Microsoft’s Surface: Lower Fiscal Visibility, More Strategic Investment
Summary
Microsoft is removing Surface business results from its quarterly reports, but Surface remains strategically important. The fall Surface Event included solid updates to several products, continued exploration of innovative new form factors, and extremely important work on accessibility and the environment.
Why Does Microsoft Make Hardware?
How important is hardware to Microsoft? In direct financial terms, not very. Microsoft is a diversified tech behemoth, with its largest divisions being cloud and business software and services. Surface brings in about 4% of revenue, and growth is in single digits. Reflecting this reality, Microsoft announced last week that it will stop breaking out Surface revenues in quarterly earnings releases. Surface revenues can have wild quarterly swings based on update cycles, supply chain disruption, and possibly the phase of the moon; they don’t amount to all that much anyway, so why highlight it?
In a Wall Street Journal article, Dan Gallagher notes this change and asks why Microsoft bothers with hardware at all. He concludes that “Microsoft stays in hardware because it can;” Microsoft’s other businesses are so profitable that Microsoft can afford to build devices that don’t really impact the bottom line. I disagree – and so does Microsoft. Microsoft considers Surface strategic to its software and services business, and provides R&D investment accordingly. The org chart reflects this view, too. Panos Panay was once just ran the Surface hardware group. He is now Microsoft’s Chief Product Officer, is in charge of Windows, and was recently added to the Senior Leadership Team advising CEO Satya Nadella.
Why? Microsoft’s hardware efforts broadly support — and often drive — Microsoft’s extensive software and services:
First-party hardware is necessary to maintain the health of the Windows ecosystem. It is undoubtedly uncomfortable competing with your licensees, and some Windows OEMs like Lenovo are wildly innovative – Lenovo will try just about anything once. The problem is that companies like Lenovo and HP are often forced to give up if that initial effort falters. It can take years to hit on the right implementation of a new device form factor or feature and to reach market acceptance; Microsoft can afford to invest in new form factors and use cases for multiple generations. This strategy has been proven with the Surface Pro (and the tablet-first convertible form factor generally), the Surface Pen, and Surface Hub.
HoloLens has forced Microsoft’s enterprise software developers and developer tools groups to create apps and frameworks for AR. It is too early to tell whether Apple or Google or Facebook will sweep in with consumer hardware that captures the headset market before Microsoft gets there, but thanks to iterating on HoloLens hardware, Microsoft is ready to provide Dynamics apps running on Azure with Mesh positioning and Teams collaboration on whatever system ends up winning.
Microsoft’s Xbox hardware is the ultimate case of selling hardware in order to drive software sales, as Microsoft deliberately loses money on every console sale and makes it up on game licensing fees and Game Pass subscriptions. Gaming overall is profitable for Microsoft and is growing at double digit rates.
Microsoft reentered the smartphone market with the Surface Duo last year. The Surface Duo is unquestionably a bold and risky bet, and it does not even run Microsoft’s own OS. However, by building a dual-screen Android phone, Microsoft is centering the Surface Duo’s unique productivity-centric value proposition around Microsoft’s extensive library of mobile/cloud apps including Outlook, Office, Game Pass, OneNote, OneDrive, Teams, and Bing.
Surface Event Highlights
Surface Adaptive Kit: the Best of Microsoft
Building hardware forces a focus on the user experience, and there is no better example of attention to human factors than accessibility. Microsoft’s Xbox Adaptive Controller introduced in 2018 is a triumph of thoughtful design aimed at disabled users. At the Surface Event last week Microsoft followed it up with the Surface Adaptive Kit for select Surface devices. The tactile stickers, high-contrast cable labels, and pull tabs were designed for the disabled, but will benefit a broad range of consumers with temporary or permanent vision or coordination issues. In other words, everyone.
Surface Pro 8: Microsoft’s Mainstream Design Gets a Proper Makeover
While the Surface Adaptive Kit may be the most important product announced at the Surface Event, the Surface Pro 8 is the volume product in the line, having established itself as the premier tablet-with-keyboard-cover laptop replacement option for both consumers and large corporate buyers. However, the Surface Pro industrial design has been overdue for an update, so Microsoft is adapting the rounded edges and integrated Surface Pen charging cradle that debuted on the Surface Pro X in 2019. The internals get a proper overhaul as well, with Intel’s 11th gen processor and Evo platform providing 40% and 74% faster CPU and GPU performance respectively. Microsoft was slow to move away from USB-A ports; this made sense initially, but the Surface Pro 8 gets a pair of proper USB-C with Thunderbolt. The display gets a 120Hz refresh rate mode which makes scrolling and gaming smoother, but was likely included mainly to support Microsoft’s new Surface Slim Pen 2.
Surface Slim Pen 2: Looks Great on Paper
The Surface Slim Pen 2 adds haptics (vibration) to improve the feel of writing and drawing; this is a great idea in theory, but we need to get hands on to determine if it makes a difference. When you pull out the pen in Windows 11, a context-sensitive ink menu pops up. Throughout its hardware presentation, Microsoft promoted new Windows features, Game Pass, and partners who support them (ex: Adobe) or enhance the hardware itself (Dolby). However, the new pen and Signature Keyboard still do not come in the box. This arguably improves choice – pick your favorite keyboard cover color! – but mainly serves to allow Microsoft to advertise low starting prices and create discount bundles.
Surface Pro X WiFi: Arm for a Lower Price
The Surface Pro X remains in the line, and a budget WiFi-only model has been added to bring starting prices down to $900 (again, without the $180 keyboard, $130 Pen, or $280 combination). Using Arm to hit lower price points is a fine tactical decision, but it is a big letdown from Qualcomm’s strategy to make cellular integration core to the value proposition. With Windows 11, Microsoft has been adding better Windows app compatibility on Arm via emulation, but this does require horsepower, and the Surface Pro X WiFi SKU is only available with the SQ1 processor from Microsoft and Qualcomm, not the faster SQ2. Techsponential has a first generation Surface Pro X with an SQ1 that we plan to test with Windows 11 to see what performance is like.
Surface Go: Microsoft’s Sort-of Answer to the iPad and Chromebooks
The Surface Pro X WiFi is not Microsoft’s true budget convertible – that would be the Surface Go. Microsoft is updating the Surface Go with a 60% faster 10th gen Intel i3. That processor is clearly not aimed at high performance computing, but the Surface Go must have found a market because this is the second time that Microsoft is updating it. There is not much else new here, so during the presentation, Microsoft simply highlighted all the Windows 11 features, including user accounts for kids that Apple’s iPad does not offer. At $399 without the keyboard, this is still more of a mini laptop replacement than a tablet, but at least the new internals mean you should be able to run both Zoom and Edge and have a bunch of tabs open at the same time without it slowing to a crawl.
Microsoft did not update the Surface Laptop Go, which can be configured for reasonable performance and will support Windows 11, nor did Microsoft update any of the full sized Surface Laptops at this event.
Surface Laptop Studio: Yes, Please
The most aspirational product that Microsoft announced was the Surface Laptop Studio, an experiment in form factors that replaces Microsoft’s Surface Book. The Surface Book tried to combine a huge tablet with a pro laptop base, but the extended flexible hinge and latch mechanism made the Surface Book large and bulky. The Surface Laptop Studio combines a laptop base with a hinged display that folds out over the keyboard or down flat for drawing. The design is much smaller, much cooler, and far more utilitarian than the Surface Book’s removable display that nobody removed. Microsoft is not the first to bring the display forward over the keyboard into a media and presentation posture, but it is the first targeting pro buyers rather than ultraportable. Power is supplied by 11th Gen Intel H Series processors NVIDIA 3050 Ti laptop GPUs. That, plus a 120Hz display and Microsoft’s superb keyboard should make software developers and designers happy, even if they plan to do some light gaming. The Surface Laptop Studio starts at $1600; the keyboard is part of the chassis, but the Pen – which magnetically attaches and charges underneath – appears to be an additional purchase.
The other Surface Studio – the desktop version with a giant, 28” 3:2 5K display attached – did not get an update, despite outdated internals. Microsoft’s desktop neglect is curious, as All-In-One PCs are having a moment: Apple’s M1 based iMac is a hit, and HP announced an exciting ENVY 34” widescreen PC for Windows 11.
Surface Duo 2: Improved to Better Serve as a Primary Device
The original Surface Duo felt almost experimental: the incredibly thin design and impressive hinge were undercut by missing features and extremely limited imaging that was awkward and slow to launch. This meant that the Surface Duo could be used as a companion device to a phone and a laptop, but could not replace either one. At $1,400, this was a big ask. The Surface Duo 2 is still not a mainstream device, so Microsoft is justified in raising the price further (to $1,500) in the service of making it easier to use as a user’s only smartphone.
Nearly all the hardware shortcomings of the original have been addressed. Qualcomm’s flagship Snapdragon 888 provides the Surface Duo 2 with efficient processing and 5G connectivity. The nearly 4,450 mAh battery should power the device through a full workday, despite new dual 90Hz refresh rate displays. The designs has been tweaked with a minimized center bezel, and when the Surface Duo 2 is closed, the edge of those displays is visible and forms an external notification bar. The Surface Slim Pen 2 is not included, but if you buy one, it can magnetically snap to the front of a super-thin case option and charge there. Perhaps the most promising addition is a camera array with main, ultrawide, telephoto cameras and a ToF sensor. We have not gotten hands on to see how well it performs, but the ability to launch the camera without having to rotate the device and wait for the software to react is a huge improvement all by itself.
Multitasking with two apps on two distinct displays was the strongest argument for the original Surface Duo, but with the Surface Duo 2, Microsoft showed off more apps and experiences optimized to use both displays within the app. In the camera, Surface Duo 2’s dual screen layout provides an instant review of your last shot or lets you make adjustments to the picture with controls on the other display. Microsoft also showed off other new dual-display tricks, including GamePass games with dedicated controls on the second screen. We look forward to seeing if one-handed use cases are possible with the device unable to fold completely flat in the open position (due to the camera bump), and how much the reduced bezel improves spanning content across both displays.
Ocean Plastic Mouse
Finally, Microsoft announced a new mouse partly made from plastic recovered from waterways. Microsoft’s press materials call this a “small step forward.” It is a reminder not just that Microsoft cares about the environment, but that even as the company spins out new Surface variations and invests in giant Azure server farms, Microsoft got its start in hardware with a computer mouse all the way back in 1983.
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