I listened in on Microsoft’s Q2 conference call, and when I started seeing articles about what was said regarding lower priced Windows 8 devices I really started scratching my head. It seemed to me that reporters and bloggers were trying to read what they wanted to hear into what was said, rather than taking what was said at face value. Before I get into my own take on this here is the exact exchange as taken from the conference call transcript:
PHILLIP WINSLOW, Credit Suisse: Hi. Thanks guys and congrats on a good quarter in a pretty tough macro environment.
I just want to spend a moment on Surface. You obviously talked about ramping up production and distribution of that. Just what are some of your goals as you look at Surface RT and Pro for this year? And within that context how should we think about the profitability of the Surfaces? Thanks.
PETER KLEIN: Thanks, Phil. As we said, we think of Surface as one part of the overall Windows 8 story. Certainly this quarter it was a contributing factor to the revenue growth in the Windows business. And what it does is it sort of highlights some interesting innovation that can happen to sort of demonstrate the power of Windows 8 when tightly integrated with hardware and software and some new categories of devices. And we’ve obviously had some limited distribution this quarter in our stores and as you know we’re excited about expanding that. So, you know our goal is to continue to build that business, to highlight the incredible power of Windows 8 in an interesting set of devices. We’re going to expand geographically. We’re going to expand the product lineup. We’re going to expand retail distribution and capacity. So, we look forward to sort of continuing the growth of that business.
WALTER PRITCHARD, Citi: Hi, thanks. I’m just wondering, Peter, if you could talk about, obviously one of the big differences here between your devices in the market and some of the competing devices, I think the price point of touch machines, Windows devices are much higher? And I’m wondering if you could just talk about what you’ve learned here in the first three or four months of the Windows launch, how important price is to the customer base in terms of driving units and what do you think the outlook is in terms of getting price points down the devices in aggregate, in order to potentially drive some demand?
PETER KLEIN: Thanks, Walter. We learned a lot this quarter. We learned a lot about the types of experiences and scenarios and to some extent the price points customers are looking for from their devices. We saw some really great demand for some of the touch devices that we’ve brought to market. In some cases we didn’t have the supply that we needed to satisfy that demand. I think from a price point we learned I think what we’ve always suspected, which is there’s segmentation and differentiation. One of the powers of the Windows ecosystem, obviously, is the variety of devices and form factors and experiences at a variety of price points.
And I think we learned that that continues to be important. And as I said, we’re working very closely with both our chip partners, as well as the OEMs, to bring the right mix of devices, which means, to your point, the right set of touch devices at the right price point, depending on the unique needs of the individual. I think we learned a lot about that and one of the things you’ll see is a greater variety of devices at a bigger variety of price points that kind of meet the differentiated needs of our consumers.
Somehow these two answers to two different questions got sploshed together in many people’s interpretation of the conference call results. In one case this got interpreted as Microsoft working with OEMs to produce more Surface devices. I can’t see that being implied in any way in these exchanges. In others it was reported that Microsoft said they’d be producing a lower cost (Surface) device, which while a perfectly good assumption was never actually said or implied. Others read into this that Microsoft was going to leave the lower price points to OEMs, something else that you really can’t take away from what was actually said.
Peter said two independent though not unrelated things. First he acknowledged that there would be further expansion of Microsoft’s own family of devices that highlight Windows 8-related innovation. And then he talked about working with partners to hit the
“right set of touch devices at the right price point”, where partners are the chip partners and OEMs. But that was part of the response to the second question, not the first. Microsoft certainly is working with OEMs to get the OEMs to offer the right set of devices and the right price points. The are also working with chip partners to make sure that chip sets suitable for all the price points are available. But nowhere did he say or imply that Microsoft was working with OEMs to create Surface devices nor that Microsoft itself was going to address all the price points.
Having lower cost chip sets that meet the Windows 8 and Windows RT requirements is something needed by Microsoft’s OEMs if they are to address lower price points. And they are something needed by Microsoft should it choose to address lower price points with a member of the Surface family.
Microsoft’s approach with the Surface is not to try to cover the spectrum of devices that customers might want and that OEMs already address. They are very specifically looking for areas where they can identify scenarios and user requirements that are going unmet by both competitors and the OEM community. Scenarios that Microsoft sees as being uniquely addressable by Windows 8 and the rest of their software.
The Surface is optimized for users who primarily want a tablet, but need to do enough content creation that they find the iPad and other tablets frustratingly insufficient. The OEMs are addressing this segment with devices where you need to decide in advance if you might be doing content creation, and if so turn the tablet into a clamshell notebook that you carry around with you. Microsoft addressed this by having a tablet with a cover that gives you a keyboard and trackpad “for free”. The Surface is optimized for unique scenarios in other ways. The rear camera, for example, isn’t for taking pictures so much as for conferencing.
The Surface Pro is optimized for users who primarily need a notebook, but don’t want to carry both a notebook and a tablet around with them. OEMs address this, again, by having clamshell notebooks that allow you to convert to tablet usage or by detaching the tablet when you don’t need the keyboard. But again you are carrying around a clamshell notebook rather than a tablet unless, in the case of detachable devices, you know you won’t need the keyboard and leave it behind. Microsoft went for a design that would allow you to have a good, but not great, keyboard with you at all times without the size and weight penalty of clamshells.
If you really want a pure tablet and don’t care about having a keyboard always at your beck and call, the ASUS VivoTab RT is a better tablet optimization than the Surface. If you really want a notebook with touch support, or that can be used as a tablet on occasion, then numerous really cool offerings are available from the OEM community. Offerings that may be far more optimized for your usage pattern than the Surface Pro.
So what can we expect from future devices in the Surface family? I’ll save speculating on device specifics for Part 2, but one thing we can be sure of is that they won’t be “me too” devices. Microsoft will choose areas where it believes it can address user requirements that are going unmet by both competitors and its OEMs.