When Microsoft (MSFT, Financial) launched Surface Hub – its giant digital boards – in 2015 after many delays, many people wrote that it may have priced the product way off. It wasn’t that hard to agree with their logic because the 55- and 84-inch Windows 10-powered units targeting businesses cost $8,999 and $21,999.
While it’s easy to mistake the Hub for a giant TV, in reality Microsoft was aiming to get into office meeting rooms and anywhere that collaboration and digital sharing were required. The Surface Hub was created with collaboration in mind so that the digital board can sit in the conference room, allowing employees to carry out presentations, conduct video calls or even use Office 365. In essence, it was a way for Microsoft to expand the utility of its own product lines – its Office suite, Skype for Business and so on that primarily target business users.
Along the way, the product picked up several use cases and is now seen in hospitals and supermarkets as much as corporate board rooms.
The Collaborative Kiosk, the preferred name given by Microsoft, has blown all sales estimates out of the water, and the company has reportedly sold Surface Hubs to more than 500 customers around the world. Five hundred units may look like a drop of water in the ocean, but the reality is there is demand for such a product.
“Demand for Surface Hubs is very strong and exceeded initial forecasts. To date, we’ve shipped to over 500 customers worldwide and that number continues to grow. We are ramping up production to meet this strong demand via our partner reseller channel as soon as possible. Customers are encouraged to speak with their sales representative if interested in ordering Surface Hubs.” – Petri
How does that tie in with Microsoft’s overall revenues for the Surface family of devices?
The extended Surface family revenue
Microsoft’s Surface family grew to $888 million in sales during the fourth quarter of 2015, a 117% increase over the prior period. Since then it has been growing steadily, reaching $965 million in the fourth quarter of 2016, a growth of 9%, mainly driven by Surface Pro 4 and Surface Book. Though sales touched more than $1.35 billion at one point, revenues are currently at the sub-billion-dollar mark. I expect that to change in the current quarter on the back of strong demand for Surface devices.
“Microsoft will increase the number of partners that can sell Surface from a couple hundred to a few thousand partners globally in the coming months. This expansion will ensure that the company can meet customers’ growing demand for the Surface family of products through its partners and create additional mobility opportunities for the channel.” – Paul Thurrott
A billion-dollar sales figure for a company like Microsoft doesn’t sound meaningful at all, especially when you compare it to the leader in smart devices, Apple (AAPL, Financial), whose iPad revenues touched $4.87 billion during the third quarter of this fiscal, something I covered in an article called "Apple’s Earnings Signal New Direction for iPhone Maker."
Implications for Microsoft
The entire Surface family revenue is only around one-fifth of Apple’s iPad sales, so what does that actually imply for Microsoft?
Well, for a start, it has now reached a place where comparisons like this are becoming inevitable. I don’t think even for second that Microsoft has the ability to be a hardware/software maker in a way Apple has been throughout its history, but it seems that the Surface family is just that kind of doorway for Microsoft to enter into the hardware/software space in a strong way.
However, that brings its own set of problems, the biggest of which is dilution of focus. I can’t help but think of Google as I write that. With so many products and ideas, Google has no clue in which direction it's really moving. Artificial intelligence? Paid video streaming? Software-as-a-Service? Cloud? No one – not even Google, I suspect – really knows.
But the way the Surface family is flying against such odds and still holding its ground is, in a way, scary. What I’m really worried about is that Microsoft might turn its sights in that direction and spend a lot of energy in building that business.
It may well succeed, but the more time spent on that is less time spent on doing what it really needs to focus on – cloud, Office 365 and Microsoft-as-a-Service.
Success in this case could be a major distraction from what’s really important to it – to successfully offset a declining legacy business; that’s something they can’t really do with Surface at this point or in the near future.
Having said that, Surface still helps them go after their ultimate target - every employee, every business and every IT department in the world. But within the framework of CEO Satya Nadella’s philosophy of mobile first, cloud first, Surface sticks out like a sore thumb.
Disclosure: I have no position in any of the stocks mentioned and no intention to initiate any position in the next 72 hours.
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