Should We Be Worried About Surface? (Premium)

Two years later, Microsoft is still unable to make its Surface Hub 2X dreams a reality. Does it matter? Or is this just a minor glitch in the matrix that is Microsoft’s hardware business?

It’s reasonable to at least ask. Ever since Microsoft announced its first-ever PCs back in 2012, the software giant has been both competing and partnering with the very companies that established it has the one-time leader of the personal computing market. Since then, its relationships with PC makers seem to have normalized, and it’s been years since bitter PC executives have lobbed passive-aggressive complaints about the Surface business. At least publicly.

Privately, I’ve heard some conflicting opinions of Microsoft’s efforts in the PC space, which range from mild respect to mild amusement. The PC market is a tough market, one that’s fraught with low margins and high risk. And there’s a feeling that Microsoft might have better helped the industry simply by lowering the licensing cost of Windows. And that its failures may have done more harm than its successes have done good.

Let’s talk about both.

As Brad detailed in his book Beneath a Surface, Microsoft’s PC efforts got off to a tough start when it tried to mimic the iPad with Surface RT and Windows RT. The result was a $900 million write-down that almost scuttled the business entirely. But after seeing some interest in the more traditional Surface Pro and its more traditional Windows, Microsoft got busy. And the result, the third-generation Surface Pro 3, formalized the tablet 2-in-1 detachable PC as a form factor so well that virtually every PC maker mimicked it with their own me-too products. (Oh the irony.)

Lost in the relative success of Surface Pro 3, of course, is the fact that it was supposed to be minor news compared to the blockbuster launch of Surface Mini, an 8-inch tablet that would run Windows RT. But it was canceled by then-new Microsoft CEO Satya Nadella and his Senior Leadership Team (SLT) at the last second—literally, as manufacturing had already begun—because the mini-tablet mini-boom had already ended and because, well, Windows RT was pointlessly hobbled.

The Surface Mini bears more on this conversation than does Surface Pro, I think, because it points at the real problem we should be examining here: How on earth did such an obviously flawed product make it all the way to production? What kind of decision making would ever lead to such an outcome? Had Nadella and the SLT not stepped in, Surface Mini would have been another very public failure. And each of these failures—there were more coming—weigh heavily on this business.

Fortunately for Surface and its fans, that didn’t happen, and Surface Pro 3 established the form factor we’re still today after four more generations of Surface Pro models.

Thanks to this success—and despite the failure of Surface Mini—Microsoft kept trying with new form factors, convinced that it somehow possessed a singular design sense for creating new products, a sense that eluded PC makers with decades of experience in the market. The results were often, well, bizarre, from the Surface Book with its unreliable Clipboard connection the otherwise stunning Surface Studio, which betrayed users with laptop parts and loud fans. There were peripherals as well, from a set of docks that started off weird but eventually became more elegant thanks to a single cable connector to a range of mice, keyboards, and other doo-dads. There were weird technology decisions, from the Surface Pro Touch/Type Covers that never spawned a third-party market to the proprietary Surface Connect connector, which was based on USB and never upgraded significantly over the years. Oh, and let’s not forget Microsoft’s fear of USB-C and Thunderbolt 3.

But there were bigger problems. When Microsoft raced to adopt the 6th-generation Intel Core processor family before any other PC maker, it created its most unreliable products of all time—the Surface Pro 4 and original Surface Book—unleashing a customer service disaster I coined as Surfacegate.

Microsoft stoically pretended publicly that there wasn’t a problem while it raced internally to find any solution, but the ramifications of this episode were perhaps more cataclysmic than you may realize. This is the real reason Terry Myerson—who thought he was going to be let go because of Surfacegate—adopted the Qualcomm Snapdragon and created Windows 10 on ARM: He didn’t want Microsoft to be screwed by Intel like that ever again. (The problem was, in fact, of Microsoft’s making, as many PC makers later told me; with their decades of Intel experience, they knew how to handle this kind of problem already.)

Here, again, you have to wonder about the decision making. Surface Book, for all its advantages as a portable workstation, was undermined at first by the 7th-gen Intel chips and over time by the pointlessness of its Clipboard tablet, an unreliable feature that virtually no customers ever use. But rather than creating a traditional clamshell product, Microsoft instead insisted on creating a new form factor. Because, again, only it somehow possesses the design sense to make that happen. But as is the case with all of Microsoft’s non-Pro Surface PCs, no PC makers ever copied the Surface Book design. And it has not sold well.

Given this defeat, Microsoft finally made the PC everyone wanted, the Surface Laptop, which is basically a MacBook Air clone. But again, decision-making enters into the story, because Microsoft had to have some differentiator, and a complex hinge with a removable Clipboard display was deemed too expensive and too unreliable. And so we got … Alcantara. A manufactured material used by some carmakers which seems designed specifically to highlight if not amplify how greasy your palms are.

Were Surface a bigger business, Microsoft could have made Alcantara optional, and there’s little doubt that option would have been quickly dropped as customers made their preferences clear. But Microsoft is a boutique PC maker with low volumes and high costs, and Alcantara wasn’t optional: Unless you bought the cheapest Surface Laptop model, It was included. And the PC’s low sales show the impact of that decision.

And then there’s Surface Hub.

Surface Hub is, at best, a niche product, but it solves a lot of problems for Surface and Microsoft because it’s a new format—Surface loves that—and it was a new vehicle for One Windows, Microsoft’s now-failed strategy for helping app developers write one app that can run across multiple platforms, including Windows 10, Windows Phone (now dead), Xbox One, HoloLens, and more. That that latter strategy never made any sense at all is the subject of another recent editorial. But Surface Hub, as a collaboration display, does make sense. And Microsoft maintains that it had difficulty meeting demand for the first-generation Hubs, which were available in 55- and 84-inch sizes and each cost about the same price as a new Camry.

For the second-generation Surface Hub, Microsoft in 2018 originally announced a single 50-inch model, called Surface Hub 2, which would support tiling—where you placed two or more Hub 2s next to each other, in effect creating a single large display, and rotation, so you could use it in both landscape and portrait modes.

Surface Hub 2 as originally envisioned was in many ways the ultimate Surface product. It was yet another new form factor. It was innovative and exciting, even for those, like me, who were never going to own one.

It was also vaporware.

Microsoft was unable to bring Surface Hub 2 to market over the next year, so it bought itself some time by claiming that customers wanted another Hub that ran the old software—you know, for compatibility reasons—so it divided Surface Hub 2 into two products. Surface Hub 2S would arrive in 2019 and provide the old software but none of the rotating and tiling. And then Hub 2X would arrive in 2020 and provide the full functionality. Today, of course, we know that 2X will not arrive in 2020 and will most likely never ship at all.

The issue may be beyond the Surface team’s control—we’ve heard its related to the Windows Core OS software that is behind the new OS—but, again, the decision making here is questionable: It’s not like Core OS looked solid in early 2018 and that Surface needed to preannounce the product at that time.

Speaking of preannouncing hardware, Surface head Panos Panay was publicly quoted as saying that he didn’t want to preannounce Surface Duo and Surface Neo last October, but that he was forced to do so by upper management (which in his case has to be the rest of the SLT or Nadella himself). If that’s true, I suspect it had more to do with the failure of Surface Hub 2/2X than with any qualms about inciting excitement about future released. He had to have known that Hub 2X was off the rails in October. Had to.

Speaking of Surface Duo and Neo, I’ve voiced my concerns about these products in the past, but it’s important to see them as what they are to Microsoft: Yet another new form factor. But with rivals and partners announcing folding display-based products, it’s curious to me that Microsoft would stake a claim in a less exciting and less future-proof dual-display form factor, with the required middle hinge blocking the view. The firm may be proven right, at least temporarily, since these devices will be more reliable and less prone to damage. But that will change over time. And dual-display devices are going to look obsolete and old-fashioned very quickly.

I’m not coming out on either side of that debate: Dual-display and folding display PCs, phones, and other devices are happening regardless of my opinions, and each certainly has its merits. But I guess I am wondering, yet again, about the decision making that led to Duo and Neo being greenlighted. That one runs on Android, which is not controlled by Microsoft, and the other runs on Windows 10X, a Core OS-based not-quite-Windows OS, all of which have failed in the past, is likewise curious. Even for those who enthusiastically support both devices.

And I’m not alone in this, but I am wondering whether Microsoft can actually release Surface Duo and Surface Neo in 2020. And whether it delaying one or both will irreparably harm Surface as a brand and as a business.

But it’s also worth debating whether actually releasing these devices is just as bad, given the experience with failures like Surface RT, Surface Mini, the original Surface Book, and Surface Hub 2X. And whether Surface can continue to withstand the relative market failures of most of its products, almost none of which sell well: As you can see in the usage data, only Surface Pro form factor devices are used by any appreciable volume of customers.

Personally, I am a big fan of Microsoft’s PC business and the quality of these products, and despite some missteps, it has overcome my initial worries about the firm competing with its own partners. Too, it’s worth pointing out that companies like HP, Lenovo, and Dell have continued innovating in the PC space and offer compelling mainstream alternatives to Microsoft’s nichier offerings. The PC market may be smaller than it was at its height, but the quality of the available PC today is astonishingly high overall.

But Surface continues to be a small and risky business. And in Satya Nadella’s Microsoft, where each business must continually justify its existence, it’s unclear how long it can stumble along as it has. Surface proponents can and should point to the Xbox business as proof that Microsoft can keep a failure afloat for many years if it sees some future bonanza coming. But the problem for Surface is that it can’t morph into a cloud-based services business as will Xbox. It will always be a low-margin, high-risk hardware business. And I’m curious why Microsoft keeps it going.

Put simply, this year is going to be interesting for Surface no matter what happens. It’s possible that software updates for Surface Hub 2S will partially erase our disappointment about the 2X. And that both Duo and Neo ship as planned. We’ll see. But my money, based on history, is that at least some of that won’t unfold the way Microsoft promised. And that fans like myself will continue to worry about the future of this business.