Microsoft (NASDAQ:MSFT) has been hammered over the past two weeks because sales of Windows 8 and Microsoft Surface were lower than expected. Yes, the Microsoft Surface RT was a disappointment, and with a $900 million write-,down the device took a big dent out of earnings last quarter, but was the device really a disappointment?
Breaking into the tablet business
One of the biggest goals of the Microsoft Surface was to demonstrate Windows 8's usability on tablets. Up until Windows 8 was released, it was basically a two-man game between Apple (NASDAQ:AAPL) iOS and Google's (NASDAQ:GOOGL) Android. In the second quarter of last year, the two companies accounted for 98.6% of tablet market share.
Over the past year, Microsoft has demonstrated the ability to run a mobile operating system, and the Surface helped encourage other manufacturers to use the operating system in their products. According to Strategy Analytics, that has led to a market share increase from 0.5% of the tablet market a year ago to 4.5% in the second quarter of this year. Microsoft isn't a huge player in tablets yet, but it's making inroads that once seemed impossible.
The sacrificial lamb
Microsoft isn't known as a hardware company, and its only real success making physical goods is the Xbox. So, putting high expectations on the Surface, especially the Surface RT, was a bit unfair by investors. The company is learning how to make devices and was really encouraging others to use Windows 8, so the Surface RT can be looked at as a sacrificial device in a lot of ways.
What's more important is that Microsoft continues to gain share against Apple and Google. As Hewlett-Packard, Dell, Asus, and others make more and more compelling devices with Windows 8, the company will take more share and become a bigger player in the tablet space.
Microsoft doesn't need to create a dominant tablet device itself; it just needs to demonstrate that tablets running Windows are possible. Surface did that, even if it wasn't a financial success for Microsoft. Long-term, I think investors should be judging Microsoft's ability to gain mobile operating system market share, not just whether a single device is a success. That's always been Microsoft's bread and butter.