Microsoft– Mercy killing.

A guaranteed flop wisely killed prior to launch.

• Microsoft launched the Surface 3 at an event yesterday in New York but conspicuously absent was any mention of a smaller device to compete with the iPad Mini and 7-8” Android devices.
• Given the vivacity of the rumour mill, I suspect that this device was killed at the last minute.

Surface 3

• The Surface 3 is a powerhouse but with the price tag to match.
• It has a 12” 2160×1440 screen and comes in three flavours: the 4^th generation Intel i3, i5 or i7.
• The device starts at $799 for i3/64GB of onboard storage going all the way to an eye watering $1,999 for the i7/512GB of storage.
• This is yet another indication that Intel’s need to hold onto 60%+ gross margins is a major drag on the market’s acceptance of the tablet form factor to replace laptops.
• The Surface 3 does not compete with the iPad, instead it aims directly at the MacBook Air.
• In this regard, it fares reasonably well as it is lighter, more versatile and offers better compatibility with other areas within the enterprise.
• However, the price is going to limit volumes and RFM considers this device to be a PC not a tablet.
• This device is a change of direction for the Surface towards the laptop market and deliberately leaves a big gap which I expect will soon be filled.

Surface Mini

• The decision not to launch the mini speaks volumes about where Microsoft is going to go next.
• The Mini was a Qualcomm powered device with a 7” or 8” screen and running Windows RT.
• I have long believed that Windows RT is dead in the water (see here) and if launched would have proved to be nothing more than an embarrassment.
• Furthermore, the Lumia 1520 (6” Windows Phone) is only one step away from being able to fill this space.
• Its long battery life and much greater market acceptance make Windows Phone a much better proposition for a consumer tablet offering than Windows RT.
• Hence I suspect that the Windows RT tablet has been killed off and the Surface moved up into the laptop market to make space for Windows Phone in the consumer tablet market.
• Hence, I am expecting some modifications to Windows Phone to make it more tablet friendly and then the launch of several consumer oriented tablets probably towards the end of the year.

Take Home Message

• The Surface is now a PC and users will purchase it on that basis and with that use case in mind.
• This leaves space in the consumer tablet market which I expect to soon be filled with larger screen Lumia Windows Phone products.
• This is a good sign that Microsoft is developing under new leadership to change with the market rather than trying to bend it to its will.
• Everything I have seen since Nadella has taken over is increasing my hopes that Microsoft intends to become an ecosystem company which I believe gives the shares plenty of long term upside.
• Along with Yahoo! and Google, Microsoft is one of my favourite plays on the digital ecosystem.