Is The Surface 3 A Game Changer For Microsoft?

May.21.14 | About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) unveiled its Surface 3 tablet on Tuesday, and I joined CNBC's Adam Bakhtiar to discuss what it might mean for Microsoft's prospects. The good news: It's a fantastic product that blows the iPad out of the water. The bad news: Given the slowdown in the growth of the tablet market, I fear it's too late to make much of a difference.

To start, Microsoft really outdid itself this time in creating a sleek, attractive product. The new Surface boasts a large 12-inch display and PC-caliber power. And in fact, Microsoft is billing its new offering less as a "tablet" and more as a "laptop replacement." It's compared as much to an Apple (NASDAQ:AAPL) MacBook Air as it is to an iPad.

The Surface 3 runs Windows 8.1 Pro, which means that a user can literally do anything on the tablet that they can do on a desktop or laptop computer. If you buy an optional docking station, you can even give yourself a multi-monitor setup. And the USB 3 jack allows you to plug in virtually any accessory you can plug into a computer.

The downside?

Cost. The Surface 3 starts at $799, making it significantly more expensive than the iPad or the assorted Android tablets. It's also more expensive than most mid-range laptop computers. If your purposes for owning a tablet are light web browsing, reading e-books or toying with entertainment apps, then the new Surface is too much computer for you.

One interesting point of differentiation is the size. Microsoft opted not to "out iPad the iPad" with a smaller screen. By opting for the larger screen, Microsoft is attempting to create an entirely new product line in the "jumbo tablet." That's a smart move; peeling away Apple loyalists is no easy task.

Unfortunately, Microsoft is coming to market with the Surface 3 at a time when overall tablet growth is slowing. The tablet market will be lucky if it grows by 12% this year. Apple sold a lot fewer iPads than the consensus expected last quarter, even while iPhone sales surprised to the upside. And ironically, PCs- the very products that tablets were supposed to destroy- are staging a mild recovery. The rate of decline in PC sales slowed to just 1.7% in the first quarter of this year, according to Gartner. With corporations finally starting to replace their employees' aging computers after years of cost cutting, we may actually see modest growth by the end of the year.

So, will the new Surface be a game changer for Microsoft? No, it won't. But kudos to Microsoft for coming to market with a worthy competitor.

Disclosure: Long MSFT.

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