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Instant Analysis: Microsoft Gives Free Xbox Ones to Surface Pro 4 Buyers

By Leo Sun – Jul 6, 2016 at 8:30AM

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Microsoft really wants to pull students away from Sony and Google.

Microsoft (MSFT -1.89%) is offering students a $300 discount if they purchase the Surface Pro 4 and Xbox One together through the Microsoft Store by Aug. 14. That discount basically makes the $299 Xbox One free, and enables students to own both for as little as $878. The bundle also includes a free game and a $50 Microsoft Store gift code. That's great news for students, but the giveaway raises some serious questions about Microsoft's hardware strategies.

Image source: Microsoft.

Countering Sony and Alphabet

Microsoft has sold about 21.1 million Xbox Ones worldwide so far according to market tracker Vgchartz. That's just over half the 40.7 million PS4s Sony (SONY -1.43%) has reportedly sold. Sony adopted and maintained that lead with lower prices and higher-profile exclusive titles.

Both Microsoft and Sony recently unveiled big hardware upgrades for 4K and VR gaming. Microsoft's update, Project Scorpio, will hit shelves next year. Microsoft also revealed the Xbox One S, a much smaller version of the console, which will launch this fall. Microsoft's free Xbox One bundle notably includes the current-gen Xbox One, so the company is likely trying to flush out its inventory before the two new consoles render the current version obsolete. It can also convince more gamers to use the Xbox One streaming feature in Windows 10.

Putting Surface Pro 4s into students' hands complements the discontinuation of the Surface Pro 3 later this year, and helps Microsoft expand into the education market. Since Alphabet's (GOOG -0.95%) (GOOGL -0.96%) Chromebooks now account for about half of all U.S. classroom devices, Microsoft needs to respond by putting Surfaces into students' hands. Otherwise, those students will likely grow up tethered to Google's cloud-based ecosystem.

A costly move?

The Xbox One and Surface Pro 4 promotion makes strategic sense, but it could be a costly play. Many of Microsoft's other recent strategies have revolved around giving away products to grow market share -- it offered Windows 10 as a limited-time upgrade, bundled free Office 365 trials to new Windows devices, and even gave away free Lumia 950s to customers who purchased the larger 950 XL.

Those moves all reduce Microsoft's margins. That's why Microsoft is expected to grow its annual earnings at an average rate of 9% over the next five years. That's much lower than the average industry growth rate of 17% for enterprise software and services companies, and indicates that investors should be wary of any more big promotions from the tech giant.

 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of Microsoft. 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.

Stocks Mentioned

Alphabet Stock Quote
Alphabet
GOOGL
$99.48 (-0.96%) $0.96
Microsoft Stock Quote
Microsoft
MSFT
$250.20 (-1.89%) $-4.82
Sony Group Stock Quote
Sony Group
SONY
$81.61 (-1.43%) $-1.18
Alphabet Stock Quote
Alphabet
GOOG
$99.87 (-0.95%) $0.96

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