In recent weeks, the company has announced two new initiatives: Surface as a Service and the Surface Membership. Both are subscription-based programs designed to give business owners an alternative way to purchase Surface hardware (including the Surface Book and Surface Pro 4) from the Windows-maker and its partners.
Surface remains a relatively modest portion of Microsoft's overall business, but it has enjoyed fairly robust growth in recent quarters. New financing options could help Microsoft generate more hardware revenue in the quarters ahead.
Low monthly payments and IT support
Unfortunately, Microsoft has offered few details on Surface as a Service. Still, in July, it announced that its "Cloud Solution Providers...can [now] offer Surface devices through a managed service offering to all of our resellers and customers." The companies that sell Microsoft's cloud services, such as Office 365, will be able to sell Surfaces on a subscription-basis.
The Surface Membership is more straightforward, with Microsoft's retail operation handling most of the work. Small business owners can sign up for Surface memberships on an 18-, 24-, or 30-month basis, paying a relatively modest monthly lease to own machines that can cost upwards of $2,000. An entry-level Surface Pro 4, for example, can be leased for about $52 per month. The membership also includes training and support, and discounts on accessories and other Microsoft software.
Surface is a billion dollar business
Surface hardware isn't a major driver of Microsoft's financials -- it generated less than 5% of the company's total revenue last quarter. But its growth over the last four years has been extraordinary. In the Surface's first 9 months on sale, it brought in just $853 million for Microsoft -- now, it regularly generates much more than that each quarter. Last quarter, Surface brought in $965 million for the company, up 9% on an annual basis. Two quarters ago, it generated more than $1.3 billion.
Most of that growth has been driven by new devices and adjustments to its operating system strategy. Microsoft rapidly discontinued Windows RT, the version of Windows that shipped on the original Surface, in favor of full Windows 8 and eventually Windows 10. Over time, Microsoft added features to Windows that made the prospect of a hybrid device like the Surface more attractive. It launched the larger Surface Pro 3 and Surface Pro 4, as well as the Surface Book, made improvements to its lineup of keyboard covers, and introduced useful accessories like the Surface Dock.
Making hardware more affordable
Surface as a Service and the Surface Membership plan notably follow recent initiatives in the mobile space. T-Mobile first popularized the concept of paying for a smartphone in monthly installments; other major carriers eventually followed. Last year, Apple introduced its own iPhone Upgrade Program, which, like the Surface Membership program, makes it easier to purchase expensive hardware. Notably, Surface as a Service and the Surface Membership are aimed at business users rather than consumers, and the market for laptops and business tablets is quite different than that for consumer handsets. But the parallels are obvious, and the effects could be similar.
Surface isn't the most important aspect of Microsoft, but it's become a nice growth driver for the company in recent quarters. It's also allowed Microsoft to play a role in shaping the PC ecosystem, as its hardware partners have used the Surface as inspiration for many of their own devices. Surface as a Service and the Membership should help Microsoft sell more Surfaces in the quarters ahead, as businesses can purchase more hardware while spending less money upfront.
Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends T-Mobile US. 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.