Microsoft Surface revenue fell 26% during third quarter, but that's not so bad

If you were paying close attention to Microsoft's third quarterly earnings report yesterday, you may have noticed that Microsoft's Surface business declined 26% compared to the same quarter last year. The same time last year, Surface made $1.1 billion, but this time only made $831 million. So what happened there?

Simple put: nothing happened. Microsoft says the reason Surface is doing somewhat worse this quarter is thanks to third-party hardware makers building really great devices and slightly eating into Surface revenue, which is exactly what Microsoft built Surface for in the first place. Hardware makers have really upped their game as of late, which is a win-win situation for the entire PC market.

Another reason why Surface revenue declined is simple: there was no new hardware in 2016. Microsoft hasn't released a "new" Surface device for its wider-audience since 2015. The new Surface Book Performance Base isn't a "new" Surface Book, it's a new SKU for the old Surface Book that was also introduced introduced in 2015 alongside the Surface Pro 4.

Microsoft did release the Surface Studio in 2016, however it wasn't expecting the Studio to sell on the same level as its other products anyway, and considering the Studio was only available in the US for most of 2016, it's not hard to imagine that that device only sold in small quantities compared to the Surface Pro or Surface Book line of devices. Similar to how Surface Hub sells less than other Surface devices too.

Simply put, the Surface Pro line of devices is Microsoft's most popular Surface product on the market. It's more popular than the Surface Book, and definitely more popular than the non-pro Surface line and the Surface Studio. So a lack of new Surface Pro hardware is significant, and likely plays a major role as to why Surface revenue declined during the third-quarter.

Not only that, but Microsoft hasn't released a new "non-pro" Surface for over two years either. Those who bought into the Surface brand with the Surface 3 are now likely looking for a replacement, and Microsoft doesn't have an offering on the market right now. So those who bought the Surface 3 are either looking at third-party hardware to upgrade to, or are sitting tight and waiting to see if Microsoft release something new this year, which they might on May 2nd.

So in short, Surface revenue declined because of new, awesome hardware from third-parties, which I'd argue is a good thing, and the fact that Microsoft hasn't released a new Surface Pro in over a year.

Microsoft is expected to talk about new hardware, Windows 10 S, and the education market on May 2nd. Rumors suggest there will also be a new Surface device unveiled at the event, designed to take on Chromebooks at the high-end of the market such as the new Samsung Chromebook Pro. We're also hoping to see another hardware event soon where Microsoft will announce an iterative update to the Surface Pro line.

Zac Bowden
Senior Editor

Zac Bowden is a Senior Editor at Windows Central. Bringing you exclusive coverage into the world of Windows on PCs, tablets, phones, and more. Also an avid collector of rare Microsoft prototype devices! Keep in touch on Twitter: @zacbowden.

  • Microsoft waits far too long to announce things, then once announced waits far too long for actual release.  It's a stupid, stupid strategy which has repeated itself many times.  
  • I agree, but Apple does the same first thing (not announce forever), but delivers quick
  • ¿? Apple's position in the market is another.
  • If they announced quicker then you would wait even longer to get hold of one... also remember that due to leaks the longer they wait to announce the more chance of a leak ruining the surprise reveal. It's all swings and roundabouts in the end.
  • I agree but remember Microsoft project Scorpio no one saw that coming. Ok people got hold of the Xbox one s but not Scorpio info. It can be kept under the hood if needs be. I think most leaks are done to generate hype tbh. Ide love Microsoft to come out with a small surface that is under £200 I know people say ms only do premium but offering a premium£200 tablet would also make others look at what can be done and give us better lower cost ones to. I have had a surface RT 2 and 3 loved the devices esp the 3 but I now have a Dell precision laptop and I am looking for a nice small tablet to user in the house as sometimes Things like online shopping and quick web browsing is better on a small tablet than useing my phone or powering up my laptop
  • Everything good happened when the book was released along with band and 950s. Been down hill since. I'm waiting for Surface Pro 5 to replace pro 2.
  • the issue is not the gap between releases and the time between announcement and release. The issue is that Microsoft is never guaranteed to release something. Companies like apple only release devices for each category once per year. But they always release one, and its always around the same time each year. Its predictable and it has people on a nice upgrade schedule. With microsoft you never know if they are going to release a new device, end the life of a device series (RIP band). Its unpredictable.
  • This hasn't been true for sometime, all of their Surface releases have come shortly after the announcement, the reason were waiting so long now is that there hasn't been a significant processor leap that would have justified a refresh before now.
  • People wanted Surface phones but instead there are no new Surfaces at all. Lol.
  • Yes, because we are waiting for Surface Pro 5, book 2 and Surface 4. Who would buy Surface pro 4 today ?? We are waiting 2 years for Surface 3 succesor, and 1,5 year for Pro 4 and book 2
  • Well, they should've gone with a Spring Event in 2017. We know there will be something on the May 2 2017 event related to Cloud--that's not bad. But, yeah. The thing with the Surface line is making it more affordable/accessible now, somethings could go better like bigger battery/port selection or advancement in N-trig (to rival Apple Pencil/Wacom Pro Pen 2).  A minor refresh for the SP5 and SB2 or anything with high-prices for questionable "bang to buck" ratio (i5 to i7, 256 to 512gb, or 8gb to 16gb RAM price hikes) will be a disaster. Hope they come up with something worth it, tho!
  • Me! I just bought one because it was on offer, brand new, my surface 2 RT was no longer fit for purpose so a Pro 4 it was.
  • This is normal as PC market is still silent. They really need focus on mobile
  • If they miss another year of new hardware, they need to be slapped. You redefine a category and now you are slowing down?
  • Perhaps they are content to let OEM partners fill the gap. The goal of the surface line was category creation. Now that the surface pro type device is more ubiquitous why does Microsoft need to refresh their hardware as often? The cash cow is software (Office sales and subscriptions, cloud stuff, etc.) and whether Microsoft or Lenovo is making the hardware, MS still profits from the software that the demographic who purchases those devices certainly loads onto those machines.
  • Microsoft is more focused on Windows 10 and Azure than they are on their (tiny) hardware business right now. And ... it is fair to say that had it not been for the folly of Ballmer's failed attempt to compete with the iPhone and iPad (while totally ignoring Android incidentally) Microsoft would have never gotten into the hardware business to begin with. So Microsoft doesn't need to divert themselves from where they are strong and growing just so their fans can have smartphones and Surface Books to take pride in while their friends and coworkers use their iPhones and Macs. If anything, the better approach would be to work more closely with the likes of Lenovo, Dell and HP to influence their product lines, rather than coming out with a new Surface device one year and letting Lenovo, Dell and HP spend another year copying it. It would be better for Microsoft to take their ideas directly to the hardware manufacturers in the first place, so they can get Microsoft's ideas out faster, and to a much wider audience than the Surface will ever reach.
  • This is exactly my scenario. Bought into the Surface 3, now ready for a replacement with improved cpu/battery/ram but there is no replacement. A Pro is overkill, screen too large, cant reuse my Surface 3 keyboard and pen. OEMs have nothing comparable which shares the premium Surface build and design.  
  • Well duhhhh. Do i have to say it for a millionth time? The future is mobile. A Surface studio can be awesome as **** but it will always be for a limited audience. Same counts for any Surface product because they are really expensive.
  • I partially disagree. The future is not entirely mobile. I don't want to be stuck doing everything on a phone. It's good in a pinch, but, given a choice, I'd rather have a laptop or, yes, a Surface tablet. Better a 15" laptop for me. But then, you're right if you are trying to point out that Microsoft is losing something very valuable by letting phones die.   The rest of your statement I agree with. The Surface line is too expensive.  
  • Wrong, small phone form factor devices will give greater screen experiences in the future. Android and ios have that audience. By the time continuum matures they have bypassed Microsoft. Wait, Samsung already has..
  • Let me know when I can develop native apps on any "mobile" platform other than Windows 10.
  • I can't do anything work related on any mobile platform, so for me any surface is the minimum. But I guess some people have brainless jobs.
  • Nope,  the greater possibility is that you are the brainless one who can't do anything work related on anything other than a windows computer.  that's all. 
  • I'm still using my SP3 on a regular basis purchased in 2014. SP4 wasn't a big enough upgrade to interest me and they haven't released a SP5. Honestly Intel doesn't improve their CPUs like they did in the past, new generations aren't much faster, harder to justify upgrading computers frequently.
  • Same here. My SP3 still works great, and even better with the Windows 10 Creators Update.
  • #MissionAccomplished 😎💖🗽
  • Too excessively expensive to consider.
    That Surface whatever all in one costs as much as a car.
  • A fully configured Surface Pro 4 costs more than any car I've ever owned, a fully configured Surface studio is more than I pay for rent annually. These devices aren't expensive. 😂
  • I can't tell if you agree with me or not.
  • I have never had a car that costs as little as any surface device...
  • Others have.
  • are'nt you special!
  • You clearly aren't the target market. I pay more per _month_ in rent than most surface pro configurations, and I can buy more than 10 surface studios for the cost of my car.
  • Having excess money to pay for it is not the point.
    I have a pre-determined price threshold for all products I use.
    I will not pay for a phone or a car beyond that threshold.
    Your ability to make rent is commendable.
    There are a billion others who make more but that doesn't mean the price is justifiable
  • You're coming across as resentful about products not aimed at your price range. You claimed Surface Studio costs as much as a car, but it's a bargain compared to a Ferrari. Are you going to tell Ferrari off too?
  • That's funny.
    A Ferrari will costs as much as I'm willing to pay for it.
  • Do you really think it's because there is not a new model ? Seriously ? Perhaps you should focus on the reliability issue. View the comments on a multitude of forums about the lack of reliability, compatibility, and support. Therein lies the reason individuals and companies aren't making an investment in new Surface product. My personal experience with the Surface line is mixed. Windows 10 updates, and steps recommended by tech support, have killed two of them. Although the store replaced them, the hours spent reloading and performing tech recommendations were way too precious. With the well documented history of problems as cited in reviews and forum posts, there is little to attract people to invest in the Surface line right now. People will stay with what works rather than pay money to become frustrated, and that includes a lot of corporate accounts. Sorry ... but new product will not reverse this trend.
  • I'm afraid Microsoft will lose this market as well if they don't respect their users and aren't "official" enough about their releases. They should be rock solid about when they will release new hardware.
  • Why are people surprised? HW was Ballmer's idea, Nadella is all about SW and services.
  • MS has a hard time with Surface marketing. When it succeeds, they say it's at Apple's expense. When sales are down, it's because of partner success. They are so worried to not look like they are competing with PC makers, when I think that is really what is happening. It's way too big of an investment to just be inspirational. If that were the case, we'd probably still have a few Lumias. 
  • Of course it did. Like with phones Microsoft didn't release hardware. People were ready for the SP5 and waited, and they were rewarded with a solid helping of nothing. I know we were looking at them at my work, then nothing came about. Perhaps MS will take the time to put a product out in the future, then we'll see revenue bounce back.
  • Wow, some people commenting don't really understand how businesses work... MS has always been a SW company. They are not interested in making PC hardware unless they had to, like years ago when the NetBook nearly crippled the PC industry. When Intel's Ultrabook reference that all OEMs are supposed to copy didn't turn the tide against rising Mac sales, MS knew they had to do something, thus the first Surface RT and Pro. Steven Sinofsky even mentioned something to that effects before he left. Now that 2-in-1 are the new desireable laptops, MS job is done, thus the scaling back. Regarding reliability, my Surface 3 has been performing superbly for more than half a year now. Never had a real issue with it except for my BitLockered microSD card. If you go to a forum to look for issues with a Surface or Mac, that's what you'd find. People having issues complaining and looking for solutions. Normal people wouldn't go to a forum and start a thread that say my gadget is fine! :D So yeah, Surface revenue drop is expected since Aug/Sep 2016 or I believe is 1Q17 or 2Q17 due to the way MS do financial reporting. I see these really cool HP, Dell 2-in-1 and I agree with some of you here. #Missionaccomplished When China brands like Chuwi starts ripping Surface, it's time for MS to look for the next big next. No point to compete with China brands to the bottom of the well. Last thing to note. The mythical Surface Mobile device will only be launched when MS is bloody sure full Win10 will work well on SD835/845. So far, Win10 Build 16xxx don't have CShell incorporated. If we don't see a Beta CShell by 3Q17, don't expect MS to release a smartphone in 4Q17. It WILL be pushed back to RedStone 4 2Q18.