3 Reasons Microsoft’s Surface Pro 3 Will Fail

Microsoft (MSFT +1.28%) unveiled the Surface Pro 3 on May 20, its largest tablet ever with a 12-inch screen. The Surface Pro 3 -- which costs between $799 (64GB, i3 processor) and $1,949 (512GB, i7 processor) -- is notably lighter than Apple's (AAPL 1.12%) MacBook Air and roughly as thick as previous generation iPads.

The Surface Pro 3. Source: Microsoft.

While the Surface Pro 3 is still heavier than the iPad Air or Samsung's (NASDAQOTH: SSNLF) Galaxy Tab, it is one of the lightest laptops on the market -- making it a threat to other manufacturers of Windows laptops, such as Lenovo (LNVGY 3.15%), Hewlett-Packard (HPQ +0.91%), and Dell.

In a previous article, I discussed two major problems with the Surface. First, it's unprofitable -- Microsoft spends $109 for every $100 in Surface sales. Second, it's cannibalizing the market for Windows tablets, which only accounts for 2.1% of all tablets worldwide.

Microsoft is declaring war on laptops to force Windows machines across the market to evolve. Some might argue that the "tough love" push is necessary, since none of Microsoft's Wintel allies -- with the exception of Lenovo -- have had much luck selling Windows machines lately.

Unfortunately, it's a push that's ultimately doomed to fail for three big reasons.

1. Approaching the market from the wrong direction
The Surface Pro 3 is certainly an impressive beast. It offers plenty of bells and whistles that Apple's tablets lack: a stylus, memory card slots, a USB 3.0 port, and front-facing speakers. However, many iOS and Android users probably consider these features to be legacy ones that aren't necessary on modern tablets.

That difference of opinion highlights the key difference between Microsoft and Apple -- the former clings to the past, while the latter focuses on the future. We can see this in the awkward split between Windows 8 and RT.

Although RT was intended to corral users in a walled garden of mobile apps akin to Apple's iTunes and Google (GOOG 1.10%)(GOOGL 0.99%) Play, it alienated users because it wasn't backwards compatible with software for previous versions of Windows. Meanwhile, Windows 8 users complained because the Metro UI was a confusing replacement for the classic Start Menu. Microsoft got stuck between the past and the future, with decades of legacy baggage weighing it down.

Apple and Google, on the other hand, built iOS and Android from the ground up for smartphones. In 2010, Apple demonstrated that the same operating system powering its iPhones could also power tablets with the iPad. With one fell swoop, Apple did what Microsoft failed to do with the Microsoft Tablet PC in 2002 -- it made an affordable, lightweight, and easy-to-use tablet that appealed to the masses.

While Apple and Google were expanding their smartphone operating systems onto tablets, Microsoft's Wintel partners took the opposite approach -- they tried to slim down laptops into convertible devices and hybrids.

2. Repeating the mistakes of the past
To understand where the Surface is headed, we need to understand what happened to the Microsoft Tablet PC over a decade ago.

Microsoft's Tablet PC. Source: Wikimedia Commons.

Instead of envisioning the Tablet PC as a mobile device, Microsoft wanted it to be a full-featured laptop, causing the price to top $2,000. It ran Windows XP, instead of a streamlined operating system for touch screens. To deal with clicking small icons, the Tablet PC relied heavily on a stylus. As a result, it was too weak and expensive to replace a traditional desktop, but also too bulky and clumsy to replace a laptop. Since the Tablet PC failed to gain a foothold in homes or offices, Microsoft tried to market the device to graphic designers and computer-aided drafters.

The Surface Pro 3 shows that Microsoft still hasn't learned from those mistakes of the past. The Surface Pro 3, just like the Tablet PC, still isn't priced competitively against its peers:

Sources: Microsoft, Best Buy.

The lower-end Surface Pro 3 with the Type Cover costs more than similar laptops, but has a less powerful CPU. Meanwhile, the high-end model with the Type Cover costs well over $2,000 -- considerably more than comparably powered Ultrabooks.

3. Targeting the wrong audience, again
In addition to uncompetitive pricing, Microsoft is still targeting the wrong audience. The company has emphasized that the Surface Pro 3's 12-inch screen and stylus would be a good fit for graphic designers. True as that may be, graphic designers and drafters are still considered a niche market, just as they were back in 2002.

Apple's iPad succeeded for the same reason as the iPhone -- it tapped into a market of consumers who believed that smart devices, such as BlackBerry (BBRY +1.58%) phones, were only designed for business users. Apple took that technology, simplified it for mainstream consumers, and created a hit device that accounted for 17% of its revenue last quarter.

By contrast, Microsoft hopes that emphasizing the productivity aspects of the Surface -- the ability to multitask, use graphical design programs, and use Office software -- will convince users that Windows 8 devices are still relevant. Unfortunately for Microsoft, the Surface and Windows tablets lost a lot of credibility as productivity devices when the company released Office for the iPad in March.

Is the Surface about to crack and shatter?
Supporting the Surface has been a costly affair for Microsoft. Last quarter, Microsoft reported that the Surface generated $1.8 billion in revenues over the past nine months, but the cost of revenues -- from marketing and supporting the product -- soared to $2.1 billion.

A loss of $300 million might not be a big deal for Microsoft, but investors should wonder why it insists on supporting the Surface at all. So far, the Surface Pro 3 looks less like an evolution of the Ultrabook than the broken successor to the Microsoft Tablet PC. In closing, I'll stick with my previous assessment of the Surface -- Microsoft should kill it now and focus on improving its software and cloud-based ecosystem instead.