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

Microsoft's Surface appears to have identity issues. Why does the company want to compete with Apple's MacBook?

Aug 27, 2014 at 2:32PM

G

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.

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Apple and Google (A and C shares) and owns shares of Apple, Google (A and C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers