Will the Surface Pro Create Wonders?

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Was the entry of Microsoft Corporation (NASDAQ: MSFT) into the hardware business another expensive business decision? That question is being asked in the light of the not-so-stellar sales performance of the Surface Pro tablet. Is it another aQantive déjà vu?

Toward the end of 2012, Microsoft moved outside its core products of software and ventured into hardware by manufacturing the Microsoft Surface, riding on the growing demand for computing devices larger than smartphones but more portable than laptops.

As a listed company, Microsoft has been performing relatively well with a P/E ratio of 15.17 and earnings per share of $1.83. However, on July 20, 2012, the company logged its first quarterly loss of $492 million due to its 2007 purchase of aQuantive for $6.2 billion even if it earned record revenues for the quarter and fiscal year.

Until Microsoft’s purchase of Skype in 2011, the aQuantive deal was the tech firm’s largest acquisition. However, after five years, the online advertising business logged about $10.4 billion losses, leading to the writedown. 

Follow the leader

Microsoft, by adding new products, hoped to follow the approach taken by industry leaders Apple (NASDAQ: AAPL) and Blackberry which were game changers when they released their iPhone, iPad and BlackBerry devices.

The tech giant, the current market leader of the PC OS and office suite market, attempted to gain market leadership in tablets by releasing on the second week of February 2013 the Surface Pro, one of two versions of the tablet. However, while the first version, which was a less powerful model, was met with generally positive reviews, Microsoft has a lot of work to catch up with competition. Only 3% of tablets shipped during the December 2012 quarter used its OS despite massive advertising campaigns in New York.

Priced at $899, the Surface Pro was said to be sold out at Microsoft’s online stores in U.S., but the volume of shipment was estimated at only 1 million units compared to the Surface RT’s 4 million tablets. Critics dismissed the success as not backed by actual numbers but relied on word-of-mouth testimonies from stores, which appeared to have carried only a handful. Nevertheless, beyond sales figures, the Surface Pro release is still considered a success for setting a higher benchmark for future Windows products and setting expectations for tablets. The tablet also has several positive points such as its Intel Core i5 Processor, which runs the full version of Windows, although it is pricier vis-à-vis Apple tablets. 

Meet the competition

With so many tablets on the market, consumers have a wide range to choose from, with Apple’s iPad and Google (NASDAQ: GOOG) Nexus taking the lead. By releasing the Surface Pro, Microsoft is directly competing with Android on software sales as well. However, its main competitor is still Apple’s iPad. To snare more market share, Microsoft released the Surface Pro with apparent better features such as a larger screen, more sophisticated OS, and unique cover-keyboard.

In response, Apple lowered the price of its 13-inch MacBook Air by $100, to $1,399, and improved specs by using a 1.8GHz dual-core Intel Core i5 Processor, 4GB of RAM, and 265GB of flash hard drive. The $400 difference with the 128GB Surface Pro is made up by the Air’s lighter weight, higher power, longer battery life, double internal storage, and an ultrabook chic.

In contrast, the Surface Pro was seen as a compromised tablet and a compromised laptop.

Google’s Samsung-manufactured Nexus 10 has higher specs and the latest Android 4.2 Jellybean OS. The device is also cheaper, at $399 for the basic version with 16GB of internal storage.

Given the price difference, tech experts believe that unless Microsoft lowers prices, the clear winner in the tablet category would still be Apple, the tablet pioneer. “In the long run, consumers may grow to believe that high-end computing tablets with desktop operating systems are worth a higher premium than other tablets, but until then [average selling prices] on Windows 8 and Windows RT devices need to come down to drive higher volumes,” said IDC mobile device analyst Ryan Reith.

Will it be a game changer?

Microsoft CEO Steve Balmer said that he is satisfied with the Surface Pro’s performance and role in integrating hardware and software for the entire Windows ecosystem, although he acknowledges that it would not yet dominate volume. Nevertheless, Surface Pro is expected to ride on the rising global demand for tablets, estimated by the International Data Corporation to have grown by 75.3% in the last quarter of 2012, with shipments up to 52.5 million, almost double the 29.9 million shipments for the same period in 2011.

Major economic forecasters all agree that the global tablet market will grow in the next few months, with growth estimates ranging from 26% to 64%. While the Surface Pro needs to clear many challenges, ranging from pricing to clearer identification, Microsoft can still count on its strong brand recognition and the OS and processor inside to attract more buyers to the newly released device. However, Microsoft clearly needs to listen to expert advice and reduce the price tag to attract more buyers under tighter market conditions.

RhodoraDagatan has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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