The Exchange

‘Surface XB’ – Savior for Microsoft’s Flailing Tablets Could Come From Within

The Exchange

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Giant Microsoft Surface

Microsoft (MSFT) has kicked off the marketing push for its second generation of Surface tablets. But the company is still missing a huge opportunity by failing to connect with its base of some 50 million active Xbox video gamers.

Microsoft pleased investors this week with quarterly earnings that came in better than expected. But the areas of strength were largely in software sales and subscriptions to big companies, and falling PC sales didn’t fall quite as far as some predicted.

The struggling Surface tablet effort did show some improvement – luckily for Microsoft. Things were so bad last quarter, with the $900 million write-off for unsold inventory, there might have been a shareholder revolt if Surface sales had gotten any worse.

One key problem with the Surface may be the company’s confused marketing message. The new lower-end Surface 2, which replaces the original Surface RT, is meant to compete most directly with Apple’s (AAPL) iPad. The higher-end Surface Pro 2, which, starting at $900, is much more expensive and is able to run demanding programs such as Adobe Photoshop. It is aimed more at the business laptop crowd. But Microsoft’s first real commercial touting the updates simply mashed up scenes of both products to emphasize their use for workplace tasks.

It may make sense pitching the Pro tablets, which are priced like laptops, at the same types of buyers who could be in the market for a laptop. But what’s really needed is a marketing shakeup, a change in emphasis that creates a fuller differentiation between the high end and low end.

Passionate Users

The answer is no farther away than the company's highly successful video game unit. Microsoft has sold about 80 million Xbox 360 consoles and more than 24 million of its Kinect motion sensor; it has close to 50 million members in the Xbox Live network. These are consumers excited and passionate about a Microsoft brand, not unlike the passion of Apple’s many fans. They are also already engaging in many of the same sorts of activities as tablet users. Xbox is the gateway to Microsoft’s video and music stores as well as online gaming.

It's true that Xbox console owners like complex games with top-notch graphics, not the kinds of more casual games such as Candy Crush Saga that people tend to play on tablets. But there’s plenty of room to blur the difference, and some popular Xbox games have tablet specific versions, too.

Additionally, it's the perfect time to roll out a campaign for a hypothetical "Surface XB" tablet when Microsoft is also spending vast dollars to market the next generation Xbox One console, which goes on sale in November.

Previously, Apple has been the king of cross-marketing. Ads highlighting the iPhone’s iOS operating system also attract buyers to the iPad, which runs the same software. Music ads that ran for the iPod in previous years also spread their wings of coolness over the iPhone. If Microsoft did the same, it could reap similar benefits.

Finally, there's a long and successful history of brands splitting their appeal. BMW's Mini Cooper line appeals to a far younger and hipper car buyer without diminishing the exclusive feel of the company's high-end models.

Changes needed soon

Microsoft certainly needs to make changes soon, as the Surface line remains buried in market share obscurity. By next year, Apple’s computer and device sales are projected almost to exceed total sales of Windows PCs and devices from all manufacturers, according to Gartner.

Improvements so far haven’t been enough. Without giving specific numbers, Microsoft said it sold twice as many Surface units from July through September as the prior quarter. Revenue totaled $400 million, Microsoft said without giving a figure for the earlier quarter.

With the cheapest model, last year’s Surface RT, selling for $349, the absolute highest possible number of units sold from $400 million of revenue would be about 1.15 million tablets. Other Surface models sell for considerably more, so the actual, undisclosed unit total could be half that much or less.

By comparison, analysts expect Apple sold about $6.2 billion worth of iPads for the July to September quarter. In the second quarter, Apple made $6.4 billion on sales of 17 million iPads.

But as the comparison to Apple makes clear, Microsoft’s products need to make enormous gains to even remain viable and not end up on the scrap heap with its Zune music players.

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