After years of declining iPad sales, Apple Inc. (NASDAQ:AAPL) has had success recently with a less expensive model. This has led to a string of quarterly gains. Microsoft Corporation (NASDAQ:MSFT) is preparing to to take another crack at the iPad’s core consumer market by releasing a new$400 Surface tablet later this year. Whether it boosts Microsoft stock remains to be seen.
Microsoft has built its Surface hardware line into a successful, billion dollar business that contributes meaningfully to the company’s bottom line. In the latest quarter, Surface revenue was up 32% year-over-year.
The key product in that lineup and the one that started it all is the Surface Pro tablet. But it’s big, expensive and aimed at professional users.
Can the New Surface help Microsoft Stock?
A report in Bloomberg says that Microsoft is going to release a new Surface tablet in the second half of this year that’s aimed at the consumer market. It will be smaller and lighter than the Surface Pro, with a 10-inch display and rounded edges. And most important (at least if it’s going to take on the latest $329 iPad) it’s a cheaper Surface tablet, with a price starting at $400.
It would continue to use an Intel Corporation (NASDAQ:INTC) CPU and run Windows 10. Accessories like a keyboard cover and stylus will be offered, but priced lower than the Surface Pro versions.
Wait, Haven’t We Been Here Before…?
If this scheme sounds more than a little familiar, it should. Microsoft has played the cheaper Surface card multiple times in the past, with little success. In fact, its first attempt was a disaster.
Remember the Surface RT? The $499 tablet was released in 2012 as a smaller, cheaper and consumer-friendly alternative to the Surface Pro. It tanked. In 2013, Microsoft stock dropped 12% in one day after it wrote off $900 million in unsold Surface RT inventory.
After the Surface RT debacle came the Surface 2 and Surface 3. Neither did particularly well and Microsoft quietly discontinued the Surface 3 in 2016.
Why Another New Surface Tablet?
There are three big reasons why Microsoft is going to try yet again with a cheaper Surface tablet.
The first is those resurgent iPad sales. In Q3 2017, Apple marked the first quarterly uptick in iPad sales since 2014. With its latest iPad model in the mix, revenue for the division was up 6% again in the latest quarter. Clearly, there is still a market for consumer tablets, and not just ultra-cheap versions like Amazon.com’s (NASDAQ:AMZN) Fire tablets.
The second is the surging Surface division revenue. With Surface sales up in a meaningful way, Microsoft may be feeling that consumers are buying into its hardware plans. Now may be the time to broaden that product lineup, boost Surface revenue further and make the division a bigger part of Microsoft stock.
The final reason is that it’s currently a relatively expensive proposition to buy a Surface product. Out of all of Microsoft’s tablets, laptops and its Surface Studio all-in-one PC, the cheapest option is the $799 entry level Surface Pro.
With a new Surface tablet starting at $400, Microsoft will have a Surface product that offers Windows 10 functionality, but is priced affordably for students and casual tablet shoppers.
Will a Cheaper Surface Work This Time?
Despite stronger iPad sales and the growth in Surface division revenue, the new Surface tablet is still a risky proposition. A Windows tablet is not the same as an iPad when it comes to casual use. It lacks the simplicity of use and the millions of App Store offerings.
The new Surface tablet would also be priced $70 higher than the new Apple iPad. As a productivity tool, it has the Windows 10 advantage of being able to run Windows software, but a 10-inch display is limiting and a $400 tablet is going to have a modest CPU that limits what software can be run effectively.
According to Bloomberg (Microsoft is not commenting), we will find out in the second half of the year whether the new Surface tablet finally does the trick for Microsoft, or slides into obscurity like the Surface 2 and Surface 3. Or in an unlikely, worst case scenario tanks Microsoft stock as a Surface RT level bomb.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
