Microsoft's Bringing the Surface to 25 New Countries: Is It the Right Move?

In the face of calls to abandon the product, will Microsoft find favorable markets?

Aug 9, 2014 at 2:00PM


Surface Pro 3. Source: Microsoft.

This week, Microsoft (NASDAQ:MSFT) doubled down on its beleaguered Surface tablet by announcing it will expand to 25 more countries by the end of the month. In the aftermath of the $900 million Surface RT writedown, and a recent analysis by Computerworld that estimates Surface's losses at $363 million last quarter, many people -- even here -- wonder if the company should abandon the product.

However, expanding this product's reach appears to be a good move for the company. Not only will this increase sales, but if the Windows Phone is any indication, these countries are more Microsoft-friendly than the United States. Of the 25 announced companies, 16 are in Windows Phone-friendly Europe.

About that Computerworld report
Nothing against Computerworld's report: First, Microsoft didn't provide a cost of revenue figure for the Surface, so it is impossible to get an exact number on the losses. Computerworld did an excellent job of piecing together its cost of revenue and coming to the aforementioned $363 million loss. However, what's unknown is how much of the cost of revenue is assigned to losses from its decision to not follow through with shipping a planned Surface Mini.

And without that critical piece of information it is rather hard to ascertain if the Surface is actually performing better on a quarter-over-quarter basis or not. And, to me, harder to come to decisions on whether to kill a product entirely.

Europe loves the Windows Phone ... well, sort of
If the smartphone market is of any indication, Microsoft may have a more sympathetic crowd than in the U.S. While Windows Phone holds a minute share in the U.S., with many analysts pegging its market share at less than 2%, Kantar Worldpanel reports E-5 (a group that includes U.K., Germany, France, Italy, and Spain) Windows operating system market share is approaching double digits -- 8.4% as of May.

It's no wonder those five countries are on the expansion list. Microsoft finds a pre-installed base of consumers that are familiar with its ecosystem and brand. That should help boost sales for the Surface. And while Microsoft is relegated to third place there -- trailing Google's Android and Apple's iOS -- a near 10% European market share in tablets should reinvigorate the product.

However, saturation abounds
Another issue Microsoft faces in its tablet ambitions isn't competition from a competitor, but falling demand for tablets. Although Tim Cook will gladly tell you that Apple's iPad is its fastest-selling product, its revenue is down nearly 5.5% over the last four quarters on a year-over-year basis.

And it is not just Apple, Best Buy's CEO Hubert Joly was recently quoted as saying tablet sales have cratered in part because of a revival of laptops and two-in-ones (tablets that can function as laptops) -- although very quickly thereafter, Hubert Joly pointed out that he considered the Surface a two-and-one device. He may like the Surface, but the greater U.S. market seems to not share his enthusiasm.

Final thoughts
Microsoft's had a tough go with the Surface. Matter of fact, many credit the Surface RT writedown with the loss of Steve Ballmer's job. And while many articles have been written about Microsoft killing the Surface, it doesn't appear that new CEO Satya Nadella is looking to do that. Instead, it appears the company is looking to compete by pushing into new -- and potentially favorable -- markets.

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

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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