January 04, 2013

Microsoft's Damnably Dumb Surface Tablet Strategy


We've been very positive and impressed with the entire idea of Microsoft's Surface tablets going back to the day Microsoft announced them last year. Since then we've been impressed with the Surface RT, and though we haven't yet had a detailed run through of the Surface Pro, our expectations for it remain quite high. Microsoft, we believe, has done a great job in developing the hardware and in getting Windows 8 mostly right. The combination of the two has set our "expectations bar" quite high, and we don't anticipate being disappointed.

Meanwhile, Microsoft has launched a huge marketing campaign, which Microsoft has also almost gotten  right, at least from our own non- advertising expert perspective. For all we know they've committed a major marketing faux pas or two, but we haven't seen any - with the exception of one we'll note in a bit. We find the marketing appealing and it works to want us to get into the stores try them out. Ah, but here is where we run into the real roadblocks Microsoft has managed to create for itself as far as the Surface is concerned.

How could the Surface not have been available at Best Buy or Staples (we do note they are available now)? Or any of the other places a user is likely to go to give such a beast a test run before parting with $500 - $600? How could it not have been there on the day of the launch on October 26, 2012?!


Image via www.microsoft.com

How does a company that is currently listed at number 37 on the Fortune 100 manage to so entirely screw up its distribution and availability plans for a product that must be easily and widely accessible and "touchable" by potential buyers? The entire thing stinks to us of the old Microsoft hubris - "we'll build our paltry collection of stores and pop up shops and users will flock to us in droves to try the Surface out." We can see Steve Ballmer sitting in his office and happily nodding his head and approving such a stupid plan.

How can Microsoft possibly have been so dumb? Well, for those of us who watched the initial launch of Windows Phone 7 back in 2010, it isn't hard to believe though we were hoping for the best. This isn't simply an easy Microsoft-bashing moment. It's a hard core reality moment - and as such moments go it is truly an embarrassing one for Microsoft.

Surface RT on Life Support

How bad are things on the RT front?

Well, here is an example: Davenport & Co. financial analyst Drake Johnstone cut his December-quarter Surface estimate for Microsoft yesterday to reflect much lower sales last quarter of the Surface tablet computer than he’d thought, down to 700,000 units from what he (and others among us) had thought might be two million, after he ran some retail checks that suggested to Davenport that there is little interest in the Surface from buyers.

In his note yesterday, Johnstone notes that, "We recently visited local Best Buy and Staples Stores. The Best Buy salesman reported strong demand for Apple’s iPad/iPad Mini (the stores can’t keep the Mini in stock) and Amazon’s Kindle Fire Tablets, with just a few people expressing interest in Microsoft’s Surface RT Tablet. The Staples salesman reported strong demand for Amazon’s Kindle Fire tablets and also good demand for Google’s Nexus tablet, with very little demand for Microsoft’s Surface tablet."

Johnstone continues, "In our view, Microsoft’s Surface RT tablet is far too expensive (basic model retails for $499 or $599, including the detachable keyboard/cover), relative to competitive offerings from Amazon (Kindle Fire 7” tablet retails for $159), Apple (iPad Mini retails for $329), and Google (Nexus 7” tablet retails for $249)."

Johnstone argues that the device is hampered by its high price. We're not completely convinced of this as there is substantial benefit in the fact that the Surface RT comes with a sweet Windows 8 implementation of Microsoft Office - that is actually worth quite a bit, but we are absolutely sure that most people fail to understand this. It comes down to a massive marketing failure here in not delivering this particular message.

Consumers mostly go with the flow, and the reason we believe the Surface isn't getting attention at Best Buy or Staples is due to the fact that Microsoft squandered its opportunity to generate significant interest early in the launch cycle through its lack of distribution of product outside of its limited Microsoft store operation.

That massive failure allowed Apple and Amazon to capture consumer attention exactly as the holiday buying cycle kicked in, and with no place for consumers to really go to try the Surface RT out the handwriting was on the wall. Furthermore, there is very little doubt that Best Buy and Staples employees are going to steer people to the Surface RT without the necessary anticipation by users - these are the sorts of missteps that require Microsoft heads to roll.

Will the Surface Pro Save the Day?

Although we've lost our own optimism that Microsoft will be able to pull off a Surface turnaround, Johnstone remains positive, and in his research note he reiterates a Buy rating on the stock, along with a $35 price target. Why? For the most part he makes the argument that the Surface Pro, which uses an Intel microprocessor in place of the RT's ARM chipset, which runs the full Windows 8 OS, and which is expected to ship this month, will appeal to corporate users. Johnstone believes that the Surface Pro can do better than the Surface RT and will perhaps save Microsoft’s efforts.

In his report, Johnstone suggests that, "It is possible that Microsoft will be able to generate solid enterprise demand for the new Surface Pro tablet. The Surface Pro tablet will run legacy Windows 7 software applications (including the Windows 7 version of Microsoft Office) and will also run Windows 8 applications. It is possible that corporations could be attracted to the Surface Pro tablet as a replacement for laptop PCs. If Microsoft is able to sell at least two million Surface Pro tablets per quarter over the remainder of fiscal 2013, then investors might assume that Windows 8 PC/tablet sales could improve in the second half of calendar 2013 as Microsoft’s manufacturing partners introduce a wide range of Windows 8 devices."

One thing Johnstone doesn't note is that the Surface Pro will be much more expensive than the Surface RT, perhaps as much as 100 percent more expensive. Corporate dollars will certainly be easier to pry from the CFO's hands if Microsoft can prove the Surface Pro a truly viable alternative to laptops. The cost won't be prohibitive from that perspective.

The problem is that very few people in the workforce will pick one up and bring it in from a BYOD perspective, which is a vital piece of the underlying marketing necessary to ensure enterprises become interested in it. That is an iPad advantage of gargantuan proportions to overcome. It is also an underlying reason why the Surface RT needed to have a huge and successful launch in the two to three million unit range, rather than the paltry 700,000 Johnstone now believes will be sold in the current quarter.

Well, we wish Microsoft luck here, but luck won't cut it. Microsoft needs to roll some product distribution heads and stop being so damnably stupid. It's a sad shame that such a worthy product - that should have set some sort of Microsoft leadership in play - should instead find itself floundering at this point in time.




Edited by Brooke Neuman



Related Tags

Google    Intel    Microsoft
Apple    Tablet    Software

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