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Microsoft Surface - Curiosity Is Not Enough - MGI Analyst Blog

 January 15, 2013 09:37 AM

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 factors:

  • 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 budgets.
  • 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.

The 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.



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