Do you like roller coasters? Do you want those steep drops where the wagon plunges 140 meters at an insane angle, subjecting your body to a force of 3.5 G? Do you squirm with anticipation as the clack-clack-clack wagon slowly climbs to the top, then hurtles down, leaving your stomach behind when you’re already at the bottom?
Attach your belt. We’re going to take a ride through the ten years of Microsoft’s Surface division, which has achieved performances worthy of a Gerstlauer Euro-Fighter 1000. After an unpromising start in 2012, the division began to grow steadily. In 2018, the division had total revenue of almost $5 billion.
The Surface division reached its peak at the end of FY22, bringing in nearly $7 billion in revenue for Microsoft. And then… See for yourself.
Revenue for 2024 is forecast based on a 24% year-on-year decline. Graphic by Ed Bott/ZDNET
The results for the 2023 financial year are gloomy
This is a pretty dramatic collapse in FY 2023. (It should be noted that the figure for FY 2024 in the chart above is a projection).
Extracting these numbers from Microsoft’s financial reports was no easy feat. The company stopped reporting actual Surface revenue in FY22, preferring to disclose changes from the previous year’s revenue in percentage terms. To make the comparisons even murkier, the company changed the line item “Surface revenue” to “device revenue growth” in 2023, incorporating revenue it receives from sales of keyboards, mice and other devices. peripheral devices.
Despite all these changes, the results for the 2023 financial year (which ended on July 30, 2023) are gloomy. In its annual report, Microsoft noted that “device revenue declined $1.8 billion, or 24%, as high channel inventory levels continued to drive additional weakness beyond the decline in the demand for PC”.
The PC market is going through a major crisis
In other words, the PC market is going through a major crisis: it’s currently undergoing a major correction, and Surface is doing even worse than its competitors.
The carnage is not over. During Microsoft’s fourth quarter earnings conference call, Satya Nadella and his team predicted that device revenue for the quarter ending September 30, 2023 would continue to fall:
In the devices business, revenue is expected to decline by 30% due to the overall PC market and the adjustments we have made to our portfolio by focusing more on our higher-margin premium products.
It’s hard to imagine this getting better before the end of 2023. The best-performing Surface products are the Surface Pro and Surface Laptop, both of which are over a year old. The Surface Laptop Studio 2, a high-priced machine aimed at a niche market, was in the spotlight at the fall Surface event in New York. But in my opinion it should not be a dazzling success.
Two resounding failures in Surface models
In the chart above, I projected what Surface’s revenue could be if the company posted a loss of just 24%, repeating this year’s performance. In fact, they are returning to where the company was in 2016 and 2017. At Microsoft, a division must be able to bring in $10 billion in revenue per year to be considered a “needle mover.” There was a time when Surface seemed poised to build this type of steady, growing business. This is no longer the case.
This perhaps explains the sudden departure of Panos Panay, boss of Windows & Devices, a few days before the fall presentation of Surface. Its portfolio has expanded significantly in recent years to cover not only Surface devices, but also Windows 11. A Business Insider article, citing internal sources, states that Panay was “unhappy with recent changes in the Windows + Devices division “, including “significant cuts to simplify the Surface business…and focus more on Microsoft’s successes rather than more experimental devices.”
The Surface Pro and Surface Laptop lines are undoubtedly the “successes” mentioned in the article. Both products are relatively mature models whose physical appearance has barely changed in recent years. The addition of Thunderbolt 4 support in the Surface Pro 8 and Surface Laptop 5 was welcome, but otherwise most of the upgrades in these product lines have been simple spec increases, not the kind something that allows you to win new customers.
Two resounding failures probably didn’t help Microsoft officials defend Surface’s interests. The Surface Duo, a dual-screen smartphone running Android, was expensive and just… strange. I bought one shortly after it came out in 2019 and returned it six weeks later.
Three years of work for Microsoft on the CorePC project
And then there was the dual-screen Surface Neo, which became one of the first casualties of the pandemic. It never shipped, as did the operating system it was supposed to run, Windows 10X. If you forgot about this project, it’s understandable. A lot happened in 2020! But the bottom line is that it was supposed to be a competitor to ChromeOS.
CEO Satya Nadella did not hesitate to discontinue products that were not up to par. Maybe Surface will meet the same fate, but I doubt it. In fact, one thing I wrote about Windows 10X when it was first announced seems to be relevant today.
Windows 10X debuts as an operating system for a new PC format, with multiple screens. But its main innovation is the ability to run traditional Windows desktop applications in secure containers that are isolated from the operating system core. It’s easy to imagine that this technology will soon be applied to more traditional form factors.
A dual-screen PC is an expensive gadget and is unlikely to become a mass hit. This is why the project was abandoned. But imagine if you could achieve many of the Windows 10X project goals on traditional hardware, like (say) a cheap laptop. You would then have a credible competitor to Google’s Chromebook.
This is apparently what Microsoft has been working on for three years with its CorePC project, which could ship next year as Windows 12. If you need an explanation, Windows Central’s Zac Bowden can fill you in on this. “modular and customizable variant of Windows”.
My sources tell me that CorePC will allow Microsoft to finally offer a version of Windows that truly rivals Chromebooks in terms of footprint, performance and operating system capabilities. A version of Windows that only runs Edge, web apps, Android apps (via Project Latte), and Office apps, designed for low-end PCs, is already in early internal testing and is around 60 75% smaller than Windows 11 SE.
ARM to the rescue of Microsoft?
Meanwhile, at the “high-end, high-margin device” end of the PC spectrum, Microsoft desperately needs a way to compete with Apple’s MacBook M2 line (especially as more powerful M3 processors are expected to arrive on Apple Stores next year). Unfortunately, achieving performance and battery life competitive with Apple’s flagships will require processors based on Arm technology. And for now, the entire PC industry is waiting for Qualcomm to deliver its next-generation Nuvia SoCs. Here’s what I wrote about it a few months ago:
As almost every rational observer has noted, Windows on Arm is far behind Apple, at least using Qualcomm’s current SoC designs. But they could catch up, and perhaps even overtake their Cupertino competitor, with a successful launch of the Nuvia-based Oryon architecture, especially if they can integrate custom Windows features into it. (The SQ3-based Surface Pro 9 has some nifty AI-based features not found in its Intel sibling, including eye tracking and background noise reduction for video calls).
This is probably why Microsoft didn’t say anything about upcoming versions of the Surface Pro or Surface Laptop at its recent hardware event. Further increase in specs won’t move the needle at all. But a device with an Arm processor that delivers twice the battery life of an x86 device, has a neural processing unit for advanced AI tasks, and can run x86 applications in secure containers? It might be worth the wait.
Battling determined competitors on the low and high end at the same time is difficult enough, and the challenge is even greater when you have to do it in the face of budget cuts. Get ready for another ride on the Surface roller coaster.