Microsoft's Surface Pro 3 Is a Great Idea (but Doesn't Change Much)

Microsoft's largest Surface tablet yet solves two key issues, but that doesn't guarantee success.

May 21, 2014 at 2:55PM

I've been hard on Microsoft Corporation's (NASDAQ:MSFT) Surface tablet line to date. But while I was initially inclined to frown at its Surface Pro 3 announcement yesterday, I'll readily admit that the new tablet has piqued my interest.


Microsoft hopes its Surface Pro 3 will lure notebook buyers. Source: Microsoft.

With its 12-inch display, the Surface Pro 3 is Microsoft's largest tablet to date, and stands as the tech behemoth's most prominent effort so far to provide consumers with a viable tablet-based alternative to laptops. Given that niche, I'm not convinced the Surface Pro 3 is meant to compete directly against current large tablets from the likes of Apple (NASDAQ:AAPL) and Samsung, but instead aims to lure Microsoft's bread-and-butter productivity seekers -- myself included -- who still prefer Windows and grow increasingly unimpressed with their options as the world migrates to smaller devices.

The Surface Pro 3 is also relatively light -- compared to most laptops, anyway -- at 1.76 pounds, offers roughly nine hours of battery life, and is reasonably powerful so should handle most anything a laptop user would expect.

Surface Pro 3 solves two big problems
What's more, by narrowing the gap even further between tablets and notebooks, Microsoft is addressing two key problems from which the Surface has suffered to date -- namely, it's opening the Surface line to a larger group of interested buyers and also partially negating the fact that its platform still lacks a meaningful app ecosystem compared to those enjoyed in devices powered by Android and Apple's IoS.

Finally, with prices for its various models ranging from $799 to $1,949, the Surface Pro 3 should offer Microsoft higher margins and help propel the entire line further toward sustained profitability. Remember, Surface revenue fell off a cliff last quarter just as I expected, dipping sequentially from $893 million to $494 million as holiday sales waned. Meanwhile, the cost of that revenue once again came in higher at $539 million, which means Microsoft lost another $47 million last quarter for its efforts. Shooting for higher-margin devices to comprise a larger percentage of overall Surface sales, then, could be just what Microsoft needs to push it into the black.

And to be fair, that $494 million did represent a 50% increase over the same year-ago period. By contrast, Apple's most recent quarter saw iPad revenue fall 13% year over year. Then again, Microsoft was working from a significantly smaller base, and Apple is likely set to unveil the latest in its iPad innovations at its annual Worldwide Developers' Conference less than two weeks from now.

A great idea doesn't guarantee success
But even putting aside any competing solutions Apple might introduce then, Microsoft's Surface Pro 3 is hardly a guaranteed winner.

For one, consumers actually have to bite on the new solution in order for Microsoft to enjoy those higher margins. And while I'll admit the folks at Microsoft have made big strides in improving Surface hardware, expanding its addressable user base, and muting the impact of its subpar app ecosystem, the fact remains that it's still working to overcome the stigma created when previous Surface models fell far short of expectations.

In the end, the Surface Pro 3 might be Microsoft's most compelling tablet yet, but I'm still not convinced it has what it takes to prop up the entire line.

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Steve Symington owns shares of Apple. The Motley Fool recommends and owns shares of Apple. It owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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