During the holiday season we have been
taking a closer look at the Microsoft Surface tablet and assessing
interest among consumers, enterprises and app developers.
Our take is that the current version of
Surface has some interesting aspects but lacks the critical mass of
capabilities and design elements to really "move the needle" for
Microsoft in the near future. Our skeptical view is shaped by several
- The Surface feels more like a ultra-portable laptop rather than a
tablet. It features high resolution graphics, good amount of memory,
ports for storage cards, detachable keyboard and a built-in stand for
the screen. The device is priced competitively vis-a-vis the AA-team
(Android and Apple) tablets. There is a a small but growing portfolio of
apps and a keen sense of interest in the device by both apps developers
and enterprise buyers.
- The Surface appears over-engineered and overloaded with features.
Many of its controls are not exactly intuitive. Unlike the case with iOS
and Android tablets, Surface is not the device that kids will learn to
use before they can read.
- The detachable keyboard was the one feature that garnered the most
attention when Surface was announced. We find it one of the most
distracting. The standard keyboard has a feel of embossed rubber and
takes a lot of getting used to. One might just use the on-screen
keyboard or buy a high quality external keyboard from a number of 3rd
party makers. There is a higher quality keyboard available from
Microsoft - one with vastly better feel but one that has many moving
parts. We are very skeptical if this keyboard gimmick adds any real
value and pretty sure that on a component basis Microsoft will not make
any real money on this feature - just eat into the gross margin. In our
view, tablets remain content consumption platforms. A keyboard is a
content creation device - if one needs to develop lots of new content,
one is likely to use a real laptop.
- We find the lack of a broadband connectivity puzzling. A new version
of Microsoft Surface tablet is due out later this month and will
feature the Windows 8 operating system. It is also not expected to
feature broadband capability. Microsoft Store staff tend to respond
dismissively to questions about the lack of a 4G capability - "use your
phone as a hot spot" was what we heard in a few different Microsoft
stores. Lacking a broadband capability the Surface in its current form
is not a real contender for either consumer hearts or the enterprise IT
- As mentioned earlier, the Surface in many respects feels more like a
slimmed down laptop rather than a mobile tablet. Of all of the features
emphasized by Microsoft for Surface, only security (at least on paper)
seems compelling from an enterprise perspective. The ability to run
Office apps on the device may be interesting to some users, but
ultimately tablets are not used to produce content but are optimized to
consume it. If Microsoft is thinking of using Surface as a wedge that
can redefine what is a laptop and what is a tablet, then they have a lot
of work ahead of them.
We do not believe that in the near
term the Surface sales results will drive Microsoft stock performance.
Any upside surprise from Surface is very limited and downside risk is
already largely factored into the stock. Microsoft equity is cheap by
almost every conventional valuation metric. But as we often pointed out
in the past, stocks like Microsoft get cheap for a reason - the
rationale being an uncertain strategy, a product line with no real
traction and a cloudy outlook.
Two of the major tech mega-trends -
Cloud Computing and Mobile - slice at the heart of Microsoft's business.
The company initiatives in both areas have had at best, a bumpy ride
driven by an un-differentiated strategy. With mobile, Microsoft
basically has a year to get itself into position of relevancy - confirm
traction with consumers, enterprises and developers and make the Surface
stand out in at least one area. We remain content for now to treat the
Surface as a learning experiment for Microsoft. The company has had a
successful history of taking a long-term approach to market spaces
dominated by others. But this time around the long-term can not take too
long. If in a year's time we are forced to make the same skeptical
comment about the next version of Surface, then the downside risks for
Microsoft become very significant.
go or no-go decision on this tablets will ultimately be pronounced by
consumers and we are very skeptical about the potential of the current
version of Surface to generate anything above curiosity or capture share
for more than a few of the mainstream apps.