When it launched, Microsoft's (MSFT 1.40%) Surface received a huge promotional push.
Remember the well-choreographed ads that were somewhat inescapable on TV especially if you watched NFL games? The company thought it had something in its hybrid laptop/tablet running the RT and touchscreen-friendly version of Windows and it spent big to push it out to consumers.
The problem was that the public wasn't buying. The problem may have been the price point or that people did not really understand the differences between RT and full-on WIndows. Even when Pro versions of the device were launched running actual Windows 8, the public's interest was largely not there.
This led to the company taking a $900 million writedown on unsold Surface RT inventory in July of 2013, and the future of the once-promising device looked bleak. Microsoft may have built a better mousetrap, but people weren't buying it.
Instead of admitting defeat, Microsoft corrected some of its mistakes and doubled down. The company launched the Surface Pro 3 in June 2014 and the Surface 3 in May 2015. Both run full versions of Windows and both have been pushed as Apple (AAPL +0.17%) MacBook Air rivals rather than iPad alternatives.
With those changes, Surface has shown some life, and it might be poised to finally become a hit.
How have the numbers improved?
Lost in Microsoft's fairly dismal quarter (which was driven by one-time charges) was that Surface revenue has perked up. The company reported 117% growth in revenue for its hybrid, up to $888 million for the quarter.
CEO Satya Nadella clearly has faith that Surface has turned a corner, citing it in his remarks in the earnings release for the quarter that ended June 30 as an area for continued investment. "Our approach to investing in areas where we have differentiation and opportunity is paying off with Surface, Xbox, Bing, Office 365, Azure and Dynamics CRM Online all growing by at least double-digits," said Nadella.
Surface posted $3.6 billion in revenue for the year, up 65% over 2014. That's strong growth and at least a sign that the public may be starting to understand the device and where it might be useful.
Why is it working now?
Source: Microsoft.
When Surface launched, it was pushed as an iPad alternative that could also function as a laptop. The problem was that the original RT version was sold for $499 with the keyboard costing roughly another $120-$130 on top of that. That made Surface a more expensive solution to a problem that iPad users did not seem to have.
Commercials for the Surface Pro 3, however, began to compare the device with the MacBook Air. The Microsoft device was shown as a laptop that also worked as a tablet. That's a subtle distinction, but it's one that made the 3 line seem like a good deal. The Surface 3 starts at $499, while the Surface Pro 3 starts at $799 (and you still need to buy a keyboard).
Compared to iPad, Surface is expensive but compared to MacBook Air, which starts at $899, it's a reasonable deal.
Does that mean Surface is a hit?
It may be too soon to call Surface a hit, but it is on its way to establishing itself as a viable product. Microsoft has done a good job in its latest round of marketing making the 3 line seem like powerful machines that are versatile and a good value.
With the launch of Windows 10, the company has an opportunity to continue that momentum. Surface fills a market niche. It's a hybrid that actually works well as a laptop rather than a tablet with a keyboard awkwardly paired to it.
That should continue to appeal to business customers, and it should let Surface continue to grow its audience. It's not a hit yet, but it's solidly moving toward success -- a huge leap for a product line that looked dead in the water not so long ago.
