Surface Reax

Microsoft’s Surface was all the buzz last week for very good reasons. It’s a vertical move from a company that is resolutely horizontal in its strategy – the original platform company (Windows, Office). When a company undertakes this kind of strategy change, it’s a VERY BIG DEAL. There is a lot of commentary on this, but the best I have seen are below.

Microsoft: Apostasy Or Head Fake?

Who will be Microsoft’s Tim Cook?

Being vertical is an all in business. You can only do it at volume and you have to take on significant inventory, supply chain and support risks/costs. If a cycle does not make profit, you take a big hit to your revenue, profits and stock. That’s why hardware companies can die pretty fast even after significant success. Microsoft’s surface announcement alone does not signal a full conversion to a vertical business model. You would need more than that to convince the market that you were serious about this. It’s a bit like deploying the US army to Iraq – it’s a sustained troop movement that is hard to hide even before the first shot is fired. There has been no evidence of this sustained troop movement.

My first take on this is that Microsoft is not interested in a vertical business. However, it would be dumb not to consider it though given the seismic shifts in the industry. I think surface is a gauntlet and a marker to Windows OEMs. It says, “Here is the hardware bar for Windows 8. If you exceed this, we take this off the table. If not, we’re taking this puppy to serious manufacturing.” Of course for the stock not to tank, you have to be able to sell this at something close to 20% margins or else.