Now the hard part: Microsoft CEO touts new Surface tablets

NEW YORK Thu May 15, 2014 4:49pm EDT

Microsoft CEO Satya Nadella speaks at a Microsoft event in San Francisco, California March 27, 2014. REUTERS/Robert Galbraith

Microsoft CEO Satya Nadella speaks at a Microsoft event in San Francisco, California March 27, 2014.

Credit: Reuters/Robert Galbraith

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NEW YORK (Reuters) - Satya Nadella has enjoyed a fairly smooth ride in his first 100 days as Microsoft Corp chief executive, but he risks hitting a rough patch next week when he unveils the latest models of the tepidly received Surface tablet.

Investors have lapped up Nadella's "mobile first, cloud first" strategy to recast the venerable software maker as a "devices and services" company, sending its shares up 9 percent since he took the helm.

So far he has stressed the services side of the business, making the momentous move to put Microsoft's Office suite on Apple Inc's iPad. This was popular with Wall Street and more importantly with consumers, who performed 27 million downloads in a matter of weeks.

But Microsoft is expected to unveil the third generation of its Surface devices at an event on Tuesday, laying hints that it will also introduce a smaller tablet, to address the fast-selling lower end of the market dominated by Apple's iPad mini, Inc's Kindle Fire, Google Inc's Nexus and Samsung's Galaxy range.

The devices side of the strategy has been a challenge. Microsoft's Surface, launched in October 2012, has about 2 percent of the market and has not made a dent on Apple's iPad. That fits with Microsoft's 3 percent global share in smartphones.

Given that tiny market, some investors believe Microsoft should not waste time and money on the low-margin hardware business. ValueAct Capital, which led the shareholder revolt last year which culminated in previous CEO Steve Ballmer's retirement, has lobbied against Microsoft's hardware effort, including its costly acquisition of Nokia's handset business.

"Nadella is off to a golden start as CEO, although turning around the tablet and mobile business over the next 12 to 18 months remain his two key Herculean tasks," said Daniel Ives, an analyst at FBR Capital Markets. "If the turbulence gets too rough on the tablet and/or mobile segment, we can potentially see some strategic changes on the horizon around the hardware business."

Despite unspectacular sales, there are signs that Microsoft's Surface Pro 2, which runs the full Windows operating system, is starting to attract Microsoft's core business customers.

"There's certainly tons of interest in the Surface Pro as an Ultrabook (lightweight laptop) replacement that has tablet capabilities," said J.P. Gownder, an analyst at tech research firm Forrester. "It is the No. 1 model I get asked about, it's going to have a lot of eyes on it."

Even if the Surface never dominates the market, Gownder thinks Nadella and Microsoft are right to persevere with hardware, if only as a way of showing other device makers how best to make use of Windows.

"Microsoft would be nuts not to have devices in the mix. The danger is in not exploring," said Gownder. The Surface "is an important product to basically show what their overall vision is for Windows, and also to offer businesses and consumers another choice."

(Reporting by Bill Rigby; Editing by David Gregorio)

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Comments (13)
SARose wrote:
I have had a Surface Pro for more than a year. It is the best Pad for the money. All the rest are toys.

May 17, 2014 3:05pm EDT  --  Report as abuse
jbeech wrote:
Do I understand correctly; Office on an iPad is for viewing documents only. When you want to create a document, e.g. write a letter or make a spreadsheet requires a subscription to Office 365? Such a deal, eh?

May 17, 2014 3:13pm EDT  --  Report as abuse
astrosteve44 wrote:
If at first you don’t succeed, fail, and fail again…

Not that I’m wishing MS to fail, but they sure aren’t trying too hard. They need to fix their Windows OS, and make a version for a desktop computer again. They need to give it up with the Windows Phone, and the same with Bing. I’m getting a little tired of seeing their dumb ads for the phones (that show nothing of what the phone or OS can do), and I can’t seem to get away from the ads for the Surface (which is a bit confusing, as they have multiple products with the name “Surface”).

I just wish they were back to where they used to be, when a new OS came out, everyone couldn’t wait to get their hands on it. But now, each version of Office or Windows is just worst than the last, everyone is holding on to their very old versions.

May 17, 2014 3:53pm EDT  --  Report as abuse
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