Third quarter earnings show Surface revenue fell 26%, but that's not as bad as some people might believe.

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.