Surface Laptop and Microsoft’s Hardware Long Game

on June 23, 2017
Reading Time: 3 minutes

I’ve been testing Microsoft’s recently launched Surface Laptop, and it’s an extremely well-designed piece of hardware. Microsoft seems to have obsessed over every detail in its first laptop, save perhaps the shipping OS (Windows 10S), and the result is a product that an awful lot of people are going to like. The Surface Laptop is also notable because even at its relatively high starting price of $999 it has the potential to drive shipment volumes well beyond what Microsoft has seen before, and it represents yet another step forward in the company’s slow-but-steady move towards becoming a hardware heavyweight.

World-Class Hardware
Most reviewers are infatuated with the Alcantara-covered keyboard, but they key design element for me is the touch-enabled 13.5-inch, 3:2 aspect ratio screen. It mimics the ratio of Microsoft’s Surface Pro and Surface Book, and I like it because it offers more vertical screen real estate than your typical widescreen (16:9) aspect ratio notebook. It’s not an OLED, but it is still beautiful with a 2256 by 1504 resolution and 201 pixels per inch.

Microsoft has been honing its out-of-box experience since the first Surface tablets shipped, and here again, the company brings a top-notch experience augmented by Cortana during setup. Using just my voice I was able to get through much, but not all, of the initial setup. It’s a smart way to remind people that Cortana is on Surface, and getting more useful all the time.
Fit and finish is quite good, the Alcantara does feel nice (longevity TBD), and the touchpad is large and highly responsive. Microsoft’s decision to forego USB Type-C ports feels uncharacteristically backward looking but is undoubtedly rooted in user feedback. Finally, the Windows Hello face sign-in camera on the notebook is amazingly fast. Once you get used to signing into your notebook this way, even a lightning-fast fingerprint scan seems old school.

Windows 10S: The Challenge of Subtraction
While I have very few complaints about the Surface Laptop hardware, I’m afraid my take on Windows 10S is less charitable. Some have called this a pared-down version of Windows 10, but that’s not exactly accurate. It’s the same Windows 10, just more restricted. I fully understand what Microsoft is trying to accomplish here, and respect it. By only allowing us to install apps from the Windows Store, Microsoft says it can ensure a fast, stable operating system that won’t face the inevitable slowdown that occurs when you install (and uninstall) legacy Windows apps. The problem is that many of the legacy apps that longtime Windows users depend upon will never make it into the Windows Store. For me, the inability to run a third-party browser and my company’s use of proprietary software means Windows 10S is a non-starter for me. Happily, Microsoft lets Surface Laptop users switch to Windows 10 Pro for free (at least through the end of the year). I’ll be making that switch, immediately. Near-term Windows 10S might make sense on low-cost education hardware competing with Chrome. Long term, to find mainstream acceptance, Windows 10S will require a much more robust offering within the Windows store.

High-Value Vs. High Volume
With the launch of the Surface Laptop Microsoft now has a very well-rounded hardware lineup. It joins a newly refreshed Surface Pro, the high-powered Surface Book, and the creator-focused Surface Studio desktop. With the launch of each new piece of hardware, Microsoft has further burnished its reputation for shipping high-end, well-designed hardware. Rather than focusing on selling high volumes, the Surface team is clearly focusing on selling high-value. And by focusing first on the nascent detachable space, Microsoft built a sizeable hardware business without taking share away from partners such as Dell, HP, and Lenovo, who only entered the space after Microsoft helped establish it. However, looking at IDC’s first quarter 2017 detachable numbers brings to light an interesting detail: While Microsoft’s share of the category has dropped as the market has grown, it still has by far the highest average selling price (ASP) among top vendors at nearly $1,200. So its 15.1% unit market share drives a healthy 27.7% of the detachable market’s total revenues. (Apple’s iPad Pro is number one in units with 32.5% of the market and 38.6% of revenues; Samsung is third with 10.3% of the unit market share but just 7.8% of the revenues). Meanwhile, nobody expects Surface Studio to ship tens of millions of units, but with a price range of $2,999-$4,199, it’s certainly going to drive some enviable ASPs.

Windows 10S challenges aside, Surface Laptop could drive decent unit volumes for Microsoft, especially if the company successfully utilizes its retail stores. And while the starting price may be $999, few will settle for this entry level product, which means ASPs will be higher (my test system sells for $1299; a maxed-out system is $2,199). Among the top five notebook vendors in Q1 2017, only Apple had a notebook ASP North of a grand ($1,560), while the rest landed in the high $500s to low $700s. Volume is the name of the game for most of these players. But market watchers and competitors should pay close attention to how well Surface Laptop does over the next 18-24 months. Microsoft may have just fielded a laptop line that will eventually grab a small piece of the overall share of the notebook market, but an outsized chunk of the the revenue pie.