Microsoft’s Surface Strategy, Explained?

I’ve been closely watching Microsoft’s strategy of positioning its Surface lineup as premium, aspirational devices. And I think I can explain the ever-escalating prices.

Microsoft formally unveiled its revised vision for Surface at last year’s hardware event, when it announced Surface Book and Surface Pro 4 in October 2015. At that time, I wrote that in “shooting for the high-end of the market, Microsoft is providing a much-missed sense of leadership” in the PC industry.

But one thing has always nagged at me when I think about what I had described then as Microsoft’s “fantastic idea.” By positioning new Surface devices as premium devices with ever-higher prices, it shuts out most potential customers, most traditional PC buyers. Few people can—or would—spend $1200 or more for a Surface Pro 4, let alone $1500 or more for Surface Book.

That Surface Pro 4 and Surface Book subsequently succumbed to almost an entire year of reliability issues is beside the point, though it’s fair to say that it impacted my opinion of these products, and my ability to recommend them to others. Whether you believe or not that Microsoft finally got ahead of these issues is likewise beside the point: The strategy is what it is. And that’s what I’d like to discuss here.

At the $1200-$1500 and up price point, Microsoft has few non-Mac competitors. There are some high-end ThinkPads, of course. And companies like HP are likewise pushing their own successful premium PC strategies as they look for growth sub-markets in an otherwise falling, or at least stagnant, PC industry.

I believe this to be the point, the real reason that Microsoft is pushing Surface ever-higher. And Microsoft Chief Marketing Officer Chris Capossela bolstered this belief when he appeared on Windows Weekly this past week.

I’ll get to that in a moment. But let’s step back in time again for a reminder of how Microsoft’s Surface positioning has evolved over the years.

When Microsoft introduced Surface in mid-2012, it didn’t just surprise us, as users or customers, it surprised its partners as well. And in the wake of the news that Microsoft would now compete directly with its own hardware partners, harming relationships built up over decades, those PC makers pushed back. Today, all major PC makers sell Chromebooks in a direct and obvious case of cause and effect.

Microsoft heard the complaints. More to the point, it realized that its unilateral desire to get PC makers to do what it wanted–build great modern PCs, not me-too beige boxes—it had perhaps overstepped its bounds. So it recalibrated.

Part of that recalibration is what I asked Mr. Capossela about this week, and what he confirmed: That in building aspirational devices that created or at least formalized new device form factors, Microsoft was explicitly telling PC makers that it was OK to copy those designs. We see this most clearly with Surface Pro: Virtually every PC maker has a Surface Pro clone today, and some are embarrassingly close to Microsoft’s designs. At least in my opinion.

But again, that isn’t just OK. It’s the point. So when Microsoft builds a new device like Surface Book or Surface Studio, it is in effect asking PC makers to copy it. To make their own renditions of this thing, and to do so at other price points. This benefits everyone who’s important here: Microsoft, PC makers, and their combined customer bases.

But here’s what’s changed. The PC market tanked in 2012 concurrently with the launch of Windows 8, and after a few years, it became obvious that this wasn’t so much a trend as it was the new normal. So PC makers began looking for growth-capable submarkets. And after a few failed experiments in high-volume but low-profit mini-laptops and mini-tablets, a few excellent candidates emerged: Premium PCs and gaming PCs, the latter of which is really just an example of the former.

HP is perhaps the best example of a PC maker seizing on this opportunity. And if you look at the premium devices that this firm has pumped out over the past few years, you will see a revolution. HP isn’t alone, of course—you can easily argue that Lenovo’s ThinkPad brand had plotted this course from the beginning, for example—but they are the proof to the theory. PC makers really can make high-quality and desirable premium devices. Surface may get them in the store, but most customers will walk out with an HP, Lenovo, or Dell.

But PC maker success in the premium market meant that Microsoft needed to revise its own pricing upward. When HP and other PC makers start selling excellent devices in the $1000-and-up category, Microsoft’s aspirational devices simply need to cost more. Otherwise, they’re just competing directly with their partners again.

So Microsoft adjusted. It killed off Surface 3, its one affordable Surface, and moved the needle on Surface pricing even higher with Surface Book. Late this year, with Surface Book with Performance Base and Surface Studio, it has moved the needle even higher.

Today’s Surface devices compete with Apple from a design perspective, for sure: You can’t look at a modern Surface and not be impressed. But they also compete with Apple on price, meaning that there’s no harm to the wider industry now: Microsoft can steal customers from Apple, but it’s not really stealing from PC makers per se—or, not much, at least—as Surface only competes in the pricing stratosphere.

This arrangement requires PC makers to be on-board with the strategy, too: It’s not enough to be happy that Microsoft is only competing at the very high-end, they need to create great PCs of their own at various other price-points, and provide alternatives to Surface that people will really want to buy.

This past year, the biggest PC makers in the world have proven that they can do just that: We are at an all-time-high when it comes to the quality of the PCs we can buy. And now I’m curious to see if we’ll be flooded with Surface Book- and Surface Studio-type devices in 2017. And if not, whether Microsoft steps back from these products and comes up with a new idea for the next form factor.

Long story short, the way that Microsoft has priced Surface since late last year has always nagged at me, as I really do put pricing and value at top of mind when I review and evaluate technology products. But put in perspective, I think Microsoft is doing the right thing. Assuming, again, that PC makers really do follow the leader’s moves. I bet they do.

I bet they will.