Microsoft announces its latest quarterly earnings Jan. 23, and investors widely expect that the company will post stronger year-over-year revenues.
For a real picture of Microsoft’s health, though, most will focus on different metrics: how many Surface 2 and Xbox One units the company managed to sell in the past ten weeks.
Microsoft watchers (and those who pay attention to video-game news) already know that the Xbox One sold roughly 3 million units through the end of 2013, which places the next-generation game console in roughly the same ballpark as its latest rival, Sony’s PlayStation 4. Microsoft’s quarterly results will likely re-emphasize that number.
But Microsoft has offered precious little guidance about the Surface 2, the next generation of the Windows 8 tablets it builds in-house. If the Surface 2 fails as badly as the original Surface (which bombed so hard, it forced Microsoft to take a $900 million write-down on existing units), it could seriously damage—if not outright destroy—the company’s attempt to remold itself as more of a “devices and services” firm.
Outgoing Microsoft CEO Steve Ballmer set the company on that “devices and services” path back in October 2012, when he suggested in a widely circulated memo that, rather than rely entirely on OEMs to build the hardware for its software, Microsoft would occasionally manufacture its own machines. “There will be times when we build specific devices for specific purposes, as we have chosen to do with Xbox and the recently announced Microsoft Surface,” is how he explained it. “In all our work with partners and on our own devices, we will focus relentlessly on delivering delightful, seamless experiences across hardware, software and services.”
That was more than enough to irritate Hewlett-Packard, Acer, and other manufacturers, which all began to complain that Microsoft was an idiot, a competitor, or some combination of both. But from Ballmer’s perspective, the move made sense: Apple (with the iPad, iPod, iPhone and Mac) and even Google (with its Nexus portfolio) had thrived by bringing much of their hardware and software back in-house, where executives could rigorously oversee part of the manufacturing process for quality.
Microsoft’s first in-house device, Surface, met with decidedly mixed reviews, and it failed to sell despite an elaborate ad campaign. Over on The New York Times’ Bits Blog, Nick Bilton blamed that tepid response on the tablet’s attempt to be all things to all potential users. “Today’s consumers don’t want options,” he wrote. “They are impatient. They want to tear their new shiny gadget from the box and immediately start using it.”
The failure could have also stemmed from the negative reactions to Windows 8, which tried to mush together the traditional Windows desktop and a touch-friendly interface designed for tablets; consumers and businesses found that configuration unwieldy, and complained so loudly that Microsoft included the option in Windows 8.1 of booting directly to the “regular” desktop.
By many accounts, Surface 2 features some improvements. If it sold in middling numbers last quarter, Microsoft will likely do its best to bury the result in some larger line-item in its financial disclosures. But if it’s a disaster—or a wild success—we’ll likely hear about it sooner rather than later; in case of disaster, Microsoft’s next CEO could be forced into a long, hard think about the company’s tablet strategy.