Microsoft (NASDAQ:MSFT) released its all new Surface 2 and Surface 2 Pro on September 23, 2013, as the successor to the Surface RT and Surface Pro, respectively. Like its predecessors, the new Surface 2 and Surface 2 Pro have a 10.6 inch screen. That's a great size for a tablet, but do all people really want a tablet that big? The answer is no, and its why Microsoft screwed up in not releasing a smaller tablet alongside the Surface 2 and Surface 2 Pro.
How big is the market for tablets for various screen sizes? Well, I dug up the numbers from IDC, and what I found was pretty surprising.
Worldwide Tablet Market Share by Screen Size Band, 2011 - 2017
8" - 11"
As you can see from the above chart, tablets less than 8'' were just over a quarter of the global tablet market in 2011. The market was dominated by tablets in the 8''-11'' range. Tablets in this range include Apple's (NASDAQ:AAPL) iPad, which was the most sought after tablet then. At this time, Android tablets had not had much influence yet, and Android itself was still growing and was not as big as it is today. However, in two short years, the tablet market shifted dramatically.
IDC: Top Five Tablet Vendors, Shipments, and Market Share, Third Quarter 2013 (Shipments in millions)
3Q13 Unit Shipments
3Q13 Market Share
3Q12 Unit Shipments
3Q12 Market Share
In 2013, a little more than half of the tablet market was dominated by tablets less than 8'' in screen size. That means that tablets less than 8'' doubled in market size, as 7'' Android tablets took hold, such as Google's (NASDAQ:GOOG) Asus Nexus 7, Amazon's (NASDAQ:AMZN) Kindle Fire, and the Samsung (OTC:SSNGY) Galaxy Tab 3 7.0. Oh yeah, and Apple knew the tablet market was changing, so it released a smaller tablet known as the iPad Mini, with a 7.9'' screen size. So, now we know that the <8'' tablet market is a something we can't ignore. And, it's going to stay like this for a while, even until 2017, <8'' tablets will still hold 57% of the tablet market. So why did Microsoft ignore this? It's simple, Microsoft screwed up.
Microsoft Made a Mistake
Microsoft had a small, but noticeable market share in Q2 2013 of 4.5%. Android shipments dominated the market, with Apple's iOS losing much ground in the last few years. Microsoft was able to get "on the board" in terms of market share by dropping prices on its Surface RT and Surface Pro tablets, but it could have doubled the addressable market, and doubled its market share just by having a 7'' or 8'' tablet. Who knows, maybe Microsoft could have had more than 9% of the market if it had a 7'' or 8'' tablet? I think it's likely Microsoft would have had close to 12% of the market if it had released a smaller Surface tablet. Windows is a great ecosystem, even if it isn't widely popular, especially with Windows PCs, Windows Phone, the Surface, and most importantly of all, the Xbox One. Microsoft could have been better positioned to the market if it had released a smaller Surface tablet when it first released the Surface product line, instead of releasing in 2014, as rumors have pointed out. Maybe it could have helped them avoid a huge $900 million writedown that they made on Surface RT in July 2013. Either way, Microsoft would have been much better off if it had released the Surface Mini earlier, assuming they plan to release it all, and Microsoft definitely screwed up.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.