starts at $899. However, the internal storage of Surface Pro can be upgraded to a 512GB SSD. The devices will be available in the market starting October 22. Microsoft is trying to push the sales of these tablets by offering freebies such as full version of Microsoft Office 2013 RT, but it remains to be seen whether this push would boost the Surface sales.
Surface OS, Windows 8.1, Still Has To Prove Its Mettle
In our article published earlier, we have argued that Windows 8.1 may fail to deliver the anticipated growth in licenses after its launch in October. One of the primary reasons why we think Windows 8.1 will fail to gain traction is the lack of a comprehensive Windows ecosystem. The new tile design of Windows 8 confused some customers and undermined its usability and this has affected sales. This has also negatively affected the growth and development of the Windows ecosystem. Additionally, the developer community has shied away from developing Windows apps since returns for them are not compelling. Unless the underlying problem of Windows 8 ecosystem is fixed, Surface tablets sales will continue to suffer.
Surface 2 Sales To Remain Lukewarm
Competition in the tablet market is intense, and Apple with a market share of almost 30%, continues to lead the tablet hardware industry. While Apple and Samsung devices are very popular among users, other companies are having difficulty selling their tablets. As a result, several companies are trying to differentiate their products with different form factors (sizes) and lower price points. This has led to a more fragmented tablet industry that has different sizes and prices, ranging from $100 for a 7 inch device to over $800 for the 11 inch device. It will be difficult for Surface to stand out amongst the crowd.
Microsoft has priced the Surface 2 tablet at a premium. We believe that this will negatively impact the tablet sales as the company, unlike Apple or Samsung, does not have a loyal user base. The adoption of tablets in developed countries fueled the first wave of global growth while strong demand in emerging markets will drive the next phase. However, consumers in these markets are price sensitive and Microsoft will have a hard time in selling its tablets in these markets. Therefore, we expect that Microsoft might end up discounting its prices in near future so as to bolster sales.
It can be argued that Microsoft can push its sales through original equipment Manufacturers (OEM), but these OEM also have their product that competes directly with the Surface. Therefore, Microsoft might face some hurdles in pushing the sales to its enterprise clients through these OEMs.
IDC has predicted that mini tablets (sub-8 inch screens) will account for bulk of the tablet units shipped in 2013.  However, Microsoft has ignored this market and continues to push for the saturated 10.4 inch space. We think that Surface will have difficulty in gaining market share in the 10.4 inch space, as incumbents such as Apple and Samsung have a strong hold in this segment.
Considering these factors, we believe that Microsoft Surface tablet will fail to boost Microsoft’s sales.
We have $41 price estimate for Microsoft, which is approximately 30% above the current market price.
- IDC Forecasts Worldwide Tablet Shipments to Surpass Portable PC Shipments in 2013, May 28 2013, www.idc.com [↩]