Having done a bit of a post-mortem on the original Surface products and strategy in Part 1, I can now dive into what I think Microsoft needs to do in order to succeed with the Surface family. The first thing I think Microsoft needs to do is eliminate the confusion around what the Surface brand is all about. Note this is not just about branding, but rather about creating a clear product strategy and establishing principles that drive the design center for products in the Surface family.
The clear guiding principle for the Surface family should be “Productivity First”. That is, every member of the product family should have being the best productivity device in its class as its primary design center. “Productivity First, Entertainment Second” might be a more complete description of the design center. Using the Content Consumption vs. Content Creation axis I’ve talked about before, Surface devices should always lean more towards Creation than competing devices in the same class. That may be saying it too mildly as the correct positioning is that they should trounce other devices in the same class at Content Creation. At the same time they need to be competitive at Content Consumption so that a user need only carry one device in any given class.
I kind of went at that backwards so let me explore this strategically. Microsoft’s strength is in Productivity software and Content Creation. It wants to win the consumer, but it can’t do that in a head-on attack on the players who dominate the Content Consumption space. No Surface will ever be a better overall Content Consumption device than an iPad. Nor will it ever be as good a portal into Amazon’s content libraries as a Kindle Fire. Even if Surface is technically superior at Content Consumption, it will never be perceived as such! And while the iPad and Android devices may achieve success as productivity devices, Microsoft has a clear opportunity to make sure that they are always considered a distant second to Surface in this area.
Notably “Productivity” and “Content Creation” does not imply purely business use, although clearly they allow Microsoft to win big in the Enterprise. One of the modest success stories for the original Surface is in education, both in institutional purchases and individual student purchases. And while Microsoft Office is a large part of the Productivity story, it is not the only story. Being the best device as a Pilot’s Electronic Flight Bag, or for a Doctor to access Electronic Medical Records, or for a retail employee to provide customer service on the store floor, counts as well. Nearly all users make some use of all devices for productivity purposes. The strategy around Surface needs to be to have the best device in class for anyone who values those productivity capabilities above the (perceived) superior entertainment capabilities of competing devices.
With Surface/Surface 2/Surface Pro/Surface Pro 2 Microsoft clearly had the productivity attribute in mind, but that itself is the point. It was just an attribute. It was not the unambiguous strategy. It was not the design center. It was not at the center of the branding and resulting messaging. The Surface/Surface 2 don’t have digitizers. They only had a version of Office Home and Student, which also didn’t include Outlook. The positioning of the Touch vs. Type Cover (Touch for Surface, Type for Surface Pro) made content creation secondary. The shipment priority favored the more Content Consumption oriented Surface/Surface 2 over the more Content Creation oriented Surface Pro/Surface Pro 2. The advertising and other messaging also was overwhelmingly tilted towards the entertainment rather than productivity nature of the devices.
For Microsoft to succeed with Surface going forward “Productivity” must be the way it intends to win, the key driver of its product designs, and the unambiguous meaning behind the brand “Surface”.
Before moving on I want to be clear, all Surface devices must be competitive (even great) Entertainment/Content Consumption devices as well. I’m not trying to say Microsoft can ignore this space, because if a user has to carry an 8″ or 10″ class Surface and an iPad or iPad Mini too many will probably just carry the iPad/iPad Mini. I have to be able to watch movies, read books and magazines, track news and blogs, and play games on my Surface. I just don’t need to beat Apple, Samsung, Amazon, and Google at it. But the reason you buy a Surface over a competing device is because you have a productivity need.
What “Productivity” means is going to vary by device class. For example, in sub-9″ class devices it probably doesn’t mean a keyboard cover (though it could). That’s a device class where note taking and handwriting as an input mode takes more of a priority. Microsoft has had a technological lead in this area for a decade, and it’s finally time for them to press that advantage. An active digitizer as a feature of all members of the Surface family would not be a bad place for Microsoft to start.
In the 10-11″ class devices the keyboard cover is a perfect example of an advantage Microsoft has, and one that would have been of greater benefit had the strategy, positioning, and branding been clearer. Also the execution. The much improved Touch Cover 2 is almost in the Unicorn category as it is never actually in stock at Microsoft stores, Best Buy, etc. The announced Type Power Cover is even worse, it is vaporware.
For larger Surface devices, such as a 12-13″ class device that many have been waiting for, having a 2-in-1 with the design optimized for notebook usage seems right. Certainly a notebook-oriented design center, even a pure notebook, seems like a winner. I haven’t said much about this class device, but it is indeed the missing link in a Productivity device family offering. 13″ is about optimal for a truly mobile, primary Content Creation, device. Any larger and you lose mobility. Any smaller and you are really talking about a secondary device. Sure 15″ notebooks and desktops with multiple 23″ monitors are better for Content Creation, but they range from marginally mobile to completely immobile. Microsoft needs to win in the higher growth rate mobile categories.
Now let’s talk about pricing. This is something that Microsoft has screwed up badly with Surface to date. They have to get it right with the upcoming announcement. As an underdog in the 7-8″ and 10-11″ categories they need to use pricing to drive adoption. In the 12-13″ or above this is less critical, but they still don’t want to price themselves out of the market. So let me offer some general guidance and then drill in a bit. For ARM-based devices Microsoft needs to price very aggressively versus the competition. For x86-based devices in the 7-8″ or 10-11″ category they need to price slightly aggressively. For 12-13″ or above devices they need to be competitive, but there is no need to be the price leader.
So let us first talk about ARM. Microsoft is at a huge disadvantage with ARM-based devices because of two sides of the same coin. On one side they have a huge gap in Windows Store application availability compared to either Apple or Google. On the other side they have a huge advantage in Windows-based productivity (and entertainment) applications that they can’t run on ARM. The net impact is that I think consumer perception of ARM-based Windows RT devices is that they are worth $50-75 less than an otherwise equivalent x86-based device at the 7-8″ class and $100-125 less in the 10-11″ class. The current state of the Windows Store also makes an ARM-based Windows tablet worth at least that much less than a similar Apple, Samsung, or Google Nexus device. I’ll call this the Perceived Consumer Value Adjustment (PCVA).
The most productivity oriented 8″ tablet on the market is the Samsung Galaxy Note 8, which has the active S-Pen, with a Suggested Retail Price (SRP) of $399 and a street price of $329. Another competitor from Samsung is the Galaxy Tab Pro 8.4 which also has a $399 SRP but a $359 street price. The ASUS VivoTab Note 8 x86-based Windows 8.1 tablet with an active digitizer lists at $329 but is currently selling at the Microsoft Store for $299. The Lenovo Thinkpad 8, which has a higher resolution screen but no active digitizer, lists at $449 but is already selling for $399. It too is an x86. Meanwhile the Apple iPad Mini with Retina Display lists at $399 and can be found for slightly less. Taken together this suggests a “Surface Mini” that is about 8″ with a Retina-class display and an active digitizer could command an SRP of about $399. But apply PCVA and an SRP of $329-359 makes more sense.
Given that Surface devices, like Apple devices, have street prices almost identical to their SRP, the $329-359 price range is likely still too high. The Galaxy Note 8 is old at this point, which accounts for its large discount from SRP. A refresh would probably leave it with a street price around $359. If we average the ASUS and Lenovo street prices we also end up around $359. Apply PCVA to $359 and it suggests that a 8″ ARM-based Surface should have an entry price of $299 or less. There are many other data points that suggest a $299 price would be a good entry point for this class Surface. Lower-spec Windows devices in the same class, such as the Dell Venue 8 Pro, are already selling for $249 and occasionally less. They will be dropping to $199 in the next few months. The non-retina display iPad Mini sells for $299. The Samsung Galaxy Tab 4 8″ has a $269 SRP and is selling for $239. Etc. So $299 is an aggressive price relative to other high-end and more productivity-oriented tablets, but a high price relative to more modest spec’d and Content Consumption-oriented tablets.
Actually I was applying 8″ pricing under the assumption the Surface device was really an 8″ class device. If it is a 7″ device then it will need to be priced at least $50-100 lower.
Ok, that was a fairly analytic approach to pricing. But what if Microsoft wanted to flood the market with these devices and really incent developers to create Windows Store apps? Then they should price an 8″ ARM device at $249 or a 7″ ARM device at $199. At that price I’ll not only buy one for myself, I’ll give a few as gifts.
You can apply this same analysis to either the Surface 2 or a replacement, should Microsoft announce one. A Surface 2 with Touch Cover (or better yet, Touch Cover 2) for $399 would gain traction. If you replaced the ARM processor with an Atom x86 processor you could charge $449 for the combination with similar results.
And if Microsoft introduces something in the 12-13″ class? No adjustments necessary. No unusual pricing necessary. Just price to the current competitive situation for 13″ Ultrabooks and Macbooks.
I’ve spent so much time on pricing because I think this is critical to the short-term, and thus long-term, success of the Surface family. Microsoft must use pricing to make itself a force in the market for under 11″ computing devices. It must use it to make up for both perceived and real shortcomings, both in the general case of the Windows Store having an inferior app selection and the specific case of ARM-based systems not having the ability to run desktop applications.
I want to talk about one more topic which is WWAN (3G/4G/LTE) support. Microsoft has mostly shied away from including WWAN support in its Surface family. Yes the Surface 2 belatedly got WWAN support, and then only as a very expensive option. I won’t purchase any further tablets without LTE support, and I know many others are in the same boat. Both Apple and Samsung introduce both WiFi-only and WWAN versions of their tablets. Failure to do so leaves a significant segment of the buying population uninterested in your device. It also leaves you out of the extensive retail footprint of the carriers, as well as that of independent mobile-oriented retailers.
Microsoft has to fully commit to WWAN in devices under 11″. That would obviously be at a premium price above the entry-level pricing exercise I did earlier. “Mobile First, Cloud First”. You can’t be mobile without WWAN, so if I don’t see WWAN support in the May 20th announcement then I think Stephen Elop should look at making changes in leadership of the Surface team.
Productivity First. Fill out the family. Price to SELL. And, on a different level, WWAN support. That’s what I think Microsoft needs to do to get the new Surfaces right.