When many investors think about the hottest tech devices of 2014, they probably think of Apple's (AAPL +2.59%) iPhone 6, Samsung's scattergun selection of smartwatches, or Facebook's Oculus Rift.
But looking ahead, Microsoft's (MSFT +0.60%) Surface Pro could be one of the top devices to watch in 2015. Not only is this "laplet" important for Microsoft, but it could play a pivotal role in the future of PCs and tablets.
Microsoft's Surface Pro 3. Source: Microsoft.
The evolution of PCs and the decline of tablets
When Apple's iPad made tablets cool again in 2010, some companies believed that they would render traditional desktops and laptops obsolete.
Hewlett-Packard famously overreacted by launching (and quickly scrapping) its TouchPad webOS tablet in 2011. Microsoft then tripped up its hardware allies with Windows 8, a confusing combination of tablet and PC operating systems which alienated users of both. Frustrated PC makers launched Android tablets, but those devices were quickly crushed by sleeker tablets from Samsung, which sold tablets continuously since 2010.
The PC market didn't crash, but sales declined. Research firm Gartner expects PC shipments (desktops and traditional notebooks) to slide 6.7% year-over-year in 2014, and another 5.3% in 2015 to 261.7 million units. However, Gartner expects sales of "ultramobile and premium" devices, which include 2-in-1 devices like Microsoft's Surface and Lenovo's Yoga Pro devices, to soar 50% in 2014, and another 70.6% in 2015 to 55 million units.
Meanwhile, tablet sales are grinding to a halt. IDC expects the tablet market to only grow 7.2% in 2014 to 235.7 million units, a major slowdown from the 52.5% growth it posted in 2013. This slowdown, reflected in Apple's three consecutive quarters of declining iPad sales, has been attributed to longer upgrade cycles and the rise of phablets and 2-in-1 devices.
Why Microsoft's Surface Pro matters
A phablet may replace a tablet as a media consumption and gaming device, but Android and iOS tablets still aren't comparable productivity devices as Windows laptops. Although Microsoft offers free versions of Office 365 for iOS and Android, and Adobe offers its Creative Cloud for both platforms (a preview version on Android), many Windows apps still lack mobile equivalents.
That's where Microsoft's Surface Pro 3 acting as a bridge between traditional laptops and tablets, comes in. Bridging the gap between tablets and laptops might not matter much to mainstream consumers, but it matters to large businesses, most of which are dependent on Windows-compatible software.
Startups and small to medium-sized businesses (SMBs) can start fresh with tablets and cloud-based servers. However, large companies are burdened with years of legacy data and software, making it impractical to upgrade aging PCs to iPads. That makes the Surface Pro 3, which runs on Windows, an ideal replacement for older Windows PCs. The Surface can transform into a full desktop via a docking station, and it can be carried around the workplace -- resolving the need for custom iPad apps tethered to PC workstations.
When Surface sales more than doubled both year-over-year and sequentially to $908 million last quarter, Microsoft attributed that growth to "strong interest from students, professionals, and increasingly enterprises".
Windows 10 and the cloud
If enterprise adoption of the Surface Pro continues into next year, it would serve as an ideal launch platform for Windows 10 in mid-2015.
If Windows 10 is really a free or cheap upgrade for Windows 8 devices (as Microsoft's Indonesia President previously suggested), Microsoft could use the Surface to secure its Windows 10 user base against enterprise challengers like Apple and Google (GOOG +2.00%) (GOOGL +1.71%). Since Windows 10 will be the "One Windows" OS for desktops, laptops, tablets, and smartphones, a strong enterprise presence could cast a halo effect on sales of all consumer-facing Windows devices.
Source: Microsoft.
More importantly, it would allow Microsoft to tether all of these devices to its rapidly growing cloud ecosystem. At the end of fiscal 2014, Microsoft reported that its annual run rate for its cloud business had doubled to $4.4 billion.
What Microsoft investors should watch
If Surface sales keep rising next year, its hardware allies will likely launch more similar Windows devices instead of traditional tablets. This would help Microsoft expand its defensive moat against disruptive challengers like Apple and Google.
But if Surface sales unexpectedly fall, it could mean that Apple, which is partnered with IBM in a massive enterprise initiative, and Google, which is offering Chromebooks to SMBs, are gaining ground in large businesses.
