I attended Microsoft’s fall event in New York City today and you can find my analysis of the Surface Pro, Laptop, Neo and Earbuds announcements here. In this analysis, I wanted to take time to discuss the biggest bombshell of the event, which is that Microsoft will ship a Surface phone during Holiday 2020 that folds from a smartphone with two 5.6” displays to an 8.3” tablet. Yes, the Yeti; often rumored, sometimes “seen” but the photos were always blurry.
Called the Surface Duo, the smartphone will have a foldable design like the Surface Neo, but is smaller, and based on Android; yes Android and yes, it can make phone calls. There aren’t many details on Microsoft’s Surface Duo, but I did want to provide some analysis on why I believe the third time could be the charm for the company in smartphones.
Surface product and customer approach is successful
I have gotten to know the Surface team well over the past five years, and one of the things I look at closely as an ex-product manufacturer is the product creation process. I look at the Surface team’s leadership, the bench, how products are created, how decisions are made, and how customers are viewed and valued. While I can’t share the innards of what I’ve seen as that’s NDA, I think it’s important to look at the results. Microsoft’s Surface products are gaining share, have high customer satisfaction, provide a premium experience and are priced accordingly. Canalys reported that the entire Microsoft Surface line shipped 1.6M units worldwide in Q2 2019, up 17% from the previous year, and Surface tablets increased 23% during the same time period. Given the entire market was only up a few percentage points, this is huge growth.
This isn’t to say the team is perfect, none are, but the decisions made are a lot more right more often than not. Detractors say the results are driven by an unlimited marketing budget, but I think that is far from reality; the huge marketing spend helps, but it doesn’t drive the product creation process or how the final product works.
As the Surface approach is working, I believe the team would only announce a smartphone design when it’s the right time, which means it can deliver a differentiated experience. I believe given the state of Android, Microsoft’s improvements to it, and the new foldable smartphone category, now is the right time to launch Surface Duo.
State of Android and Microsoft’s value-add
The architecture for Microsoft’s last smartphone attempts, Kin and Nokia, were based on Windows derivatives which didn’t work for a multitude of reasons. Surface Duo is based on Android, so many of those issues are resolved. With each Android OS, I believe the experiential gap narrows between it and Apple iOS, and in some ways, surpasses it. This means it’s the app and service experience that means more than the OS. According to AppBrain, the Google Play Store has 2.8M apps. Therefore, we won’t be having the “does the Microsoft Store” have enough or the right apps” debate. Ever. Amen.
I remember when Android was a very insecure operating system. While I believe Samsung’s Knox add-ons are the most secure Android an enterprise can deploy today, I expect Microsoft’s to be very secure as well considering the company’s enterprise pedigree. Even the base Android experience is more secure with the improvements Google has done with Play Store scanning, store management and firmware architecture.
We also can’t forget how much investment Microsoft has poured into Android. All of Microsoft’s key apps (ie, Outlook, full Office, OneNote, Teams, News, Edge) and services (Microsoft 365, Dynamics 365, OneDrive), are available and I believe, deliver a very good Android smartphone experience. This is where I expect Microsoft’s SwiftKey Keyboard and Cortana to resurface. (Sorry for the pun). With the Your Phone app and service, Android and Windows now link together for texts, notifications, photos, and screen sharing.
I believe Microsoft is doing a lot of Android multi-screen UX work that it will share with all companies up the open-source tree. Before you fall out of your chair, remember that Microsoft went open-source a while ago and has fundamentally changed how the company works. Microsoft is one of the largest Linux contributors, made Linux its IoT deep end point OS, acquired GitHub, and hosts more Linux instances on Azure than Windows The company also open-sourced .NET and Visual Studio. Microsoft is an open-source company so don’t be so surprised.
Unique form factor and experience
As the maturation of the smartphone industry progresses, buyers are tending to stick more in their “camps.” Good examples are Apple and Samsung users, who are trading a lot less users back and forth. This is a statement on the rate of declining smartphone innovation and increasing buyer complacency. Therefore, if a new vendor like Microsoft wants to enter the smartphone market, it needs to bring something different to the table. A lot of users are also not upgrading their devices are frequently as they have in the past, partially due to this lack of compelling new features.
I believe Surface Duo’s foldable design is different enough and if Microsoft prices it to other flagships, it could give buyers a reason to shift.
Premium means lower risk
This may sound odd, but for a Surface smartphone, lower volumes mean lower risk. With Nokia, Microsoft had to sell hundreds of millions of smartphones to be successful. This required huge supply chains and many factories around the world. If you screw up that supply chain, you are out billions of dollars.
According to Canalys, premium smartphones $800+ account for only around 10% or 150Mu (million units) of the 1.3Bu global volumes in 2019 and this is the market Microsoft is likely targeting. Imagine if Microsoft captures 5% of the 10% for .5% overall after the first year. That’s 6.5Mu, very manageable. The other benefit to lower volumes is that you can use “harder-to-find,” leading-edge components. When you’re Apple and have to ship roughly 200Mu, you can’t take huge supply chain risks not bet on harder to source components.
I am by no means declaring immediate Microsoft victory in smartphones as there isn’t a whole lot of information to go on at this point and there’s a lot of work to be done. And Microsoft doesn’t exactly have a great history in smartphone hardware with Kin and Nokia. What I do know is that the conditions for a Surface smartphone’s success have turned in favor of Microsoft. The one area I’d like a drill-down on first is Microsoft and its partner’s capabilities in cameras. While I don’t think Microsoft has to have the best smartphone camera, it can’t be too far behind. Cameras aren’t anything the Surface team had to get right in Surface PCs but are vitally important to smartphone buyers. I believe Microsoft has a grasp on what the new experience needs to be and it needs to work with Google to get it done. That will be interesting.
I am looking forward to the drip of future Surface Duo disclosures and will update with analysis.