But uptake has slowed.
Microsoft's Surface strategy is doing what it was supposed to do
Yesterday Microsoft reported flat Windows revenue from the year before, despite an unprecedented drop in PC sales -- IDC put the drop at 14%, and outgoing Microsoft CFO Peter Klein suggested during the company's earnings call that the drop was in the "12-13-14" percent range.
There are several factors that made this possible. As investor relations chief Chris Suh put it on the earnings call, "Non-OEM revenue grew 40% this quarter, driven by sales of Surface and continued double digit growth in volume licensing."
So how much did Surface help Microsoft's Windows revenue this quarter? Let's do a rough back-of-the-envelope estimate.
Surface sells for a much higher average price than the OEM version of Windows -- it retails for anywhere between $499 (for the lower-powered Surface RT) and $999 (for the highest-end Pro version), and that's not including the keyboard/cover.
Let's assume that Microsoft leaves a reasonable margin for its retail partners, including its own stores. Some analyst estimates put Surface Pro sales around 400,000 for the quarter, and Surface RT sales at maybe 200,000. Let's say that Microsoft collects an average of $700 per unit, including attached peripherals like the cover.
That would be $420 million. That's about 10% of Microsoft's adjusted Windows revenue of $4.62 billion (that's adjusted downward to make up for how Microsoft accounts for upgrade sales made in previous quarters). Even if those estimates are generous and the number was lower -- say 5% -- it means that Surface was material in helping Microsoft make up for a drop in PC sales this quarter. And those estimates could very well be low, which would mean that Surface was an even bigger factor in saving the quarter.
The rest of the difference was made up from Microsoft's corporate customers buying the Enterprise edition of Windows 8, which are available only on subscription volume license plans -- mainly Enterprise Agreements. Companies buy these licenses for a number of reasons, but the likely reason this quarter is that they know they're going to upgrade some PCs from Windows 7 to Windows 8. Buying the subscription license now lets them make those upgrades any time during the period of the agreement -- usually three years. The Enterprise edition also includes special features for management and security that are not available with lower editions of Windows.
In other words, Microsoft has successfully convinced enough consumers to buy hardware, and enough companies to "subscribe" to Windows upgrades, that it made up for a horrible quarter of new PC sales.
These year-to-year trends will likely continue through the year. And as the Windows XP deadline approaches in April 2014, at least some businesses with really old XP computers -- which can't be upgraded in place to Windows 7 or 8 -- will buy new ones, which could slow the PC market's decline. Many of these companies will probably subscribe to the Enterprise edition of Windows 8 to get the additional features, too.
But there's some bad news looming here as well:
Google's plan to bring Chrome packaged apps to Android and iOS is part of its strategy to make the web the primary platform for users. Converting Apple device owners will be a challenge.
Most companies understand that they need a social media presence, but many are flying by the seat of their pants instead of crafting a social media plan that aligns closely with business goals.