How Did Microsoft Turn Surface Into Its Own Mac in Three Years?

The way Surface has changed over the past three years tells the story of how Microsoft itself has changed.

In early October, Microsoft held a launch event that, for once, caught the attention of the press and the public. The star was the Surface Book, a machine that works as both a laptop and a tablet.

Today the "touch tablet + PC" that Surface pioneered has become the model for anyone exploring the future of tablets and PCs. Lenovo's IdeaPad series, Dell's XPS 12 and HP's Spectre x2 all copy it. Even the large screen, stylus and stand-style cover that Apple prepared for the iPad Pro seem to owe something to Surface.

Microsoft began as a software company, and this is the first time in its history that it has launched a hardware product that set a trend. But three years ago, when Microsoft introduced the first Surface, few people saw it that way.

Why Surface? The Days of Easy Money Were Over

In early 2012, Steven Sinofsky, head of Microsoft's Windows division, demonstrated the first generation of Surface on stage: the Surface Pro and a second model, the Surface RT. Both ran Windows 8 on a 10.6-inch screen and came with the latest version of Microsoft's own Office apps.

At the time, nobody thought this device represented the future. It looked more like a reckless bet.

In June 2012, Microsoft launched the first-generation Surface RT

It was a tablet + PC that you could work on, and also, like an iPad, use for fun, such as watching videos. During the demo, the Surface in Sinofsky's hands crashed on cue, which made the bet look even shakier.

PC makers were unhappy. Oliver Ahrens, a vice president at Acer, spoke out against Microsoft soon after the launch and said flatly that the product would fail. Gianfranco Lanci, Acer's CEO at the time, also said: "We asked Microsoft to think carefully about developing Surface."

To PC makers, Surface was nothing less than a betrayal of a partnership that had lasted decades.

In the 1990s, Windows took over the screens of personal computer users. The Mac was pushed to the edge of the market, and Apple at one point faced bankruptcy.

As Windows spread, Microsoft built a highly efficient business: it took a cut of every Windows computer that PC makers sold. Under this model, Microsoft only had to focus on developing Windows. Whoever won the fight among PC makers, they all had to pay for Windows.

For more than a decade after that, Windows and Office were Microsoft's most profitable businesses, bringing in billions of dollars every quarter. In 2000, Microsoft's market value passed an astonishing US$660 billion, a record that stood for 11 years until Apple broke it at US$700 billion.

The good times lasted until 2010. After that, the PC market became saturated and began to shrink. On one side, smartphones rose and gradually replaced the PC as the true "personal computer." On the other, Apple's Mac line under Steve Jobs, especially the MacBook Air, which came of age in 2010, pulled away from its PC rivals on the strength of its design and yearly system upgrades. Microsoft, by comparison, could release a new Windows only once every three years.

The long decline pushed Dell and HP to reinvent themselves. Through more than ten acquisitions each, both shifted from selling PCs to selling services to businesses. Most of the remaining makers began turning out more and more Android products, phones and tablets alike.

All the while, Windows revenue shrank year after year, and the easy money that Bill Gates had created almost single-handedly became a thing of the past. Microsoft needed a new source of revenue for Windows. Selling a high-end PC of the future, with both software and hardware under its own control, and keeping more of the profit looked like a workable idea.

The first-generation Surface failed, and so did Windows 8

So Surface was given a special mission from the start: "to make Windows 8 into a physical object." Those were the words of Ralf Groene, the Surface designer, who had worked at two well-known design firms, IDEO and Frog, before joining Microsoft.

Microsoft tried hard to sell Surface. It opened Microsoft retail stores next door to Apple stores so that shoppers could get their hands on Surface more easily. To give the Surface RT the same battery life as the iPad, it even created Windows RT, a version of the system that could run on ARM processors.

Surface was an all-purpose computer meant to do the job of both a laptop and a tablet, a faithful reflection of what Windows 8 was meant to be.

In the future Microsoft had planned, Windows sat at the center of all computing, and every device, phones, tablets and PCs included, would run it. The tile-covered Metro interface was designed so that tablets and PCs could share a single interface, and Microsoft also bought Nokia's phone business, which ran Windows.

Ballmer showing the device at the June 2012 Surface launch event

"I love our efforts on Windows 8. It's a big bet," admitted Steve Ballmer, then Microsoft's CEO. He lost the bet.

Serving both tablets and phones with one operating system proved simply too hard. With its confusing logic and its thin selection of apps, Windows 8 became a failure on the scale of Windows Vista. Surface RT sold so badly that within a year it had cost Microsoft US$900 million.

The failure of the first Surface also confirmed something: Microsoft, the software giant, had little pull with consumers.

The damage went beyond Microsoft's PC software and hardware. It also threatened Office, the company's most profitable business. While the iPhone and Android took 90% of the phone market, Office stayed loyal to Windows Phone and Surface, whose market shares were negligible, and missed the mobile era entirely.

Three months after Windows 8 was released, Sinofsky, the head of the Windows business, left the company. Less than a year later, Ballmer announced his retirement.

A fresh start: a Surface built only for work

In February 2014, Satya Nadella took over as Microsoft's CEO. A Microsoft veteran who had run internet services, Office and cloud computing in turn, he made internet services and mobile the company's priorities.

Less than two months after he took office, Julia White, general manager of marketing for Office, walked on stage with an iPad Air to demonstrate Office for iPad. The first touchscreen version of Office was built for the iPad, not for Surface.

Julia White, marketing manager for Microsoft's Office business, demonstrating Office apps on an iPad Air

Any internet service, to succeed, must first run on enough devices. Nadella made his choice: getting Office onto more computers mattered far more than selling more Windows tablets.

Office for iPad was downloaded 12 million times in its first week. A few months later, it was running on iPhones and Android phones too.

A shift in priorities always has casualties. Stephen Elop, the former Nokia CEO who had joined Microsoft along with more than 20,000 Nokia employees, lost almost all of his staff in two rounds of layoffs, and then left Microsoft himself, along with the other executives who had come from Nokia.

Surface, though, found a reason to exist in Nadella's Microsoft: as a dedicated work computer.

In May 2014, Microsoft released the third generation of Surface, the Surface Pro 3. This time the design team stopped worrying over whether a screen larger than 10 inches was too big for a tablet and simply gave the Surface Pro 3 a bigger, 12-inch screen. It also changed the aspect ratio from 16:9 to 3:2, which is better for reading documents and charts.

Built as a productivity tool, the Surface Pro 3 used a bigger 12-inch screen

To fit this larger, more work-friendly screen, the Surface Pro 3's face was 43% larger than that of the iPad Air 2, released around the same time. Bigger, heavier and with shorter battery life, the Surface Pro 3 was closer to a laptop than to a tablet you hold in your hands.

At the same time, Microsoft dropped the 8-inch model, which was better suited to consumers, as well as the Surface RT line, to concentrate on the large Surface Pro.

The new hardware won a decent response. In the quarter after the Surface Pro 3 launched, sales of the whole Surface line reached US$908 million, up 117% year on year.

And this came while sales of iPads and Android tablets were falling across the board. For a while, the work tablet became the direction in which manufacturers looked for the future of tablets, and even of PCs.

But can Microsoft make a good Mac of its own?

Today's Surface is no longer a vehicle for promoting Windows and Office. It is a product Microsoft controls from software to hardware, aimed, like Apple's Mac, at the high-end work market. In a future where the PC market shows no sign of recovery, the revenue Surface brings in will be what keeps Windows moving forward.

If the Surface Pro 3 was where Microsoft decided to turn Surface into a laptop, the Surface Book goes further down that road. It has a 13.5-inch screen with a resolution of 3000 x 2000 and runs on Intel's latest Skylake processor.

Closed, the Surface Book looks more like a traditional PC

Detached from the keyboard, the Surface Book runs for only 3 hours on its built-in battery; it was designed from the start to be used with the keyboard attached. The name says as much: it is a laptop first, and its touch-tablet mode is for occasional use.

Now that Surface has become a PC through and through, the Surface Book's rival is the MacBook family, not the iPad as before.

Given that the MacBook now earns Apple more profit than all PC makers combined, copying that business does not look like a bad idea.

iPhone and Mac profits compared with the combined profits of all their competitors in each category

For years, many users who care about their work tools have switched to Apple. At Google's developer conference, year after year, you see almost nothing but MacBook Airs and MacBook Pros. At tech launches in the US, the laptops on reporters' laps all glow with the white, bitten apple.

To sell Surface, Microsoft must win back people who have already moved to the Mac, and that will not be easy. In the 40 years since its founding, Microsoft has had little experience selling to individuals, apart from the Xbox. However many people use Windows, almost all copies were sold in bulk to PC makers, who preinstalled them on new computers.

Recent sales confirm that Surface's future is uncertain. Figures released last Friday show that Microsoft's Surface revenue for July to September this year fell by a quarter from the same period last year.

With Surface, Microsoft has its own Mac. The question now is whether it can sell.

Cover image: Tehnot