Edison Investment Research

Microsoft – Wood for the trees.

Microsoft is so focused on the future that it misses the opportunity in the present.

 Microsoft has moved even further away from the consumer with its Creators Update for Windows 10 and the launch of the Surface Studio complete with the Surface Dial accessory.
 At the same time, Microsoft continues to ignore the huge opportunity presented to it by the obsolescence of the laptop form factor which we find strange as it claims to be all about creating new product categories.
 Microsoft unveiled two new innovations as well as an incremental update to the Surface Book.
 First: Windows 10 Creators update
 In addition to a host of other incremental improvements, the Creators Update focuses on enabling 3D objects on the PC as well as in both AR (HoloLens) and VR, gaming and easier connections and sharing with close contacts.
 None of this is desperately new except that the degree to which content now works across different devices is far superior to anything else that has been launched to date.
 Microsoft hopes to include the mobile phone in this range of devices but how well it can do that on Android and iOS remains to be seen.
 These platforms are now critical as Windows Phone is rapidly losing all of its remaining users.
 Also key to this update is the focus on content creation as the upgrades in this update are aimed at improving functionality for those that draw, write, broadcast and so on rather than those that consume.
 This is a tacit admission that the battle with iOS and Android for content consumers has long been lost.
 However, it also shows Microsoft aggressively acting in both software and hardware to keep the content creator users and corporates on its platform.
 Second: Surface Studio.
 This is very high specification all-in-one PC with a 28” monitor that can transform to become a work surface exactly like the drafting table used by anyone that draws or designs for a living.
 Surface Studio comes with the Surface Dial which is designed to go in the non-pen hand to alter characteristics such as ink colour, brush size, opacity and so on.
 The Surface Dial works both on and off the screen and is backwards compatible with all Surface products.
 This device is clearly aimed at professionals and it is priced accordingly at $2,999.
 Third: Surface Book.
 The top end i7 model has been upgraded to offer double the graphics capacity than its predecessor as well as 30% more battery life.
 Microsoft now claims that the device can provide 16 hours of battery life.
 However, the single biggest failing if this product has been carried through into the next version as the keyboard stops working as soon as the screen is detached.
 The net result is an update to the Microsoft Windows proposition that is aimed at keeping content creators and corporates on its platform.
 In that vein, this is a good update with nice looking and relevant products but we still think that Microsoft is missing the wood for the trees.
 We have long argued that the laptop form factor is obsolete as having the keyboard, mouse and screen permanently locked together offers a substandard user experience that is both uncomfortable and unhealthy.
 This is why the Surface Pro line of products is a game changer as it enables a desktop like user experience to be enjoyed from anywhere.
 This works by allowing the screen to be at the correct height and distance from the eyes with a wirelessly connected mouse and keyboard to be in the most comfortable and ergonomic position.
 However, this does not work with the Surface Book as the minute the screen is detached from the keyboard, the keyboard ceases to function.
 We think it would cost Microsoft less than $1 per unit to put this right and it would enable it to really push a whole new use case for content creators out of the office.
 We have long believed that this could lead to a huge replacement cycle where ageing laptops are replaced with PCs in the tablet form factor which could even kick the PC market back to growth for a few years.
 However, this failing indicates that Microsoft has still not realised the opportunity that lies before it.
 Intel and the PC makers are equally guilty of this oversight but these companies have not taken it upon themselves to re-imagine computing.
 We suspect that the main issue here is that these companies have been selling laptops for over 30 years and it is very difficult to break out of that mindset.
 It would also require a big marketing campaign as laptop users are also so ingrained with this form factor that they have not realised that there is something much better on offer.
 The net result of this event is a software and hardware update that goes a long way to keeping content creators faithful to Windows but continues to ignore the possibility to create a large replacement cycle in its core product.
 Fortunately, Microsoft’s valuation does not demand this vision to come true in order to be attractive which is why we continue to like it alongside Tencent and Baidu.

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