Microsoft, it's time to get serious about devices

In the summer of this year, Microsoft announced – ultimately to the surprise of no-one – its intentions to purchase Nokia’s device business in a move that, when it is completed next year, will see Microsoft effectively become a smartphone manufacturer with the kind of product integration of software and hardware that only Apple has managed to make a lasting success.

Nokia – still operating more or less autonomously as the Microsoft deal slowly progresses behind the scenes – this week unveiled a trio of new devices, including the first Windows Phone phablets, the 6-inch Lumia 1520 flagship, and the cheaper but identically sized Lumia 1320. The company also revealed its first Windows tablet, the Lumia 2520, immediately introducing an awkward overlap with Microsoft’s Surface 2. It seems likely that it will be Nokia’s one and only tablet, as it is widely believed that Microsoft will maintain the Lumia brand for its smartphones, with Surface remaining for its tablet devices.

You would be forgiven for experiencing a modicum of apprehension over this state of affairs. Microsoft doesn’t exactly have a great deal of experience when it comes to its own hardware. Yes, you can point to Xbox, but that’s a very niche market with very specific requirements; hardly a relevant comparison to the broad and infinite needs and wishes of the smartphone and PC markets. Of course, Microsoft does have Surface – but this is isn’t exactly a shining example of market success.

Yesterday, as part of its earnings report for the first quarter of its 2014 fiscal year, Microsoft revealed that, for the three months ending September 30 2013, sales of its Surface tablets had doubled compared with the previous calendar quarter. But over a year on from the launch of Surface, Microsoft has still not revealed any actual sales numbers for its tablets. That in itself is telling, but this ‘doubling’ in Surface sales tells us nothing: if I sell one slice of cake, and then another slice of cake, I’ve doubled my sales, but I haven’t really sold much cake overall.

The absence of real sales figures from Microsoft certainly implies that the news is not good, and as Business Insider points out, $400m in Surface revenue for the quarter hints at sales below one million units. The fact that the company took a $900m write-down on Surface inventory last quarter paints an even bleaker picture. And deep price cuts – with up to 30% reductions on the Surface RT – earlier this year only go to underline the fact that Microsoft did not exactly get things right on its first try.

We cannot really condemn Microsoft for this – however nervous that imperfect start may make us about the Nokia takeover – and the company is clearly undeterred by its lack of progress so far. This week, it launched its second-generation Surface tablets in a blaze of publicity, including placing a giant 383ft Surface in London’s Trafalgar Square.

But Microsoft hasn't exactly rocked the boat with its new Surface devices. In terms of design, they are virtually identical to their predecessors, a fact that some have expressed disappointment over. "The company has done some great work with its Surface accessory range"That said, it gives Microsoft the opportunity to improve its accessory support without cutting ties completely with the previous generation, so there is some merit in this choice.

The company has certainly done some great work with its Surface accessory range. A docking station for the Surface Pro and its successor is a very welcome addition, and one that many have been hoping for. Today, it emerged that Microsoft has brought forward the launch of this accessory, with it being available for purchase right now, rather than next year as originally stated. The new Touch Covers are immensely impressive too, offering greatly improved gesture support and backlit keys in a package that is somehow even thinner than the original.

With the new generation, Microsoft has also introduced us to Surface ‘blades’ – essentially Touch Covers with customised layouts for specific usage scenarios. The company showed off a DJ-centric blade for music production, as part of its Surface Remix Project, and is encouraging users to share their ideas for other blades too. The potential here is very exciting.

But blades remain a concept for now, and it is not clear whether or not Microsoft has any structured plans to release such covers, or if the company is just kicking it about as a side project and making noise about it to make Surface seem a bit more cool and exciting to consumers.

Surface could certainly use the help. The new generation of its tablets is certainly a fine, incremental improvement over the original line-up. Battery life is improved, there’s a new dual-stage kickstand, the Windows RT version gets a 1080p display… it’s all very nice.

But there is nothing to get excited about; nothing to really grab a consumer’s attention, slap them across the face a bit and get them to want this product. They don’t have Retina Displays to take on iPads; they are neither the thinnest nor the lightest; they do not offer superlative performance; and this is all to say nothing of the less than perfect state of the Windows app ecosystem.

Instead, Microsoft’s marketing of its second-gen Surfaces remains focused on the keyboard covers as a central part of the offering, despite these still being optional extras. On the Surface homepage, the main header declares the trio of Surfaces (Surface 2, Surface Pro 2 and the original RT, which lives on at a lower price-point) “the most productive tablets on the planet”, highlighting the keyboards, USB port and Office as the main selling points. 

It seems that Microsoft has adjusted its focus – having failed to make any significant impact on the consumer market with its first-gen devices, is it now looking to a more business-focused future with Surface? A report a couple of weeks ago on Surface sales in the U.K. actually suggested that that might be the case, indicating that Microsoft would be targeting the business and education sectors with the new devices, rather than aggressively chasing consumer sales.

Whether or not that is the case remains to be seen. But if it is not, then it is another indicator that Microsoft is repeating its mistakes. When one of the highlights of the Surface launch was the company pointing out that the Windows logo on the rear had been replaced by ‘Surface’ branding, it certainly seemed that way. "Microsoft has chosen to release two new products that look the same as the old ones, at pretty much the same prices"Microsoft appears to believe that the best approach is more of the same, with modest improvements.

That strategy is working out pretty nicely for Apple – but then Apple has already been giving people what they want for some time, and incremental improvements are what its customers expect. Shake things up too much – as with iOS 7 – and people get upset. Microsoft is not in that position. The last twelve months has proven, beyond reasonable doubt, that people are just not that interested in Microsoft’s tablets as they stand. Rather than look closely at the reasons for this, and make changes to improve that situation, the company has chosen to release two new products that look the same as the old ones, at pretty much the same prices.  

Some would cite this as justification enough for Microsoft to give up on devices entirely, and focus instead on what it is good at – software. But look at the company’s earnings for the last quarter. The Windows Division was down 20% year-on-year. Yes, the Windows Division includes figures for Surface, but Surface alone was not responsible for that decline. The market is changing, and consumers are increasingly finding that they do not necessarily need to replace that desktop PC, for example, or that they are more content carrying around an iPad than a larger Windows laptop. That has had a significant impact on Windows sales, as PC makers turn increasingly to alternatives such as Google’s Android and Chrome OS.

"OEMs are looking towards a future where they no longer have to pay OS licensing fees to Microsoft"Indeed, Microsoft’s once-faithful allies are now turning their backs on the company. Many OEMs were furious when Microsoft began selling its own devices; Acer, for example, was one of the most vocal to criticise the launch of the Surface tablets. Acer’s president also spoke up to complain about weak sales of Windows 8 devices, as well as consumer confusion surrounding Microsoft's products. All of Microsoft’s OEM partners – with the exception of Nokia, which is effectively part of the family now anyway – have abandoned Windows RT. And as OEMs release more and more Chromebooks rather than Windows laptops, and Android tablets rather than Windows slates, they are increasingly looking towards a future where they no longer have to pay a small fortune in operating system licensing fees to Microsoft.

That, to put it mildly, makes Microsoft uneasy.

The evidence of this is already plain to see in Microsoft’s financial statements, and with traditional PC shipments in continuous decline, there is no reason to believe that it is going to change in the long term. Worryingly, the news that Microsoft's Windows licensing revenues didn't decline by as much as expected last quarter - but still fell significantly nonetheless - is only likely to fuel Microsoft's desire to avoid doing anything that might harm that revenue stream. 

But the die has already been cast. The company has already edged into the hardware business with Surface, and incurred the wrath of its OEM partners in doing so. There is no way to put that toothpaste back into the tube. Meanwhile, Microsoft’s hardware rivals have already established a commanding lead in selling the new generation of devices that buyers crave. And Google's decision to avail its operating systems to OEMs without charge remains one that Microsoft can do nothing about, even as manufacturers are now flocking to these alternatives in greater numbers.

HP’s CEO, Meg Whitman, acknowledged this changing state of affairs earlier this month, when she said that “long-time partners such as Intel and Microsoft are becoming outright competitors”. Like many other OEMs, HP has released non-Windows devices. Earlier this year, it launched the $169 Slate 7 with Android Jelly Bean, long before Windows 8 even supported devices of that size; this month, the company also announced its new $279 ChromeBook 11, a small budget-friendly notebook running Chrome OS.

Acer – outspoken as ever – had something to say on the matter as well. In October last year, ahead of the Surface launch – the company’s CEO, JT Wong, called Microsoft’s entry into the hardware market “something to kill the whole ecosystem”. He added that Microsoft may believe that “they need to do something aggressive to compete with Apple and not rely on brands like Acer.”

Although he probably did not intend it as such, that last comment from Wong is precisely what Microsoft needs to do. Microsoft’s Surface strategy so far has not been successful, and the company has only itself to blame for this.

There was marketing that focused too heavily on the keyboard – an accessory that is not essential or a ‘killer feature’ for everybody, and one that was only offered as an optional extra that added a sizeable amount to the cost of the device. Pricing was a broader issue in its own right. Microsoft positioned the Surface RT against the iPad, and the Surface Pro against similarly specified notebooks. But the RT was an entirely unknown quantity for consumers – a new and unfamiliar OS with an immature app ecosystem could not compete effectively for buyers’ attentions against the well-established and immensely popular iPad at the same price. "Surface RT could not compete effectively against the well-established iPad at the same price"

The Surface Pro, meanwhile, suffered from an identity crisis. Most techies understood the concept – a notebook PC in a tablet form factor – but consumers had become accustomed to the idea of tablets as thin and light devices, and were instantly turned off by the Pro’s heavy, chunky body. Consequently, to many, it came across as an incredibly expensive tablet, rather than a competitively priced laptop in a compact form factor.

Curiously, Microsoft appears to have learned little from any of this. The new products appear more or less identical, while the marketing still focuses on the keyboard and productivity – not exactly thrilling features to promote – and pricing has more or less stayed the same. The price of the RT-based Surface 2 has been slightly reduced, but this is unlikely to make a significant difference with the launch of the thinner and much lighter iPad Air for just $50 more.

So, at a time when the company faces attacks on all sides, when even its own allies have all but declared war on it by consorting with the enemy, Microsoft’s strategy to pursue long-term success in devices now stands with two modestly improved versions of devices that failed to meet sales expectations, with one of the originals still being sold alongside them. Oh, and Nokia, which has repeatedly been held back by the limitations of Microsoft’s operating system.

This is depressing.

It is not as if there is a shortage of inspiration out there for Microsoft to explore in making better devices, as well as new ones.

Earlier this week, Apple announced its second-generation iPad mini, featuring a beautiful Retina Display and a range of other nice but modest improvements that you’d expect. Meanwhile, the first 8-inch Windows devices are only now starting to roll out from various OEMs – if you forget the utterly terrible Acer Iconia W3 released earlier this year with Windows 8 – but there’s still no Surface device in that size range. A smaller Surface is expected to arrive in the first half of 2014, but in the meantime, millions of iPad minis, Nexus 7s, Kindle Fires and other small tablets will be sold while Microsoft's entry in one of the fastest growing device segments is still in development. 

Elsewhere, Samsung has been raking in the big bucks too, selling tens of millions of Galaxy Note devices, and bringing stylus input and handwriting support to some of its smartphones and tablets. Windows Phone has no such support, despite the first giant phablets having now been released. Stylus input remains absent too on the Surface 2, even though this would be a fantastic addition coupled with OneNote and the inclusion of Office, which Microsoft is convinced seems to matter so much to buyers.

"It may not wish to admit it, but Microsoft is now battling against not only Google and Apple but also its OEM partners, in a war that everyone else is already fighting"Microsoft could have sought hardware inspiration from the diversity of the Windows PC ecosystem too, with a wide range of fascinating new form factors - from the Acer Aspire R7 to the Lenovo Yoga range - certainly indicating that there’s still life left in the PC market. Frankly, with this kind of innovation still alive and well, it’s not hard to understand Microsoft’s hopes that it can continue to prolong the inevitable, so that it can milk the Windows OS licensing cash cow for as long as it can.

But like it or not, the global PC market is shrinking, and OEMs are relying less and less on Windows. It may not wish to admit it, but Microsoft is now battling against not only Google and Apple but also its OEM partners, in a war that everyone else is already fighting.

Microsoft needs to start fighting back.

The ‘transition’ to becoming a devices and services company was never going to happen overnight, but the pace we have seen from Microsoft on the devices front so far is not encouraging. While its rivals are releasing entirely new devices and pushing boundaries – thinnest, lightest, fastest – Microsoft’s devices offer incremental changes and no significant differentiation besides Office and the keyboard covers.

Microsoft’s OEM partners are already launching devices in ‘traditional’ Windows form factors – laptops, desktop PCs and even all-in-ones – with Android and Chrome OS on board. Needless to say, manufacturers are delighted at the prospect of selling more machines without paying additional Windows licensing costs to Microsoft. But Microsoft has not yet responded in kind by diversifying its own hardware offering. A smaller Surface mini will be a welcome addition – when it eventually arrives – but we need to see more than this.

When will Microsoft release an ultra-thin ‘SurfaceBook’ laptop to go head-to-head with the MacBook Air? Not everyone wants a tablet, and whatever Microsoft might say, there are some seating or reclining positions that just work a lot better with a notebook than with a Surface and Touch Cover, even with the new dual-stage kickstand.

"OEMs want the best of both worlds: the freedom to explore other OS options, while expecting Microsoft to just grin and bear it"When will we see a ‘SurfaceTop’ all-in-one desktop PC? Dell has shown how effectively you can combine a PC with a tablet form factor with its stunning XPS 18, while other designs like Sony’s VAIO Tap 20 show that there’s plenty of room for Microsoft to explore interesting ideas in creating a truly compelling Windows PC for the home or office. 

When will we see a ‘SurfaceStation’ business PC? It’s not all about high-def displays and kick-ass specs. Many organisations have much more modest needs for their devices, but they still need them in enormous quantities, as evidenced by the huge numbers of low- and mid-range PCs sold to them from the likes of HP’s Pro line and Dell’s Vostro. One of Microsoft’s greatest strengths is its relationship with its business and enterprise customers, who spend vast sums on Windows OS licensing each year, and it is understandably keen to keep that arrangement going for as long as possible. Even so, it is easy to see how the company would be well positioned – and well served – by selling its own hardware to its business customers too.

The PC ecosystem is just so much more diverse than the limited, ‘one size fits all’ solution of the current Surface line-up. Microsoft cannot – and of course should not – attempt to copy every form factor out there. But as its OEM partners turn away from it, it needs to push further into their territory if it seriously believes that there is a ‘Windows Everywhere’ future as it claims. Microsoft’s hardware partners want the best of both worlds – they want the freedom to be able to explore other OS options so they can wash their hands of the company; but they also expect Microsoft to just grin and bear it as this plays out. Microsoft, fearful of antagonising OEMs and impacting its dwindling Windows revenues further, has been holding itself back.

This is the time for Microsoft to be pushing forward. The company is still learning the ropes when it comes to offering its own hardware, of course, but that does not mean that it cannot be a bit more aggressive in its offering.

The Surface 2 weighs 50% more than the new iPad Air, although you’re unlikely to notice the 1.4mm difference in thickness between the two. The Surface Pro 2 still weighs enough to make using it as a tablet less than comfortable, despite the tablet form factor being a central selling point. Was it really beyond Microsoft to make thinner, lighter devices while still maintaining support for accessories? "The tech industry has shown time and again that those who do not move quickly enough die"

And what about price? Why, when original Surface sales were so poor, did Microsoft price the new tablets at more or less the same level as their predecessors? This is all the more galling given the company’s own admission that sales doubled when prices were reduced. Of course, the reason is that, yet again, it did not want to risk upsetting its hardware partners.

This, ultimately, is Microsoft’s biggest problem as it continues its huge transition from software giant to a company built around services and the devices that use them: it is bound by the fear of what may come. It was afraid enough of the decline in Windows PC shipments to dip its toe into the waters of building its own hardware; but it is too afraid of antagonising its ‘partners’ to take the actions that it needs to strengthen and broaden its hardware offering.

The tech industry has shown time and again that those who do not move quickly enough die. BlackBerry is perhaps the most obvious example of this, but Nokia is another valid, and very relevant, example, having failed to anticipate or react to the threat of the iPhone until it was too late, resulting in the rapid decline of its business. Microsoft simply cannot afford to drag its feet and run the risk of being left further behind when it comes to building its future around new and better devices.

It is not just about Surface and not only about hardware either. The pace of improvement – which Microsoft laughingly refers to as ‘innovation’, on occasion – in the Windows Phone 8 OS has been woefully lethargic. It is telling that a unified notifications centre, a widely requested feature since Windows Phone 7 launched in 2010 – is still not slated to arrive until the first quarter of next year, and there many more examples like this. Still, Microsoft did announce some worthy improvements in WP8 Update 3, but delivery to users remains complicated by carriers, frustrating the experience of owning a Windows Phone.

Credit where it is due though: Microsoft delivered Windows 8.1 which, while still imperfect, is a vastly improved version of its predecessor. The wide consensus is that this is the OS that Microsoft should have shipped a year ago – and that seems to be a fairly common verdict when it comes to the company’s way of doing things these days.

Windows Phone 8, for example, delivered a much more complete experience than its predecessor, so much so that it effectively ‘rebooted’ the platform – leading many to make the same comment about how WP8 was what WP7 should have been in the first place. But even at launch, Windows Phone 8 was still lacking many of the features of its OS rivals which, even today, it continues to lag behind. The latest Surface improvements, meanwhile, are welcome, but consist largely of features that may well have been exciting a year ago at the original launch, but which do not really make much of a difference when compared against rivals today.

Perhaps Microsoft needs to regain its confidence after losing its dominant position in the market. Perhaps it just needs to ‘man up’ and stop worrying about upsetting its hardware partners, who have already begun to flirt with its rivals. Either way, things will not improve for Microsoft until it starts to really get serious about devices.

Expanding its portfolio of PC hardware will be a critical part of this as OEMs begin scaling down their Windows device production. If Microsoft was really serious about pushing its own devices, it could follow Apple’s lead in no longer charging for OS updates on its own PCs, giving consumers an incentive to buy Microsoft devices over those of other Windows OEMs. That might well happen further down the line, but not until Microsoft has succeeded in capturing a greater share of the market.

For now, though, it would be nice to see… well, more – something to indicate that Surface means more to Microsoft than just an Apple TV-like ‘hobby’. That means more than just incremental improvements, more form factors, more impressive marketing that tells a more exciting story than just ‘the tablet with the keyboard’. "Will Microsoft do what it takes to succeed in hardware, with truly compelling and exciting features, and new devices and form factors?"

Perhaps it all seems like a bit much to expect of Microsoft, just one year on from the launch of its first tablet. After all, the company is still finding its way in a new segment, and is up against intensely strong competition from entrenched rivals.

But Microsoft’s rivals are not going to afford it the courtesy of waiting for it to catch up, and they will gladly take any action that serves their best interests, even if that means turning away from their long-term 'partner'. The company now has the impending Nokia acquisition looming over it too, making it even more crucial that it understand the need to act more swiftly and more aggressively in executing its devices strategy. It has taken three years for Microsoft and its partners to eke out just over three percent share of the global smartphone market. How long will it take for Microsoft to capture a significant share of the tablet and PC market with its own devices? How long can it afford to spin its wheels in the mud as others continue to advance?

No intelligent mind could deny the immense potential in Microsoft’s hardware future. The range of Lumia handsets that it is acquiring in the Nokia deal are, with few exceptions, outstanding devices, while there is much to like in the new Surface tablets for those that will give it the time of day. It is easy to imagine what Microsoft could achieve with its own devices and services if it stopped holding itself back. 

But the question remains whether or not Microsoft will do what it takes to succeed in hardware - not just to catch up with its rivals, but to strengthen its current offering with truly compelling and exciting features, and diversifying into new devices and more form factors as its partners move on to pastures new.

The possibilities are endless and ripe for exploration. For now, though, it seems that Microsoft is only scratching the surface. 

Image credits: 1) Microsoft; 2) David Parry/PA Wire; 3) Microsoft; 6) HP; 7) Apple; 9) mobilenet.cz; 11) Mashable

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