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Can Microsoft Rebound From Surface Flop?

Clearly, Microsoft's Surface tablets have bombed. Now what will the company do about it, and what does it mean for customers?
At some point, Microsoft will presumably release a version of the Surface Pro equipped with Intel's Haswell chip, which should address one of the device's primary flaws -- poor battery life. The refreshed device could face trouble if it maintains the current Surface Pro's $899 base price, especially with cheaper Win 8.1 models expected from other OEMs.

Even so, the next Surface Pro could still attract attention from businesses, many of which will begin device refreshes over the next year. The Pro is vastly outnumbered by iPads in the enterprise, but that ratio could owe partly to timing. Businesses don't generally invest in a new OS until an update – such as Windows 8.1 – is released, and with many businesses still embroiled in Windows XP upgrades, this tendency has arguably been exaggerated.

It remains to be seen if consumers will ever embrace a high-end Surface tablet, but with businesses, there's obvious value in the device's ability to run both mobile apps and desktop software. The Surface Pro could still factor into a write-down of its own at some point, but potential enterprise sales at least give Microsoft reason to be hopeful.

The next Surface RT model will face a tougher path, however. Rumors indicate that the forthcoming device will rely on Qualcomm's Snapdragon 800 chip, which not only handily outclasses the Nvidia processor in the today's model, but also suggests LTE support -- one of the current version's more crippling omissions. The new device is also expected to be smaller, with a 7- or 8-inch screen. Between an updated OS, improved components and an attractive form factor, the next Surface RT could be substantially more compelling to consumers.

Then again, the current model has barely registered a pulse with the mass market, so "substantially more compelling" might not mean much in context, especially given that competing models are growing more persuasive as well. New iPad Mini models could be on the market by the time the new device hits, for example, and unless you truly need Office on a tablet, the new Nexus 7 Android tablet trumps the current Surface RT in nearly every way. Throw in the fact that devices that run the full version of Windows 8 might cost as little as $300, and there's not a lot of room in the market for a Windows RT device.

A truly competitive price could help Microsoft's efforts. The company will no doubt be sensitive to profit margins, especially since the lack of Win RT support means Microsoft is almost singlehandedly bearing the cost of promoting and supporting the OS. Nonetheless, with Surface pricing, Microsoft has already been stung by its own hubris.

Apple has sold more than 57 million iPads since the Surface RT went on sale, for example, which means that if each of the iPads were priced at a mere $20, they still would have produced 33% more revenue than the entire Surface line. Such a low price isn't viable, of course -- but it demonstrates a point: By keeping prices high, Microsoft is losing money.

If the next Surface's price is dramatically lower, Microsoft might still lose money -- but with higher sales volumes, the losses could be less substantial. At the same time, the increase in sales would boost user investment in the Modern UI, which would in turn compel more developers to create Windows Store apps. If short-term hardware profits are unlikely, in other words, Microsoft needs to concede as much and price the devices such that the larger Windows ecosystem benefits.

Data about the discounted Surface RT isn't yet available, so it's unclear how low Microsoft will need to drop prices in order to guarantee a market response. But with its first effort, the company aimed too high on cost and too low on user experience. This time, Microsoft needs to learn from its mistakes.