Microsoft's Surface Sales Rebound

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While PC sales continue to fall, Microsoft (NASDAQ: MSFT  ) appears to be well on its way to creating a market for its Surface hybrid tablet/notebooks. The company, which is still searching for a new CEO, reported second-quarter results last week, and though signs of weakness remain, the Surface has rebounded from its near-disastrous launch in October 2013.

The company reported during a conference call that Surface revenue more than doubled to $893 million, up from $400 million in the first quarter, according to CNET. And, while the article reports that Microsoft is still losing money on the Windows 8 device, the Surface roll-out was about entering a new product space and competing with Apple's (NASDAQ: AAPL  ) iPad and the various Android tablet-makers, including Google (NASDAQ: GOOGL  ) and Samsung.

"We launched Surface to create a product that showcased what can happen when you innovate in hardware … and software," said Amy Hood, Microsoft's chief financial officer, during the call. "We learned a lot over the course of this journey. We have to make more meaningful progress."

Microsoft knows PCs are dying

Microsoft has for years minted money by having its Windows software included on computers made and sold by a variety of third parties. The deal was pretty sweet. Since the widespread acceptance of the PC in the 1980s, sales climbed steadily and Microsoft made money from Windows on each computer sold. The company also profited from its Office suite of products, which were essentially required for anyone who bought a Windows-based PC.

Before the rise of the non-PC, Internet-connected device, Microsoft had a near monopoly, with only Apple's niche PC audience and the handful of techies who used Linux as outliers. As recently as 2009 and 2010, personal computer sales were still rising. Numbers even eked out a small increase in 2011, but by 2012, PC sales fell for the first time in 11 years.

In 2012, the bottom truly began to fall out of the market. As research firms Gartner and IDC said, "worldwide PC shipments fell 10%...the worst-ever sales slump for the industry."

Blame tablets

In 2012, IDC reported that the iPad had a 43.6% market share, shipping 22.9 million units in the fourth quarter alone. Total tablet sales increased 74.3%. More importantly, the research company also predicted that it "expects tablet shipments to surpass desktop PCs in 2013, and portable PCs in 2014." IDC also said, as reported by Tech Crunch, that it expects tablet market share to continue to grow through 2017 while desktop and portable PC sales will continue to fall.

Basically, the Surface is Microsoft's hedge against these declines. And while the device did not have immediate success, the company ended 2013 with around $83.9 billion in cash on hand-- more than enough to lose a few bucks on the way to establishing the brand. And though IDC reports that Microsoft has only 3.2% of the tablet market , that share is rising. Losing around $40 million in 2013 on Surface is roughly the equivalent of dropping a nickel on your way to learn that you're getting promoted and a huge bonus.

Microsoft can wait

While the stock market has punished Microsoft for taking the long approach compared to the flashier strategies of Apple and Google, having huge piles of cash means you can afford to be patient. Surface fills a need. It's a laptop and a tablet that works well for business and reasonably well for traditional tablet uses like watching movies or playing games. Microsoft is not BlackBerry, which launched its Playbook tablet with huge hype only to see it fail and further drag the company toward its death. Microsoft has the money, time, and long-range vision to turn a failure into a slowly nurtured success.

Microsoft, as you can see in its current round of commercials where the company touts a wide range of Windows 8-powered devices, can slowly develop an audience for Surface while also licensing Windows 8 for tablets, laptops, and hybrids from a variety of third parties. This won't stop the decline of PCs, which Gartner expects have bottomed out, but, it will give Microsoft a hedge against those falling sales and keep Windows revenue chugging in. 

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

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 January 30, 2014, at 12:57 AM, frometa wrote:

    Microsoft as always will win... no doubt... They have the ca$h for anything technology brings and they will follow that trend or invent themselves.

  • Report this Comment On January 30, 2014, at 7:03 AM, foolscap wrote:

    LOL @ 6th Paragraph SPIN:

    QUOTE: "In 2012, the bottom truly began to fall out of the market. As research firms Gartner and IDC said, "worldwide PC shipments fell 10%...the worst-ever sales slump for the industry."

    In 2012, IDC reported that the iPad had a 43.6% market share, shipping 22.9 million units in the fourth quarter alone." UNQUOTE

    Saying the Worldwide PC shipment fell 10% right before saying iPad market share is 43.6%, makes it sound like iPad is a PC. These two products are for two different target markets and must not be compared in that manner

  • Report this Comment On January 30, 2014, at 11:14 PM, vanquishedangel wrote:

    Even if tablets are a different market they do cause a decline in pc sales. Look at it this way, the average home user only logs into facebook, checks their emails, posts on twitter, writes a blog, plays music, watches movies, etc. All of these things can be done on a tablet.

    Tablets are cheap, $50-$500. $500 ones are generally the very high end ones. Why would you pay hundreds of dollars more for a pc, just to do those things? Especially when you have a pc at home that you have had for years that can also do them.

    Another missed aspect in this article is the fact that there is linux, namely Ubuntu, Fedora, chrome os, and 500 others. Many people wont spend hundreds to update their computer hardware, then hundreds more to update their os if they don’t have to. Many will keep their old computer, and switch to Ubuntu or fedora or Mint, to keep an updated OS. Since there is no market sales to measure the number of converts who knows the rate of true conversion. All my desktops are built by me and run Linux.

    When MS made it big, you only had one option, a PC (or apple but much of apple stocks are owned by microsoft or bill gates, so in reality MS had a monopoly disguised as two companies).

    The truth is MS is failing, slowly. It is a "has been" like many other companies that were once the "best" but are now gone.

    The reality of the surface tablets is this:

    Surface....epic fail, has no apps, no compatibility with desktop ms software, cost $400+, horrid specs, lagged like hell.

    Surface pro 2.....the best viable option but, it costs about $1,000, again has bad specs (my 1 and 1/2 year old tablet has similar specs, microsofts new 1.9 ghz quad core vs my 1.7 ghz quad core, yeah no reason to spend $1,000) In reality you can buy a small laptop with better specs for less than half the price. It weighs the same as a small laptop as well.

    Netbooks also cut into sales, again for the simple things most people do, they don’t need windows, a chromebook will do.

    Windows is a niche OS, that is, its really only needed by gamers these days and only because not many games are made for other platforms atm.

    Not to mention other aspects, windows lost the server market since its hay-days, Windows mobile epically failed similar to these tablets (they had lots of hype in the late 90's, and also as many reviews and articles like this one, but no sales), and they are late to the tablet market which has cause others to have long established names and more polish.

    Windows is an old clunky dinosaur any more. Maybe they will catch up, but I suspect it will be a lenthy slow death with a few fanboys clinging on for dear life. At this point all they have to sell is their name.

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Daniel B. Kline

Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.

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