Microsoft’s silver lining: Surface loses, but Windows wins

Microsoft Corp’s lineup of Surface tablets, laptops and desktop computers has always been a paradox.

The software company’s surprise foray into hardware became a billion-dollar-plus business and even managed to outclass longtime rival Apple Inc with its Surface Studio desktop machine last fall, according to some tech critics.

At the same time, the Surface range competes with Microsoft’s longstanding PC maker partners, such as Dell Technologies, Lenovo Group Ltd and HP Inc, which pay billions of dollars to license Windows, Microsoft’s traditional cash cow.

Those two facets came into sharp relief in the latest quarter, when Surface sales suffered while Microsoft’s own Windows licensing customers prospered.

Surface revenue declined 26 percent to $831 million, its lowest tally in a year. Meanwhile, the overall PC industry staged a slight comeback, notching a 0.6 percent gain in shipments for the first time in years, according to IDC. That helped drive Microsoft’s Windows licensing revenue up 5 percent this quarter.

Effectively, Microsoft lost in Surface sales, but it gained in Windows licensing.

It has always been part of Microsoft’s Surface strategy to release flagship models that goad the rest of the PC industry to improve its products, said Microsoft investor relations director Zack Moxcey.

He said competition from PC makers selling lower-priced hardware, along with some Surface hardware nearing time for an upgrade, led to the lower Surface sales.

“It’s definitely about driving the health and performance of the broader windows ecosystem,” Moxcey said.

Buried in the supplemental information Microsoft provides investors, there was further silver lining. The company said sales of Windows licenses destined for consumer PCs was down 1 percent, but revenue for more lucrative Windows licenses for business and educational computers was up 10 percent.

Moxcey said this was attributable to sales of higher-priced machines, especially for businesses. “That carries a higher revenue-per-license for us,” he said.

The data fits with Dell’s latest results, as the PC maker’s sales of computers to businesses rose 11.6 percent year over year to $6.6 billion in its last quarter, versus 8.5 percent growth for consumer PCs.

Rebounding sales of Windows PCs to schools and businesses is a boon for Microsoft, which is staking its comeback on business and productivity software.

And higher Windows revenue per license means that the Surface strategy – to pull the PC industry back upmarket with expensive flagship machines after a years-long race to the bottom on prices – might be getting some traction.