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Video: Microsoft goes after the iPad with low-cost Surface Go
Microsoft has metamorphosed several times in its corporate life, but one trait has remained consistent throughout. When the company decides to enter a market, it’s relentless in its efforts to gain a toehold.
That was true in the 1980s and 1990s, when Bill Gates and his lieutenants scratched and clawed their way to a market position so dominant they lost a landmark antitrust trial.
And it’s still true in the Satya Nadella era, as evidenced by the surprising success of the Microsoft Surface division.
Microsoft just closed the books on its 2018 fiscal year. As usual, it didn’t break out unit sales or revenue for the Surface division, but after going through the last four quarterly reports I was able to calculate that the division brought in total revenue of about $5 billion.
No one in their right mind would have placed a bet on that number five years ago. At the end of FY2013, Microsoft had to take a one-time writedown of $900 million to account for the spectacular failure of its Surface RT.
Many companies would have given up at that point, but not one run by Steve Ballmer, who famously described Microsoft’s approach as “long-term, tenacious, and partner-centric.”
As he once told an arena full of partners, “We don’t go home. We just keep coming and coming and coming. Tenacious, tenacious, tenacious.” (As Ashlee Vance noted when transcribing those remarks for the New York Times, “The man likes to talk in threes.”)
In fact, while PC shipments overall have been flat or down for the past four years, the Surface business has been growing at a compound annual rate of better than 22 percent a year.
Data from Microsoft SEC filings
To put that in perspective: In less than six years, the Surface business has grown to roughly 20 percent of the size of Apple’s entire Mac business. Apple brought in just over $25 billion in revenue in the fiscal year that ended September 30, 2017. Its compound annual growth rate since 2014 is 2.4 percent.
And that trend is holding steady in 2018. For the two most recent quarters that Apple reported, its Mac revenues were down 5 percent and flat, respectively.
By contrast, Microsoft’s Surface business was up 25 percent and 32 percent in its most recent two quarters. (In fairness, Microsoft’s SEC filings note that the previous year comparables were “impacted by product end-of-life-cycle dynamics.”)
So what accounts for this steady success in a market where other OEMs are struggling? In a word, good products.
After the Surface RT disaster, Microsoft didn’t have much luck with its first two Surface Pro models, which were bulky, quirky, and unlike anything the market had ever seen. (Being a showcase for the unloved Windows 8 didn’t exactly help, either.)
And then came Surface Pro 3, which went on sale a few days before the start of Microsoft’s fiscal 2015. At the end of that fiscal year, the company noted in its official SEC filing that “Surface revenue increased 65 percent to $3.6 billion, primarily due to Surface Pro 3 units sold.”
(I noted with interest that that FY2015 annual report was the one and only time Microsoft has disclosed its annual Surface revenue instead of hiding it in a series of arithmetic problems over the course of four quarterly reports.)