Microsoft Corporation Launches Thermonuclear War On Its Own Partners With Surface Pro 3

During his opening speech at the launch of Microsoft's (NASDAQ: MSFT  ) Surface Pro 3, CEO Satya Nadella explicitly refuted the claims that the company was out to compete with its OEM partners. But everything from the intended usage model of the device to the very marketing slogan about how this is the "tablet that can replace the laptop" says Microsoft isn't just competing with its own tablet OEMs anymore, but the PC vendors themselves.

Microsoft's conflict of interest
In the consumer space, the vast majority of the company's revenue/operating income dollars comes from the license of Windows to OEM partners. This has been a superb business for the company as it can extract significant value from the sale of just about every PC sold without having to worry about whose PC is getting sold. Indeed, hardware is a pretty bad, low-margin business for most competitors, so Microsoft's model of profiting from the operating system sale along with the sale of a copy of Office (or an Office 365 subscription) is a beautiful one.

But in Microsoft's apparent quest to become more like Apple (NASDAQ: AAPL  ) , it has now decided that it wants to compete with its own hardware partners -- the folks buying those Windows licenses. At first, this wasn't too bad -- the Surface Pro and Surface Pro 2 weren't really that great as laptop/desktop replacements, and the Surface RT and Surface 2 were extremely limited for anything close to resembling a typical Windows usage model.

Microsoft declares war on PC OEMs
That changes with the Surface Pro 3. Microsoft has declared war on not only its tablet partners, but on its very partners in the PC space. If Microsoft is selling a "tablet that can replace your laptop," then presumably Microsoft's intention is that with each sale of a Surface Pro 3, a laptop vendor (ASUS, Dell, Lenovo, etc.) loses a sale. And Microsoft claims that the point of Surface isn't to compete with its partners?

Now, to make matters worse, Microsoft has an inherent cost structure advantage over the OEM partners with whom it is now in direct competition. All of those OEMs need to pay Microsoft a license fee for each copy of Windows. Microsoft, on the other hand, pays zilch for Windows and can therefore either sell similar hardware for a lower price than its competitors/customers or sell better hardware at the same price. If you are a Windows OEM, Microsoft's move with the Surface Pro 3 is likely downright devastating -- is it any wonder that they're all trying to hop on board the Android/Chrome train?

The Chrome plan B
At this Surface event, there was no mention of Windows RT -- only a "technical love affair" with Intel (NASDAQ: INTC  ) to get Surface Pro 3 to be as thin and light as it is with good battery life. The good news for Intel is that Microsoft seems to -- with a lack of Surface RT update -- realize that Windows RT is more or less a dead end since it can't run any traditional Windows applications.

But if you will remember, Intel -- along with a whole slew of the traditional Windows OEMs -- sang the praises of Google's (NASDAQ: GOOG  ) Chrome OS at a recent event, pledging to bring a bevy of Chrome OS-based devices to market. It is now in the OEMs' best interests to reduce dependence on Microsoft's Windows as much as possible. While Microsoft has a tight stranglehold on many verticals (high-end gamers, corporate/business use, workstations, etc.), Chrome has a shot of succeeding in the lower-end, mass-market notebook market, which should help the OEMs sleep easier at night.

Foolish bottom line
Microsoft's Surface Pro 3 is another shot across the bow of the multitude of PC OEMs already having a tough time thanks to weakening PC sales (which many believe were caused in no small part by Windows 8 to begin with). The OEMs should now know that -- if they hadn't already gotten the message -- Microsoft intends to compete with them in a much broader fashion than it has in the past. Hey, at least Intel's on-board the Chromebook train, right? 

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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 May 20, 2014, at 4:37 PM, H2323 wrote:

    chill...it's not a big deal, they run hot, are not that fast, are expensive and run hot. Surface is not a success today nor will it be with a pen tomorrow.

  • Report this Comment On May 22, 2014, at 5:20 PM, PDM wrote:

    My take on the Surface Pro 3 is more that it represents a raising of the bar. Nice engineering and design. The overall impression I come away with is it makes the current MacBook Air and the iPad somewhat irrelevant.

  • Report this Comment On May 27, 2014, at 2:55 PM, danL50 wrote:

    The extremely high prices for the Surface 3 suggest that Microsoft isn't really competing against its OEM partners. The Surface 3 computers are at a much higher pricepoint than other laptops or tablets -- and there are serious limitations on the amount of disk storage (the Surface 3 with 512GB solid state drive retails for over $1,900).

    While Microsoft may be raising the bar, it really seems like this is much ado about nothing.

  • Report this Comment On June 09, 2014, at 3:23 PM, sidorg222 wrote:

    The surface pro, whether 1, 2 or 3 is a rather clunky, heavy, awkward tablet, at a very premium price. The keyboard is an extra $100.

    I ordered a surface pro over Christmas, and also ordered a Dell XPS12. The Dell is a far, far better tablet/desktop replacement, especially since it comes with a built in keyboard and screen that flips.

    Its two inches bigger than the surface, but about the same weight. I returned the surface pro since I never used it. I use the Dell XPS12 all the time.

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