Microsoft Said to Back Off Plans to Debut Smaller Surface

Big 5

Microsoft Corp. (MSFT), struggling to break into the tablet market, backed off plans to introduce a smaller version of its Surface tablet based on Qualcomm Inc. (QCOM) processors, people with knowledge of the decision said.

Microsoft Chief Executive Officer Satya Nadella and Executive Vice President Stephen Elop decided that the product in development wasn’t different enough from rivals and probably wouldn’t be a hit, said one of the people, who asked not to be identified because the plans weren’t public. Engineers had been working on the device and had planned to unveil it as early as today at an event in New York, two of the people said.

Instead, the company removed any references to Surface devices based on Qualcomm’s processors from the event and unveiled Surface Pro 3, an upgraded version of its pricier Windows-based tablet, which uses chips from Intel Corp. (INTC) and features a larger 12-inch screen. Microsoft is still working on smaller versions, Panos Panay, who runs the Surface business, said in an interview after the event. Panay declined to provide details on future products.

Microsoft’s Surface had just 1.3 percent share of the market in the first quarter, while smaller-size tablets accounted for 53 percent of sales in the period, according to researcher IDC. Nadella has said he wants to turn the Redmond, Washington-based company into one that focuses on “mobile first, cloud first.”

Smaller Device

Jon Carvill, a spokesman for Qualcomm, declined to comment. Asked about the Qualcomm device, which would have used ARM Holdings Plc technology, Panay said the company never announced it and is working on a lot of things.

“Windows on ARM continues to be an important element of the Windows strategy,” Microsoft said in an e-mailed statement. The company didn’t answer explicitly whether there would be future Surface products on ARM.

There are already smaller versions of Windows-based tablets from companies like Dell Inc. and Toshiba Corp., as well as rivals running other operating systems like Apple Inc.’s iPad mini.

Microsoft and Qualcomm have been working together on Surface for about a year and the project had been proceeding until recently, when Nadella and Elop declined to give it the final go ahead, the people said.

As a result, Microsoft doesn’t currently have an approved project to create a smaller tablet but it could look at the category again in the future, said one of the people.

Product Strategy

By choosing to focus on larger devices and the Intel-based Surface Pro, Microsoft is making a bet on an area that has sold well for Surface, even though tablets using ARM technology dominate the broader tablet market. The Pro versions of Microsoft’s device are outshipping the RT version, which uses ARM-based chips, by a margin of about four to one, according to IDC. So far this year, sales of tablets with screens bigger than 9 inches are down 12 percent, according to NPD Group Inc.

While succeeding with Surface Pro remains an “uphill battle,” Daniel Ives, an analyst at FBR Capital Markets & Co., said Microsoft has a better shot in that segment where it can convince consumer and corporate customers that the device can replace laptops.

“No mini is a minor disappointment to some, although we would rather Microsoft put all their eggs in the Surface Pro basket at this point,” Ives said. “We can still see a mini at one point, but not likely until 2015.”

Tablet Market

The decision on a smaller Surface is a blow to Qualcomm in what would have been its first Surface device. The previous Surface RT uses an Nvidia Corp. processor.

Another challenge facing Microsoft is slowing growth in the touchscreen-device market, which IDC predicts will grow 19 percent this year, compared with 52 percent in 2013. Fewer consumer purchases in developed markets are behind the weaker outlook, growth in the tablet market, according to IDC. The slowdown is already being seen — Apple said iPad sales fell 16 percent, the largest drop on record, in the quarter that ended in March.

The new Surface Pro 3 unveiled today is thinner and lighter than its predecessor, and will sell at prices starting from $799.

Microsoft still has room to gain ground in tablets, said Jitesh Ubrani, an analyst at Framingham, Massachusetts-based IDC, though the company will need to connect with customers soon.

“It’s tough to say how many chances they will have,” Ubrani said. “But they are certainly running out of time.”