If imitation is the sincerest form of flattery, the folks working in Microsoft's (NASDAQ:MSFT) Surface Pro pseudo-tablet unit must be on cloud nine. As Microsoft demonstrated last quarter -- its fiscal 2015 Q4 -- the 44% jump in its Computing and Gaming division revenue was, in large part, thanks to strength in its Surface sales.
At just shy of $900 million in revenue last quarter, and a whopping $3.6 billion for its fiscal year, Microsoft's Surface has struck a chord with consumers in search of hybrid computing solutions. According to data from Gartner, there are a lot of folks looking for what Microsoft's Surface has to offer. Gartner expects hybrid device shipments to jump 70% this year compared to 2014. With so much at stake, it's no wonder Microsoft is gearing up for competition, even from longtime partners like China-based Lenovo (NASDAQOTH:LNVGY).
Introducing the MIIX 700
Berlin was the host of this year's IFA consumer electronics tradeshow scheduled to run from Sept. 4 to Sept. 9. As one of the world's largest gatherings of electronics manufacturers, IFA is the ideal time to introduce the masses to new products, and Lenovo did just that. Including its MIIX 700 that looks, feels and acts eerily close to Microsoft's Surface Pro 3.
It was bound to happen: Not only are hybrid device sales expected to outpace virtually all other mobile sectors, but when Microsoft went all-in with its massive deal for Nokia's devices and services unit, it served notice to its longtime device partners.
Both Lenovo's MIIX 700 and Surface Pro 3 boast 12-inch HD displays, two top-of-the line cameras, 8 GB of RAM standard -- both are upgradeable -- and what Microsoft refers to as its "kickstand" to utilize the devices like a laptop. Not to mention both hybrids come equipped with Microsoft's new Windows 10 OS.
So, what's the big deal? Cost. Similarly equipped Lenovo models -- Microsoft sells its keyboard separately -- are expected to go on sale this November for about $230 less than today's Surface Pro 3. Has Microsoft created a burgeoning market only to get undermined by friends and foes alike? Possibly, but not likely, for several reasons.
Not so fast, Lenovo
Somewhat buried in last quarter's earnings release was news that Microsoft intended to dramatically expand its cadre of reselling partners around the world. "In the coming months," the number of Surface resellers will balloon to over 4,500 from today's paltry 150. Just think, Microsoft was on track to generate $1 billion in quarterly Surface sales with 150 folks hitting the sales pavement. With over 4,500, the sky's the limit.
In what could prove to be one of the tech sector's worst-kept secrets, the rumor mill has it Microsoft will host its own big hardware event next month, following this year's IFA gala. In addition to a couple of new Lumia smartphones -- no, Microsoft isn't exiting the phone business, as some pundits have suggested of late -- and a couple of other gadgets, word has it a new Surface Pro 4 is slated for introduction in Oct., just in time for the holidays.
As for price -- it's about $629 with a keyboard -- it gets consumers' love of deals. More Surface models with lower barriers to entry would seem a natural, particularly as Microsoft rolls out new version like a Pro 4. Not to mention that as sales continue to improve, simple economies of scale should help bring all Surface prices down.
Then there's CEO Satya Nadella's "mobile-first" mantra, which includes getting Windows 10 OS into as many units as possible, regardless of device or even operating system. Boosting search results and software sales no matter the OS may also help influence pricing as competition heats up.
Lenovo's new MIIX 700 won't be the last Surface Pro clone Microsoft comes across. With about 45,000 more resellers in the fold, and a rumored Surface Pro 4 on the horizon, Microsoft should continue to see significant revenue growth in the division -- and that's going to bring out competition, just as it should.
With its strong toehold in the hybrid market and a division that isn't shy about pushing out new models, investors needn't worry. If anything, Lenovo's new device is confirmation of Microsoft's success.