Surface Devices Could Lead To Upside For Microsoft – Forbes
Microsoft recently rolled out its Surface Pro and Laptop to 25 markets. While the new convertible Windows 10 tablet, Surface Pro, starts at $799 and costs $2,699 for the highest configuration, the Surface laptop starts at $999 and goes up to $2199. These launches closely follow the successful launch of Surface Book in 2016. With these launches, Microsoft is targeting the premium segment of the PC market. However, the company faces intense competition from Apple, which has a significant share in the premium PC hardware industry. In this note, we explore why Microsoft is targeting this segment and the possible upside to Microsoft’s revenues from these devices.
Why Is Microsoft Targeting The Premium Segment Aggressively?
The global PC market has been witnessing a secular decline in shipments. However, the decline was arrested in Q1 2017 as shipments grew by 0.6% Q-o-Q to compared to a 5.7% decline in 2016, per IDC. While PC shipments are expected to rebound in 2017 as the market stabilizes, it is interesting to look at why Microsoft is targeting the PC market so aggressively.
Within the Global PC industry, Apple has managed to capture a significant chunk of the premium PC market. While Apple’s shipments declined by 9.8% y-o-y to 18.5 million in 2016, the company reported 4% y-o-y growth in Q1 2017 to 4.2 million units shipped. While Apple’s share in the industry has improved marginally to 7% in 2017, it can lose some share at the lower end and mid-tier of the premium segment of the market as it has discontinued its Apple Air product and its Macbook has not been refreshed recently. Microsoft recognizes this opportunity and hopes to take advantage with its Surface Pro tablets and Surface Laptop. Microsoft has been aggressively targeting these segments and offering better hardware at relatively low price points.
Furthermore, there is a dearth of quality PC hardware for Windows OS user that offers a seamless user experience. Therefore, we believe that these launches will not only strengthen Microsoft’s foothold in the low and mid-tier segment of the premium PC market but also help the company to expand its Windows ecosystem to high-end users. Microsoft has been trying to reinforce integration within its ecosystem by offering features and products that allow its devices to work together seamlessly. With the re-launch of the Surface Pro and Laptop in 2017, and Surface Book Pro last year, Microsoft tried to not only bridge the gap between PCs and tablets but also cover a shortfall in its hardware portfolio. Microsoft plans to leverage the Surface brand name and the growing popularity of its hardware devices to possibly re-enter the ultra-niche (professional) segment of the market. If this offering were to be successful, it would supplement the expanding Surface line, and thus improve its ecosystem.
How Much Can This Add To Microsoft’s Top Line?
In calendar year 2016 and Q1 2017, the Surface line contributed $4.3 billion and $831 million to Microsoft’s revenues, respectively. On the other hand, Apple made over $23 billion in 2016 and close to $6 billion in Q1 2017. Based on these numbers, we estimate that Microsoft’s share in the Global PC market was close to 1.3% in 2016 and 1% in Q1 2017. However, if Microsoft can successfully launch an appealing line of Surface devices, it is possible that Microsoft’s share could increase to 5% by 2020. This would help the company nearly triple its Surface revenues to almost $15 billion. In this (very optimistic) scenario, Microsoft’s cash flows would be boosted by $1.4 billion (assuming margins similar to Apple).