Are Microsoft's New Offerings Game-Changers?

Microsoft got a positive response to its Surface Pro 2, but sales were lukewarm at best. However, the new Surface Pro 3 has the potential to take the industry by surprise.

Jun 10, 2014 at 9:30PM

The rise of smartphones and tablets, led by Apple (NASDAQ:AAPL) and spurred by Google's (NASDAQ:GOOG) Android phenomenon, has changed the entire computing industry. This rise has forced Microsoft (NASDAQ:MSFT) to change its approach to business and, in fact, computing itself.

At first glance, Microsoft appears to be somewhat underweight, but is this opinion accurate? The company has been transforming, albeit in a rather delayed reaction, to the evolving computing devices industry. The transformative "Mobile First, Cloud First" strategy may well be its savior in the coming years. Microsoft bought Nokia's devices business, is rolling out its own tablets, and is focused on the cloud through its Office 365 and Azure offerings. The company has finally let go of its Windows-centric strategy, which will be beneficial in the future, as Microsoft recently unveiled the third iteration of its Surface Pro tablet and updated its Azure platform.

Inherited dominance
Microsoft may be changing into a cloud and mobile company, but its strong enterprise end-client and server presence should not be overlooked. According to a survey, MS Office is the most-demanded skill for employment in the U.S. On the server side, Microsoft holds approximately 40%-50% share of the OS market.

Apple and Android are not going to challenge Microsoft's position in either the office or the server OS space. Consumers may use Apple or Samsung products after work, but during office hours, Windows and MS Office will be used predominantly. Microsoft will continue to dominate the enterprise side, which gives the company time to rectify errors it made in devices segments. Moves like the Nokia acquisition and the current "laptop replacement" with Surface Pro 3 tablets are early evidence of such rectifications, and the company is also gaining traction in the cloud segment. Therefore, the general perception that Microsoft is in a constant decline does not seem to be true.

Surface Pro 3

 Images

Source: Microsoft 

Microsoft recently unveiled its new Surface tablet, which it presents as a replacement for tablets and laptops. Surface Pro is positioned between tablets and laptops as far as screen size and weight are concerned. It is a 12-inch tablet with a thickness of 0.35 inches, as compared to the MacBook Air, which is twice as thick, and the slightly thinner iPad Air at 0.29 inches.

Specifications

 

Surface 3 

Lenovo Idea Pad Yoga 2 pro

MacBook Air 

iPad Air 

Display

12'' 2160×1440

13.3'' 3200×1800

13.3" 1440×900

9.7" 2048×1536

CPU

1.9GHz i5 4300u

1.6GHz 4200u

1.3GHz 4250u

ARM A7 1.3Ghz

Memory

4GB

4GB

4GB

1GB

Storage

128GB

128GB

128GB

128GB

Price

$999

$999

$1099

$799

Surface is priced competitively and is set to take on Apple's iPad and MacBook. The Surface Pro 3 also has more computing power than the MacBook, and for a lesser price, too. It also competes well with Lenovo's counterpart, as a slightly smaller screen and high computing power make it a more attractive portable option at a similar price.

Performance
Early benchmarks seem to gauge the performance of Surface Pro 3. It is a complete computing device capable of laptop-level work. 

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Source: CNET

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Source: Anandtech

These benchmarks reveal that Surface is a better overall performer than the MacBook Air. This puts it in a competitive position with MacBook and other large-screen convertibles. The touch screen and additional pen allow it to compete with tablets, including the iPad Air.

Some critics believe that offering a replacement to laptops will deter Microsoft's Windows licensing position in the laptop market by capturing share from companies like HP. This will not be the case. If Surface successfully captures market share from laptop manufacturers, Microsoft's margins will improve because the company will get margins otherwise earned by OEMs. Plus, OS licensing is already incorporated into the price of the device, and vertical integration of devices and software always results in improved margins or higher market share. Hence, the argument of licensing fee loss is not valid.

Bottom line
The Surface Pro 3 has been designed to compete with laptops and tablets. This approach seems to be the right one, as the tablet market is growing and laptops are the only segment showing a slight growth in the PC market. The performance benchmarks, specifications, and price also point to the fact that Surface Pro 3 holds a competitive advantage and will attract consumers who want a single device for both general use and work.

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Muhammad Saeed has no position in any stocks mentioned. The Motley Fool recommends Apple and Google (C shares). The Motley Fool owns shares of Apple, Google (C shares), and 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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