Microsoft’s Surface Problem Has Nothing to Do With Hardware

Microsoft (NASDAQ: MSFT  ) is planning to showcase its second-generation Surface tablets on September 23. Early reports indicate that the Windows-maker has not significantly altered the Surface, instead planning a modest improvement of the device's internals.

This might seem surprising -- the original Surface was a failure; in fact, Microsoft took a $900 million writedown on the tablet, as it had not sold as well as the company had expected.

Yet, the Surface's problems do not stem from its hardware -- rather, Windows continued lack of mobile apps puts it at a disadvantage to its tablet rivals.

The Surface's failure
To date, the Surface has unquestionably been a failure. From its launch last October through the end of June, Microsoft sold an estimated 1.7 million Surface tablets. Over that same period, Apple (NASDAQ: AAPL  ) sold 57 million iPads.

Why such a discrepancy? Admittedly, that figure includes the iPad Mini, of which Microsoft has no direct competitor, but the full-size iPad is still many times more popular than the Surface, even though they were (until recently) priced roughly the same.

The Surface even includes features the iPad lacks, like a USB port, built-in kickstand, and specially designed keyboard cover. And don’t forget Office, Microsoft's ubiquitous productivity software suite.

Windows 8 lacks mobile apps
Nevertheless, these features pale in comparison to the iPad's big advantage -- its app ecosystem. iOS remains the premiere mobile operating system among developers, and the iPad in particular has a bevy of apps made for it specifically.

Windows 8, on the other hand, continues to lack many major mobile apps, including Instagram, Pinterest, and HBO Go. Not to mention hit games like Candy Crush and Plants vs. Zombies -- an important category, given how much time tablet owners spend playing games.

As long as Windows lags in apps, hardware simply doesn't matter. Microsoft's recent decision to slash the Surface's price by $150 gives it an advantage over the iPad in terms of price, but the iPad still represents better value to most consumers.

Android tablets are starting to gain steam
But comparing the Surface to the iPad, as Microsoft has been eager to do, might be the wrong idea. Although Apple remains the single most dominant individual tablet maker, tablets powered by Google's (NASDAQ: GOOGL  ) Android are just starting to hit their stride.

Android-powered smartphones surpassed the iPhone in terms of marketshare back in 2011, but it wasn't until this year that Android-powered tablets began to overwhelm the iPad. There are now numerous capable Android tablets on the market, like Google's own Nexus 7, and Sony's waterproof Xperia Z, in addition to Amazon's bargain-priced Kindle Fires.

Samsung, long the premier Android handset maker, has begun to expand its dominance into the tablet market. In the first quarter, Samsung's share of the tablet market surged, jumping 282% on a year-over-year basis. Samsung makes a number of Galaxy tablets, with its Note 8.0 and 10.1 priced competitively with Apple's competing devices.

But Samsung's most interesting tablet is its ATIV Q. The device, which Samsung showed off in June, hasn't been released yet, but when it does go on sale, it will be interesting to see how the device sells -- and not just for Samsung's earnings.

The ATIV Q is unique in that it runs both Android and Windows 8 side-by-side. While it has the full functionality of Windows, it offers Android apps for those times when mobility is preferred.

In a way, the ATIV Q is emblematic of the Surface's larger problem: If Windows 8 had a robust mobile app ecosystem, Samsung would've never needed to create such a device.

What to watch for September 23
New hardware won't save the Surface. A faster processor and better battery might sound nice, but if Microsoft wants the Surface to sell, it needs to solve the app problem.

As long as Windows continues to lag iOS in apps, the Surface is going to continue to lag the iPad in sales. Moreover, the iPad might be the least of the Surface's problems -- rising competition from Android tablets, including Android/Windows hybrid tablets, could ultimately be much more consequential.

Come September 23, Microsoft announcing a program to accelerate mobile app development would be far more important than any adjustments to the Surface itself.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 12, 2013, at 12:09 AM, techy46 wrote:

    Screw the mobile apps, real Windows users don't want to pay almost a $1000 for a small hobbled device. We've been waiting for all-in-1 and 2-for-1 devices that contain Intel's new 22nm 3D chips and here they come for $329 and up. I would never pay extra for an Apple or Microsoft label. Now a Microsoft Lumia 920 or 1520 is a whole different story.

  • Report this Comment On September 12, 2013, at 4:27 AM, Henry3Dogg wrote:

    @techy46

    Strange that you loved the last set of Surface devices and Windows phones, when they came out. And now you would never have bought them but love the next set, that you haven't seen yet.

    Face it, Microsoft is dead.

    With the launch of the new devices, there will be a further write down of $5B for the remaking stock of the first generation.

    And the new device will still me a device with a great ad, and no purpose.

    The market knows this. That's why they knocked $15B off MS when they agreed to pay $5B for Nokia's phones.

    Microsoft is now trapped in a succession of forced mistakes.

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