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From a consumer and from a developer standpoint, I absolutely adore Microsoft (NASDAQ:MSFT). Say what you want about Steve Ballmer (who has managed to quite nicely grow net income and sales over the years), but Microsoft's Windows 7 is amazing, Windows 8 is extremely innovative, the Xbox led the company to living room dominance, and the firm's server/enterprise products are top notch. Oh, and Microsoft's balance sheet is very clean with about $50B in net cash on the books.

Why is it then that everyone cares so much about the sales of the "Surface RT" tablet that was recently launched? The point that I hope to make here is that the Surface just doesn't matter.

Software Company With A Hardware Hobby

Microsoft is not Apple (NASDAQ:AAPL). While the latter is a consumer electronics company, the former is a software company. The constant accusations that Microsoft isn't "innovative" and "needs a new CEO" are, in my view, baseless. Windows is the world's most popular operating system, and the company is not standing still as new compute devices show up. Windows now covers:

  • Smartphones (Windows Phone 8)
  • Tablets (Windows 8/Windows RT)
  • Laptops (Windows 7/Windows 8)
  • Ultrabooks/Hybrids (Windows 8)
  • Desktops (Windows 8)

In the PC space, Microsoft is not only spending quite a bit to market the platform, but Intel (NASDAQ:INTC) and the majority of the PC OEMs are working full-force to really promote Windows 8.

So, What About The Surface?

The "Surface RT" was... a decent idea that was executed poorly. I can understand why Microsoft wanted to do an ARM (NASDAQ:ARMH) compatible version of Windows:

  • It was not clear that Intel would really be pushing to produce viable products for the space until very recently.
  • By breaking compatibility with existing Windows applications, it would force users to buy applications at the Windows Store, which generates additional revenue for Microsoft.
  • Even with Intel now aggressive in low power tablet chips, Microsoft likely wanted to keep the door open to alternatives to avoid price gouging on Intel's part in the Windows tablet ecosystem (although this may be somewhat of a stretch).

The problem, however, is that Windows' major selling point is precisely that it is backwards compatible with the majority of applications out there. Without this selling point, people will be more than content to buy a Google (NASDAQ:GOOG) Android or Apple iOS tablet, each with their own rich, well-established ecosystems. With Windows RT, Microsoft throws away its entire software compatibility advantage.

Further, it did not help that Microsoft chose the fairly underpowered Nvidia (NASDAQ:NVDA) Tegra 3 to power the device. At the $500 price point, the Apple iPad 4, with its significantly better processing capabilities, thanks to the A6X chip (both graphics and CPU), just blows the doors off of the Surface (and any other tablet chip currently available).

So, Why Do We Care?

Well, the thing is, we shouldn't. Microsoft makes its money in the consumer market by selling copies of Windows with laptops, desktops, convertible Ultrabooks, tablets, and phones. Does it matter if Microsoft's own tablet doesn't sell?

What matters is that the competitive positioning of products using Microsoft's OS relative to Android and iOS products improves. With Microsoft's port of Windows to ARM, it forces Intel to really push hard with its own low power Atom products to compete with Apple's formidable efforts in the space. With the release of the Surface, Microsoft is setting a baseline standard for the devices based on Microsoft's operating systems -- the days of the cheap, flimsy netbooks with gimped processors are now quickly winding to a close.

Microsoft is a software company that opportunistically does hardware when it serves a particular purpose. The Xbox serves as a platform to generate revenues from the sale of games, and Surface is simply a way for Microsoft to push the system designers to put out quality products (and again, keep Intel in line).

I would say that Microsoft really doesn't want to compete with its OEMs in the tablet space -- doing so will merely drive them to the free-and-established Android. It does, however, want to make sure that the name "Windows" is associated with quality.

Conclusion

"Surface RT" sales don't matter. Sales of Windows-based devices in general do matter. As long as Microsoft has viable operating systems in place in the relevant segments, and as long as the system designers do a good job, then Microsoft will succeed. Worrying about how many Surfaces are sold is not the right way to think about Microsoft's prospects in the ultramobile space.

Source: Microsoft: Surface Sales Don't Matter