When Microsoft (NASDAQ:MSFT) first launched its Surface line of tablets at the end of 2012, the company's strategy wasn't quite right. The original Surface, featuring the ARM-based Windows RT, didn't make much sense. It couldn't run any desktop applications, removing Windows tablets' one advantage over Android and iOS tablets.
The Surface Pro, now in its third iteration, made far more sense. These tablets are true laptop replacements, with powerful Intel processors, and the latest version, the Surface Pro 3, has a large 12-inch screen for increased productivity. The Surface Pro 3 has been a success, powering the Surface business to $1.1 billion in revenue during Microsoft's second fiscal quarter.
With the recent announcement of the Surface 3, due to be launched in May, Microsoft has finally abandoned its ill-fated foray into ARM-based tablets. An Intel Atom x7 processor will power the device, allowing for all the functionality of the more expensive Surface Pro 3. Priced at $499, with the attachable keyboard adding another $129, the Surface 3 is positioned as an iPad alternative, providing far more versatility than Apple's market-leading tablet.
A game changer, but not because of the price
The Surface 3 is a game changer for Microsoft's tablet efforts, although not for the reason many seem to think. The Surface 3 is not the first device to bring Windows into an affordable 2-in-1 form factor, and it's certainly not the cheapest to do so. Compared to other Windows devices, the Surface 3 seems downright expensive, particularly considering that the keyboard costs extra.
But the point of the Surface 3, I suspect, is not to compete with OEMs making Windows devices. The point is to create a product that defines the Windows ecosystem, one that stands out in a sea of cheap Windows and Android tablets, presenting a viable alternative to the iPad. The Surface 3's job is to bring people into the Windows ecosystem.
Surface 3-like devices have been around for quite some time; Asus, for example, has had some success selling its Transformer line of 2-in-1 Windows devices. Asus recently released a new version, the T100 Chi, which is quite similar to the Microsoft's Surface 3.
The T100 Chi is powered by an older Atom processor, but performance should be similar to the Surface 3. The Surface 3 has a slightly larger screen, but both devices feature nearly identical resolution. The T100 Chi is priced at $449 for the version with 64GB of storage, matching the base version of the Surface 3, but the Asus device includes its keyboard. In all, the T100 Chi is nearly $200 cheaper than the Surface 3 with a keyboard attachment.
If the iPad has proven anything, it's that price and specs alone don't sell devices. The iPad isn't the most powerful tablet out there, and it's certainly not the cheapest. Part of the iPad's success stems from the strength of Apple's ecosystem, thanks largely to the iPhone.
Another component is the lack of a well-defined alternative. When someone who doesn't closely follow technology and gadgets goes to buy a tablet, the choice is often between an iPad and everything else. There are a ton of choices, of course, but most people probably aren't going to weigh them all before making a decision. Asus' Transformer devices have proven to be popular, but this popularity is dwarfed by the iPad's.
With the Surface 3, Microsoft has the opportunity to create a real second option for prospective tablet buyers. People are already likely far more aware that the Surface exists compared to something like Asus' Transformer devices, and I'm sure Microsoft will put a considerable amount of money behind marketing the Surface 3. Awareness is half the battle.
The second half is convincing people the Surface 3 is a better choice than an iPad. Of course, part of this comes down to preference, and for those looking for a device that will be used solely for consumption, the Surface 3 has no advantage. But the iPad isn't built for productivity, and the Surface 3 should be more appealing on that front, especially once Windows 10 is released.
Microsoft hasn't done anything revolutionary with the Surface 3; other, cheaper devices are very similar to Microsoft's new tablet. But the Surface 3 represents a shift in strategy for Microsoft. Instead of throwing cheap tablets at people and hoping they stick, Microsoft has created a premium device, priced similarly to the iPad, in the hopes that quality can draw people into the Windows ecosystem. It's a play directly out of Apple's playbook, and it's a game changer for Microsoft's Surface business.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple. 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.