This is my opinion on how Microsoft Surface can add value to Microsoft.

Microsoft's Business Model

Microsoft makes money by selling licenses to run software. Two high volume licenses are Windows and Office. The business of software licenses is unlike normal manufacturing.

In normal manufacturing there is a high capital cost to design a product, and then there is a high cost to produce it: buy materials, manufacture, and physically transport the product to market. Additionally, manufacturing typically relies on borrowed money which has a borrowing cost that fluctuates with interest rates, until the sale is realized that interest needs to be paid. There is also the potential to be left with unsold stock.

Software has a high capital cost to develop but each license sold has near zero cost. To be fair, the cost to develop and sustain development of software like Windows or Office to keep it competitive far outstrips the cost of developing most manufactured products, the only way to sustain this development and keep licenses low cost is through high volume sales.

Microsoft from the beginning has relied on other companies to produce computer hardware, and derives revenue from selling volume licenses to the manufacturers for the operating system, that operating system then provides the ground to up sell customers on Office productivity software. Controlling the operating system also allows for faster innovation in Office.

At first glance this seems like a fantastic business model. Other companies take on all the capital cost and the risk of building hardware and compete with each other for sales. Microsoft gets to sell an operating system license for every PC produced.

Why would Microsoft ever want to get into computer hardware manufacturing?

Apples Business Model

Let's compare Microsoft's business model with Apple's.

Apple's product is a unique computing experience encompassing the end-to-end hardware and software. Apple enforces this uniqueness by only allowing its software to run on its hardware.

Instead of primarily selling software licenses, Apple sells hardware.

Apple targets the premium customer segment. Customers' perception of the brand's high quality combined with its unique experience - only available from Apple - allows it to have high margins in an otherwise low margin hardware business.

Apple further drives down cost, increasing profit, by producing the same design at a far higher volume than other hardware manufacturers. The large volume of orders to hardware component suppliers allows further reductions in cost, and allows it to make special requests for components to increase quality.

Finally Apple further reduces cost by owning the complete stack of hardware, software, and endpoint sales.

From a software standpoint, Apple only has to support the small fixed set of hardware combinations that it produces. Each generation of hardware has a single chip set. This vastly simplifies the software stack and significantly reduces the cost to maintain and test software.

From a hardware standpoint, Apple oversees the manufacturing process and can make optimizations in its software to aid manufacturing, and further reduce per unit cost.

Because the volume, learning and optimizations stacked on each other over time - I have no doubt Apple has a massive cost advantage over other hardware manufacturers to produce a similar product.

Goals for Microsoft's Surface Hardware Business

In my view the fundamental goals for Microsoft's hardware division should be the following:

  • Profit
  • Showcase Software
  • Increase Quality

The Surface hardware line needs to be profitable to sustain the business long term. All development and sustainment cost must be paid for by the revenue that the surface hardware line brings in.

The Surface hardware line showcases the Microsoft's Windows operating system and other software products by providing a iconic computing experience. When customers think of Windows they should think of Windows on Surface. Customers should feel Surface hardware is a premium product line that is trustworthy, high quality, and reliable. The halo of Surface will ideally extend to other PC hardware.

The Surface hardware line should innovative in the quality of end to end PC experience. This encompasses security, reliability, repair, stainability, packaging, core hardware components, connectivity, accessories, supply chain, manufacturing, service, total cost, and sales. These innovations should be licensed to or integrated with other PC manufacturers to increase the overall value of the Microsoft hardware ecosystem.

Customer Categories

The following categories are of critical importance to the Surface Pro.

Generally categories can be broken up by workload:

  • Normal - Browser, Office: Teams, Word & PowerPoint

  • Heavy - Excel, CAD Modeling, Video Production - High computation needs

  • Secure - secure access to high privilege resources such as servers, where we want to restrict access to known verified devices.

  • Enterprise Business (Normal, Heavy, Secure)

  • Consumer (Normal, Heavy)

  • Schools (Normal)

Surface Core Products

Device Categories:

  • Surface Pro
  • Laptop
  • Laptop Go
  • Laptop School
  • Internet only Workstation

Accessories:

  • Dock
  • Camera
  • Monitor
  • Charger
  • Adapters (USB-C to Audio)

Limit SKUs within device categories

  • SSD size

  • RAM

  • Processor

  • RAM (16, 32, 64)

  • SSD (256 GB, 512 GB, 1 TB)

  • Processor (Low, High)

  • Ports (USB C, Audio, Charging)

  • Touch Screen

  • Screen Resolution

  • Screen Coating - non reflective

  • Camera Resolution

  • Backlit keyboard

  • Discrete Graphics Card

  • Chassis Material

  • Chassis Colors

  • Speakers

Areas for Innovation

  • Long term support - 10+ year hardware
  • Quick and Cheap repair by any individual
  • Secure and transparent component supply chain.
  • System on a Chip
  • Durability
  • Branded Accessories by 3rd Party suppliers (Headphones, Mouse)