Microsoft's Surface Pro 3. Source: Microsoft
Microsoft (MSFT 1.92%) surprised investors this week by announcing that its beleaguered Surface Pro 3 tablet had actually sold out...in select markets. In Australia, some retailers had sold out by lunchtime on the first day of sales. And this wasn't just a one-country issue: China, Germany, New Zealand, South Korea, and the United Kingdom all reported some degree of stockouts of the tablet.
Finally! Microsoft investors and fans have clamored for positive news regarding the tablet since its introduction this summer. Alas, good news for Microsoft's tablets has been hard to come by. Its initial rollout of the tablet was marred by missteps: The entry-level, first-generation unit -- then branded Surface RT -- was widely considered a disaster, and the subsequent $900 million writedown was credited with Steve Ballmer's exit as CEO.
It's not just Microsoft's tablet line that is underperforming; Windows Phones and Xbox One devices are also considered runners-up in their respective categories. So you can forgive Mr. Softy fans for celebrating at the slightest hint of positive news. However, let's pump the brakes on the party -- for the time being.
This might not be demand-derived
Going back to basic economics, stockouts at a fixed price point result from either excessive demand (a positive for investors) or from inadequate supply (less positive). Unfortunately for Microsoft investors, the company squarely pins the stockout on the latter.
Brian Hall, Microsoft's general manager for Surface marketing, stated in a blog post:
Due to the response, Surface Pro 3 is in limited supply in some markets. Given the interest that we saw as part of our US launch, retailers ordered what we thought was a healthy amount of Surface Pro 3s for these new markets. It turns out that we didn't ship enough.
Apparently, the company expected demand to be rather low. And that's understandable, as demand for Microsoft's Surface tablets in the United States has been subdued. So to avoid another huge writedown on unsold inventory, Microsoft appears to be staying conservative in modeling for demand.
But it could be
On the flip side, it is entirely possible there's pent-up demand for the Surface Pro 3. Traditionally, Europe has been more Windows Phone-friendly than the United States, and having a native Microsoft Windows and Office productivity suite is important to some consumers as opposed to Apple's iPad and Google's Android tablets. In addition, Microsoft has been positioning the Surface Pro 3 more as a laptop replacement more than an actual tablet.
That said, Microsoft has been accused before of intentionally keeping supply low and then and pointing to stockouts as proof a device is a hit.
The company also experienced stockouts in January for its second-generation tablets -- the Surface 2 and Surface Pro 2. A company representative said:
The public response to Surface has been exciting to see. It is our primary goal to get Surface 2, Surface Pro 2 and new Surface accessories into the hands of all people who want the most productive tablets on the planet. We're actively working with our manufacturing teams and retail partners to get Surface in customers' hands as soon as possible.
The Surface 2 and Surface Pro 2 were widely considered flops, leading many to question the validity of Microsoft's boasting about these devices. In addition, the company was accused in a lawsuit of outright lying about first-generation Surface RT sales. With that in mind, it's understandable that the company would err on the side of caution.
Final thoughts
Microsoft fans have looked for positive news about any of its devices -- and now it seems it has delivered just that. Will the Surface Pro 3 tablet be a game changer in foreign markets? Probably not, but investors should watch the Surface's global rollout for continued momentum.
