Microsoft Surface is nearly a $7 billion business after a decade

Microsoft made a splash in 2012 when it introduced the Surface, the first computer it had built in its 37 years of existence. The computers are still kicking 10 years later, with Microsoft issuing annual updates, but Surface’s mega-growth is long in the past.

Microsoft tried to reimagine tablets, which are made popular by the iPad, when it launched into the PC market. In 2012, the Surface with Windows RT, later named Surface RT, was more than just a touchscreen slab like Apple’s iPad. The Surface could act as a full PC with an optional cover featuring a keyboard and trackpad.

Apple in the ensuing years would make the iPad more like the Surface, adding similar accessories, while Microsoft would do what it usually does: Roll out a series of small updates. It later added new Surface computers to the family, including an all-in-one PC, a standard laptop and miniature versions of the Surface.

Those steps have brought about growth. In Microsoft’s most recent fiscal year, Surface kicked in $6.7 billion of the company’s $198 billion in total revenue. That’s more than the total revenue of over 100 companies in the S&P 500 index.

But the hyper-growth vanished after the first three years. In the 2022 fiscal year, Surface revenue increased by 3%, despite being smaller than PC initiatives at several other companies. Apple’s Mac business, at almost $38 billion, grew about 8% over the same period.

Surfaces just aren’t as popular as other computers. They have never managed to take more than 2.1% market share of PC shipments, according to an estimate from technology industry researcher Gartner. Lenovo has a 25% share of the market, while HP has 19% and Dell has 18%, respectively.

Microsoft declined to comment on whether it considers Surface successful.

“We design Surface to be the one place where the best of Microsoft comes together, delighting customers and inspiring the Windows ecosystem,” a spokesperson told CNBC in an email. “Surface began as a tablet to replace your laptop, showcasing Windows capabilities like touch, ink, Windows Hello, and more. Since then, the 2-in-1 category has taken off and Surface has grown into an innovative portfolio of products offering premium designs and capabilities that consistently earn high customer satisfaction.” 

That Surface has not surpassed more experienced PC makers might not be such a bad thing anyway. PC builders are among Microsoft’s most prominent clients because they pay Microsoft a fee for the copy of Windows that goes on each computer. Upstaging them might not be wise.

Surface has held on to an important role — bringing to market Windows PCs with fresh designs, Gartner analyst Mikako Kitagawa told CNBC in an interview.

“I think those are the things they should really focus on, instead of looking for share gain and revenue growth,” she said.

If Microsoft were to charge forward in pursuit of dominant share, they could kill their customers, she said. Kitagawa recalled that Windows PC makers were not very happy with Microsoft when the first Surfaces arrived. “Taking 3% share was taking from somebody, right? That’s not incremental share,” she said.

The first line of the news release about the 2012 Surface showed Microsoft’s intent. These computers were meant to be “the ultimate stage for Windows.” A section near the bottom acknowledged the clients that were suddenly becoming the competition. “Microsoft is delivering a unique contribution to an already strong and growing ecosystem of functional and stylish devices delivered by original equipment manufacturers (OEMs) to bring the experience of Windows to consumers and businesses around the globe,” the company said.

The inaugural Surface, the Surface RT running Windows RT, boasted clever physical attributes. A thin but sturdy kickstand could sweep out and prop up the display on a table or a desk. The case was made out of magnesium in a process called VaporMg, which lends it a premium feel akin to the aluminum wrapping up Apple’s MacBooks. An optional magnetic Touch Cover contained a narrow keyboard and a trackpad that doubled as a cover for the display. A power-sipping Arm chip gave it respectable battery life.

But the Surface RT blocked people from opening programs that weren’t listed in Microsoft’s app store, preventing them from using most existing Windows software. Basically, there wasn’t a lot you could do with it, and many third-party developers hadn’t done the work to adapt their software to it. The device garnered less than glowing reviews, with The Verge calling it “honestly perplexing.” “Little inconsistencies and bafflements are everywhere,” The New York Times’ David Pogue wrote.

In 2013 Microsoft brought out the Surface RT’s more expensive and more powerful sibling, the Surface Pro. It contained a stylus, along with an Intel chip that could run real Windows programs, with stronger performance than the Surface RT.

For Microsoft to put forth a more traditional Intel-based Windows PC would be bold. It would directly challenge some of the company’s top clients. “It did not seem prudent,” Steven Sinofsky, president of Microsoft’s Windows division who left the company in 2012, wrote in “Hardcore Software,” a detailed recollection of his experience that he’s been publishing in parts on Substack. Windows was Microsoft’s main source of profit. If even one of the major Windows device makers were to stop building Windows PCs, that would be, in Sinofsky’s words, “a massive problem.”

Microsoft pressed on anyway.

Like the Arm-based Surface RT, the Intel-powered Surface Pro wasn’t perfect. It could only run for a few hours on a single charge, and it was heavy and impractical to use as a tablet. And regular laptops offered better keyboards than those that Microsoft sold separately for the Surface Pro.

A few months later Microsoft revealed a black eye. It trimmed the price of the Surface RT by $150 to $349 and instituted inventory adjustments for related parts and accessories, which resulted in a $596 million reduction in its quarterly net income.

But Microsoft did what it usually does. It stuck with the Surface line instead of ditching a challenged brand. It rolled out refinements, such as making the hinge on the back of the tablet adjustable and changing the aspect ratio in such a way that work became more comfortable in landscape orientation.

1. By 2015, Microsoft had walked away from Windows RT and was focused on building devices with Intel chips that could run standard Windows applications.

Meanwhile, copycats were coming out from top PC makers such as Dell, HP and Lenovo. And Apple was also responding, rolling out the laptop-like 12.9-inch iPad Pro and compatible Apple Pencil stylus and Smart Keyboard cover in 2015.

It was a strong dose of validation for Microsoft. In 2012, before the Surface came out, and there were only rumors of Microsoft’s plans for Windows, Apple CEO Tim Cook told analysts that “you can converge a toaster and a refrigerator, but those things are probably not going to be pleasing to the user.”

Yet in 2017, Apple, perhaps Microsoft’s toughest corporate critic, capitulated. It came out with a toaster-refrigerator combo of its own, said Michael Gartenberg, a technology industry strategist and former Gartner analyst. “It’s clearly become a mainstream design,” Gartenberg said.

Also that year Microsoft introduced the Surface Laptop. While it was as boring as any other laptop, it left out the software that sometimes could burden Windows PCs from other manufacturers, the sorts of things end users might want to spend time deleting, Gartenberg said.

In 2019, Microsoft took another shot at an Arm-based Surface, with the Surface Pro X. Reviewers gave it credit for long battery life but dinged it for performance and compatibility reasons, not unlike the original Surface RT.

This year, Microsoft made things more complex by introducing an Intel-based Surface Pro 9 along with an Arm-based version, which put an end to the distinct brand for Arm-flavored Surface. People have fretted that the Arm model of the Pro 9 is still unable to run some programs. The Intel version has received more praise. “The removal of the headphone jack is the only new thing that’s wrong with it,” Ars Technica said in its review.

Those who opt for the Surface Pro 9 with an Arm chip can at least access a broad swath of apps. The 2022 update to Windows 11 includes a way to run over 50,000 Android apps through the Amazon Appstore.

If you look at it for just a second, the Surface Pro 9 with Intel inside looks a bit like the 10-year-old Surface RT. Changes inside and out have made it tougher to dismiss as a novelty. There’s a button to enable the Function row on the keyboard, which boasts a more responsive trackpad. Enhancements to Windows make it easier to tap buttons on the screen when using the Surface as a tablet. You can open the programs you need.

Gartenberg, who lives in New Jersey, doesn’t see many people using Surfaces in the real world, although he did recently witness a man working on a Surface while walking around outside. The man was wearing a harness that held the Surface just off his chest, so he could tap on the screen when necessary, Gartenberg said.

There’s one place you’ll certainly see them, though. During televised games, you can spot players, coaches and referees using branded Surface machines at National Football League games as a result of a partnership Microsoft struck with the NFL in 2013.

In the course of a decade, Microsoft has managed to raise the bar for Windows PC makers, demonstrating that a top tier of Windows can exist, Gartenberg said.

“If someone said to me, ‘I need a Windows PC,’ what would I recommend? I would say, ‘Go see what Microsoft is offering. Go see if that meets your needs,'” he said. “‘It’s not going to come with any junk you’re going to call me about, and it will just work.'”

Still, it’s not very easy to locate Surface diehards. A few can be found by surfing Craigslist.

There is, for example, Stephane Prunet, an investment advisor in Berkeley, California. For years the device’s unconventional design has appealed to him. He bought a Surface Pro 3 and then a Surface Pro 7. The latter, which came out in 2019, is his main computer, and he runs Microsoft Excel and other work-related programs on it.

“I almost never use it as a tablet. Maybe I should, but I don’t,” he said. Earlier this month he listed both on Craigslist. If someone buys the Surface Pro 7 for a good price, he’ll upgrade to the Surface Pro 9, which has a larger display.

If not, he said, he’ll hang on to the 3-year-old Surface. He won’t be giving it away to one of his children. His daughter uses a Mac, and his son is happy with his own Windows laptop. “He’s never shown interest in the Surface,” Prunet said.

Sure, some people might want a bigger screen, but beyond that, he doesn’t understand how people would be better off with a regular laptop than with a Surface.

“Except the fact that maybe some laptops are less expensive. That’s probably an explanation,” he said. “Because otherwise, I find there is no compromise whatsoever. In fact, there are only benefits. The keyboard is very comfy. It’s not as rigid as a laptop, but who cares?”

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