Surface revenue goes down!

Q4 2015 Surface revenue up

Microsoft has announced their latest earnings and it’s not all good news for them.

In a nutshell:

  • Server products and Cloud derived revenue have increased by 12%.
  • Microsoft’s Azure revenue (within cloud service revenue) has increased by 93%.
  • Windows OEM revenue has increased by 5%!
  • Gaming revenue has decreased by 3%.
  • XBox Live revenue (within gaming revenue) has increased by 15%.
  • Office 365 revenue has increased by 47%.
  • Surface revenue has decreased by 2%!

Mostly the above lines up with my expectation but obviously there are couple of surprises from my perspective:

For those who are not aware, Azure is a cloud computing service, used to build, deploy and manage applications/services. Microsoft operates their own data centers and they offer services for even non-Microsoft applications. The entire industry has been going that way for a while now and since Microsoft is relatively new in this sector, a big increase (93%) is not a surprise (I will give them a serious thumbs up if they can keep this rate up for the next 3 years). But their entire server/cloud revenue is only 12% so that means most of that must come from Azure, which is both good and bad for them.

As for the Windows OS – it sure is resilient. I certainly didn’t expect the revenue to go up, especially given the recent trend! This tells you that there STILL isn’t a good Windows OS/apps replacement within the productivity application market. iOS and Android isn’t replacing them anytime soon.

Office 365 is doing rather well. With its cloud based subscription model, the market is accepting this strategy rather gracefully. Microsoft isn’t alone here – it appears that the entire consumer/business application industry is switching towards this direction. Adobe has done this for couple of years and they are rather successful at doing this. Even smaller players like ACDSee is mimicking this. A small monthly fee to “use-all-you-can” on many of the latest and the greatest products that you can’t normally afford sounds good for many. Yes, I’m one of those. ­čÖé

Now the Surface. Given the recent trend, shouldn’t Microsoft experience a continued growth at this stage of Surface lifecycle?

Well, yes and no.

I think the biggest reason is because they have not released any new models this year (that Book’s slab update doesn’t count!). They have continuously lowered the price to keep the volume going but that’s not the best way to increase the revenue, especially in the leading edge, trendy gadget market. Considering this, few percent down figure might actually be a positive surprise.

Microsoft puzzlingly continues to sell their Surface products at limited markets – many countries still don’t receive some of their products, most notably the Surface Book. Are they not seeing the market to make it worthwhile? I don’t think so. Are they┬ásupply restricted? Have they already switched their factory equipment to new models? Could they be┬áintentionally controlling the market share to not give perception that they are monopolizing the 2-in-1 market?┬áNot sure.

Very puzzling.

Microsoft’s fiscal year starts in June. I think Microsoft will come out with a big bag in March so that they can have a gangbuster Q2 quarter.

Overall, Microsoft has beat Wall Street’s expectation in this earning call. So, as a company, they are doing fine as you can see here:

(Blue line is MSFT, Red is NASDAQ – last 5 years)

I hope they have invested enough into the Surface Pro 5 and the Surface Book 2, which is supposedly due in a month or two.

Stay tuned for extensive reviews once they become available!


  • I really don’t find myself surprised.

    The Surface Studio – for all that it was more successful than expected – was never going to be a high-volume product. Apart from the Studio, they haven’t released anything this year.

    As such, I have to agree with the conclusion in the article: the Surface division is doing as well as can be expected of them. I expect that the Surface Pro 5 will sell very well if it’s as thoroughly developed as the timing implies.
    More than anything, I’m personally hoping for significantly longer battery life and a thunderbolt type c port.

  • I would not expect Surface revenue to be increase these last few months because of the news that a new Surface Pro is soon to be introduced, and with greater battery life, no fan, an improved display, and other features. The average person will hesitate in purchasing the existing Surface Pro 4 in anticipation of the Surface 5. At least that’s what I think. Thus this decline in revenue should not at all be unexpected.

    Arguably, Apple is not innovating much these days with the MacBook Pro, but why should they? They have a huge fan base. Apple appears to be ensuring it hangs on to most of their well earned fan base along with the incredible success it has earned. When you have the kind of crazy success you’d have to be an idiot to screw around too much with that formula. And unlike Microsoft’s mistakes of the past, I think Apple is carefully monitoring their hardcore fan’s response to all this Surface stuff; how can they ignore it. Those guys are shrewd. I have noticed, hardcore Apple fans are only slightly annoyed that Apple’s innovation is slow at present. Sure, they’ve lost some folks to Surface, but I don’t know if there is yet a significant migration from Apple to Microsoft. It’ll take quite a lot to get a significant percentage of those users to really take the leap. Again, you can be Apple is seriously focused on this. Apple is not stupid.

    And so Microsoft cannot screw around with their new, upcoming product if they want to win a significant number of those users over. Whatever the Surface Pro 5 turns out to be, it must be unquestionably awesome, period.

    Remember, Windows 8 was a fiasco; Microsoft clearly was not listening to what customers wanted. But they finally did turn it around, but almost too late, and thus we witness the bypass of Windows 9, which resulted in Windows 10 (along with Surface 3 & 4). Also, those Microsoft projects to develop a Surface tablet were no doubt hair-on-fire projects commissioned to counter the iPad’s success. Seems that Microsoft has had significant success, but they have yet to arrive, at least in my opinion.

    It just may be that the upcoming Surface Pro 5 (and new Surface Book) will truly jolt the market and compound Microsoft’s momentum; it is a real possibility. I hope they realize this for their sake.

    Whichever way this all turns out, I must say that I really like what this competition between these titans is producing. Engineers in both camps are pushed to the edge…and we the end users ultimately win.

    Kinda of like the Super Bowl between the Falcons and the Patriots; it was not a blow out. Ha! You really did not know who was going to win. I was crazy and had most on the edge of their seats. ­čÖé

  • I am using surface pro 3 for 1,5 years. Although I am very pleased from some of the advantages of this tablet/computer I have several and often problems using it. These problems as well as the high price of every new model made me avoid changing to next generation of surface pro 4.
    To be honest when I decided to buy surface pro 3 I was expecting that a company like Microsoft would provide better stability and reliability. I am also extremely disappointed from the way they provide technical support due to the assembly methods the use to manufacture surface products.

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