Why is Microsoft's Surface Pro Challenging Apple's MacBook?

Microsoft wants its Surface Pro 3 to compete with Apple's MacBook line. It that the right move? Source: Microsoft.

If you've been paying keen attention to commercials for Microsoft's (NASDAQ: MSFT  ) new Surface Pro tablet, you'd have noticed that it doesn't appear that Microsoft is positioning the product as a tablet but rather as a "laptop replacement."

The motivation for this marketing approach was less clear considering that, in the past five years, tablet sales have increased substantially and PC sales have slowed. It appears consumers have already gotten this memo: Matter of fact, a shocking IDC report pegs PC sales as declining by a massive 9.8% on a year-over-year basis last year and expected to drop another 6% this year. But it's all coming into focus now, Microsoft's going after Apple's (NASDAQ: AAPL  ) MacBook line with its Surface Pro 3.

Has Apple cornered the only segment of the PC market that matters?
A recently released report from Ed Bott gives insight into Apple's successful MacBook strategy. While analysts and fans obsess about Apple's iPhone and iPad strategy -- and they should, as those two lines combine for nearly three-quarters of Apple's revenue -- Apple's Mac strategy is impressive in its own right.

Many companies do well when presented with favorable tailwinds. However, it takes a superior corporate strategy and product to grow when the industry is contracting. And that's just what Apple did by growing its Mac line by 2.7% in the face of a sluggish computer environment.

And just how did Apple do it? Well, according to Ed Bott, it all has to do with product positioning. Apple's been very good at honing in on a part of the PC market that is still doing well -- premium ultramobile computers. Those are PCs that weigh in at less than 1.6 kilograms (3.5 lbs.), are optimized for media consumption, and retain capabilities for full-scale data processing.

And it's still a growth area. Gartner predicts that the premium ultramobile market will grow from 22 million shipments in 2013 to 55 million in 2015. In addition, Gartner predicts that this subsection will grow from under 7% of units shipped currently to 17.3% in 2015.

Can Microsoft win, and does it need to?
Microsoft is positioning its Surface and Surface Pro products to snag some of the 58% annual market share growth this segment is projected to experience over the next two years. The Surface has had a rocky rollout since its introduction. The recently discontinued Surface RT was a disaster, and after a nearly $1 billion writedown it was credited in part with the loss of former CEO Steve Ballmer's job.

But returning to the "favorable tailwinds" argument, even if Microsoft isn't the strongest competitor in this field, it is entirely possible these favorable conditions will help sell the product as long as it's considered a worthy competitor. And let's not forget Microsoft's ace in the hole here: a native-run Microsoft Office suite for both students and the enterprise crowd.

For what its worth, with the Surface Pro 3 Microsoft brings a nice premium device to market that competes with Apple's entry-level MacBook Air admirably. Both units have similar storage and RAM specs -- the Surface Pro emphasizes its touchscreen, detachable keyboard, and stylus features. However, for the money  it appears Apple's still bringing a more cost effective unit to market. Its entry-level model 13-inch MacBook runs at the same cost with the same RAM --128Gb--and to get the functionality of Apple's MacBook you need the additional keyboard attachment that runs $130.

One small problem with this strategy: something called an iPad ... 
Regardless of how much Microsoft wants to compete against Apple's MacBooks, its Surface Pro 3 is a tablet and will be judged against other tablets. And that's the problem. Right now, Apple's iPad is years ahead of Microsoft's tablets when it comes to its ecosystem. For perspective, Microsoft recently broke down and allowed Microsoft Office on the iPad. For years that was one of its largest selling points for its Surface line of tablets. Not only that, but Apple's 128Gb iPad model starts at $799.

Also, Microsoft has to continuously worry about original equipment manufacturers. In the event that Microsoft's Surface line of tablets starts to pull revenue away from other manufacturers, they could respond by abandoning new Microsoft-based products. Recently, Hewlett-Packard CEO Meg Whitman caused a stir when she labeled Microsoft a "competitor" instead of a partner. HP's been diversifying away from Microsoft and cozying up to Google's Chromebooks of late.

Final thoughts
Microsoft's Surface line of tablets has had a rough go of it. It's estimated that Microsoft lost nearly $370 million last quarter from Surface-related operations. And while many analysts are opining about when Microsoft will ax the line, the company appears to want to compete. In fact, the company's rolling out the device to 25 more countries by month's end. Many of those countries are in Europe, a place where Windows Phones have substantive market share.

I question the strategy to position the product as a laptop replacement and ignore existing tablet competition. However, given the favorable tailwinds for premium ultramobile units and a rollout to Windows-friendly Europe, I'm interested to see how the Microsoft's Surface line performs going forward.

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