In case it is a helpful context, I attended the original launch of the Microsoft Surface in Los Angeles. Microsoft moving into hardware has been one of the most interesting developments within the Windows ecosystem and Windows hardware of the last decade. I followed Microsoft’s Surface journey from the start and listened to the PC OEM complain and share their outright disdain for Microsoft’s efforts with Surface because they believe Microsoft is stealing hardware customers from them, which they are to a degree. But the Surface effect on the PC industry has been more positive than most OEMs realize, and in hindsight, the PC industry may very well have been in worse off shape had Microsoft not helped give the market a boost with Surface.
Should Microsoft Be in the Hardware Business?
The debate around whether or not a company that sells software or services should be in hardware is an interesting one. If you look at both the Surface hardware business as well as Google’s Pixel business, you conclude they are relatively small businesses, but their impact on the market is quite large. The Surface business will likely be a $10 billion dollar business for Microsoft by the end of next year. Microsoft sells under 10m Surfaces a year, but I remain convinced market share is not the goal of Surface for Microsoft.
It is certainly true that the presence of the Surface does, in a way, compete with Microsoft partners. This is the tension that exists with the OEMs who are living in much smaller overall margins than Microsoft, and, Microsoft’s partners worried that Surface would get special treatment and preferable features of Windows. However, the Windows team treats the Surface group just like any partner. Meaning any special functions of Windows that are unique to Surface are things the Surface team had to do on their own the same way any OEM could do if they please.
So, then, what exactly is the role Surface plays for Microsoft?
Surface Sets the Bar
My overall observation on the role of Surface is to set the bar and be the physical manifestation of hardware innovations that help fuel more innovative hardware functions from Microsoft’s PC OEM partner. Unbeknownst to many, Intel used to do this but in a behind the scenes way. When Intel wanted to see hardware innovation or show the PC OEMs what new innovative hardware could be possible, they created a series of reference designs with the ODMs in an effort to showcase hardware innovation and hope the PC OEMs adopted some new ideas. Sometimes they did, and sometimes they didn’t, but Intel was aggressive in trying to push hardware innovation in PCs since that drove demand for new processors that utilized new hardware innovation. It was a cycle-dependent on each other, and OEM complacency in hardware is the worst thing that could happen to both Intel and Microsoft.
Microsoft knew they could not let OEMs get complacent since that was bad for the Windows roadmap in the same way it was bad for Intel’s silicon roadmap. Enter Surface as the piece of hardware that sets the bar for the rest of the category, as well as new categories and as the best first customer for Windows.
What I have always appreciated about the Surface was the hardware focus on unique innovations and experiences that led up to the total experience. I’ve long said, and it’s true, that if I was a Windows user as my primary notebook OS, I would be a Surface customer in a heartbeat. I’ve always loved the hardware, the keyboard, the Pen experience, and the overall look and feel is super-premium. From what Surface does with the display, to hinges, to material, etc., it all adds up to a premium experience and Surface has consistently been the bar for a premium PC experience.
To accomplish premium hardware innovations, Microsoft’s Surface team has looked to control more of the stack, creating unique things for Surface that sometimes were adopted by other OEMs. Things like the smart keyboard connector, or specific hinge designs used for the kickstand. Now with Surface Duo and Neo, there is a uniquely designed hinge that helps the device fold elegantly and smoothly. But their latest move to control more of the stack came with the ambition to influence more the silicon that powers the Surface by co-developing a custom chip with AMD and with Qualcomm.
This turn of events is quite fascinating, and we can be certain this is the beginning of Microsoft’s efforts to more greatly influence the semiconductor components in Surface going forward. Microsoft is not going to become a chip design powerhouse like Apple is, but Microsoft is able to benefit from the extremely clever foundational architecture innovations from AMD and Qualcomm that made their solutions flexible enough to give Microsoft, and other customers, a wider range of options to tweak the underlying architecture. AMD and Qualcomm thought about this flexibility in their architecture long ago, but Intel has recently created a similar approach with Lake Field. Intel was late the flexible architecture game, but they are now there as well, which means we should not be surprised if we see Microsoft work more closely with Intel as well to co-develop some Intel solutions for Surface products going forward.
I could write an entire article on this fascinating development, where all three primary Silicon providers are allowing for more rich customization and co-designing of specific chipsets, but from a hardware development standpoint, this could be a fascinating area to watch as it will likely help create more specialized computing products in the future.
The last thing I want to mention about Microsoft’s Surface hardware lineup and strategy evolution is how the core strategy has evolved. When the first Surface came out, it was all about Windows. The device featured a hardware form factor Microsoft wanted to see get adopted as well as pen and touch on tablet design. The first Surface was absolutely a key strategy to try and slow down the momentum of the iPad. While I never thought the two were real competitors, the reality was Surface benefited as consumers (not enterprise customers) looked for a tablet that could also handle heavy productivity tasks and leveraged existing workflows. iPad requires a change of workflow for most productivity minded humans, and the Surface/2-1 form factor never required a workflow change. This is why Panos Panay, who runs the Surface group, focused much of his commentary on keeping the customer in their “flow.” The workflow between different form factors is consistent when you use Microsoft software or services, and this is a relevant gap to understand for Apple since the workflows between Mac and iPad are actually quite inconsistent when you consider their target customer.
I encourage you also to read my colleague Carolina Milanesi’s write up on the new Surface Duo and Neo hardware, but this line in particular in her column is apt to understand how Surface has evolved.
This week, we witnessed the role of Surface devices move from being the best implementation of Windows to being the best implementation of Microsoft. This shift does not mean that Microsoft is no longer a software company, but it does mean that software does not define and limit the value that Microsoft can bring to its customers.
When I said earlier that Surface was the best first customer of Windows, it was true of the time, but that is no longer the case. Surface is now the best first customer of Microsoft. This includes Windows in some cases but is not limited to Windows. This now includes the Azure cloud, Microsoft apps, and a wider range of services. This profound strategy evolution is best seen in the Surface Duo, which runs Android and not Windows. Android is the default mobile OS for everyone, but Apple and for a device that has communications at its core running Android is critical. Yet Duo, just like other Surface hardware, is now more about Windows and more about everything Microsoft is and wants to become. Knowing this strategy shift is a helpful framework to think about the future of Surface, along with the future of Microsoft and how the Surface effect is more than just a business for Microsoft but a way to elevate the broader ecosystem and thus help Microsoft and their partners in much more meaningful ways.
