New Model Shifts Hint at Surface Turmoil (Premium)

As I noted in yesterday's quarterly earnings analysis, Microsoft's Surface business is in trouble. And while more meaningful fixes are needed, the firm is moving to stem the bleeding in the short term.

To recap, Microsoft revealed this week that Surface revenues increased $126 million in the quarter, a gain of just 1 percent year-over-year. It also quietly noted that it sold fewer units, year-over-year. That's troubling because the software giant released four major new Surface devices in 2017---Surface Laptop, Surface Pro (2017), Surface Book 2, and Surface Pro with LTE---or five, if you count the new 15-inch Surface Book 2 as a separate product. In the same quarter a year ago, it had released only two niche products, Surface Studio and Surface Book with Performance Base. And that was pretty much it for the entire year.

To be clear, I am surprised by the Surface struggles, and on a number of levels.

While we can---and do---quibble about particulars like Microsoft's tone-deaf lack of support for USB-C/Thunderbolt 3---those new devices were all meaningful updates to their predecessors. Or, in the case of Surface Laptop, a new and much-needed addition to the product family. While we had spent much of 2016 wondering why the heck Microsoft wasn't shipping new Surface PCs, it felt like the firm was firing on all cylinders in 2017.

Surface Laptop is a particular concern. I had expected this new product to quickly become the best-selling Surface PC, and for it to propel Surface to new heights overall. But not only have unit sales fallen, Surface Laptop has never come close to dethroning Surface Pro from a sales perspective. Looking at the latest usage data from November, the new Surface Pro is almost five times as popular as Surface Laptop. Five times.

So something has to give. And Microsoft appears to be responding, though we won't know what it plans for the long term until it announces new Surface models or products.

In the wake of its earnings announcement this week, Microsoft has quietly made two addition to its Surface lineup. Both provide lower-cost options to Surface PCs that many feel today are over-priced.

Surface Laptop is now available in a new $799 model that eschews the Core i5 processor for a much less desirable Core m3 processor. And it only comes in Platinum, where other versions have Burgundy, Cobalt Blue, and Graphite Gold choices too. But that's a $200 savings over the former low-end Surface Laptop model, and it could drive new sales.

The 13.5-inch version of Surface Book 2 is also available in a less expensive new model: For $1199, a $300 savings over the previous low-end model, you can get a Surface Book 2 with an Intel Core i5 processor, 8 GB of RAM, and 128 GB of storage. That is actually a reasonable configuration for the price, and this change, too, could drive sales.

Which is, of course, the point: With Surface sales falling, Microsoft has to do something. And it starts, as it should, with low...

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