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Microsoft's Surface Business Breaks $1 Billion Mark In Quarterly Sales For First Time

Microsoft's Surface RT didn't sell well, but Surface 3 is blowing away those memories and giving the vendor confidence to launch new types of computing devices that aren't PCs.

Microsoft's Surface PC/tablet hybrid got off to a slow start in the marketplace, but it's now rounding into form and giving the vendor confidence to unveil new types of computing devices.

Microsoft said Monday it sold $1.1 billion of Surface devices in its fiscal second quarter, surpassing the $1 billion mark in quarterly sales for the first time. This was a 24 percent increase from last year's second quarter and a 21 percent increase from Microsoft's previous quarter.

"The value proposition of being the most productive tablet is resonating," Microsoft CEO Satya Nadella said during Monday's earnings call.

[Related: Microsoft Amps Up Apple Attack With Switch To Surface Campaign]

Surface 3, which hit the market last June, is now selling at three times the rate that Surface 2 did, Microsoft CFO Amy Hood said on the call.

When Microsoft launched Surface RT in 2012, the big question was how its PC hardware partners would react to the prospect of Surface eating into their PC sales. Acer, for one, was particularly vocal, as CEO JT Wang urged Microsoft to "think twice" about launching Surface.

When Surface RT didn't sell well, and Microsoft ended up taking a $900 million charge on unsold inventory, the chorus of Surface critics intensified. The fact that Microsoft only let a small subset of partners sell the device didn't help matters.

But not only has the Surface gamble worked out for Microsoft, it has also prompted PC makers to step up their game with new devices, Nadella said on the call.

"I think it's definitely expanding the market opportunity," Nadella said of Surface.

Softchoice, one of the handful of partners Microsoft allows to sell Surface, is using the devices in conversations with customers about Microsoft cloud services.

Chris Woodin, director of Microsoft business development at Softchoice, told CRN he thinks Surface momentum could help boost adoption of Windows Phones.

"With Windows 10 designed to provide a nearly identical experience across all devices, Surface could easily pull increased Windows Phone adoption with it," Woodin said in an email.

Microsoft has been aggressively comparing Surface 3 to Apple's MacBook Air, and last month launched a website that highlights the advantages of Microsoft's two-in-one device, urging Apple customers to make the switch.

Todd Swank, senior director of product marketing at Equus Computer Systems, a Minnetonka, Minn.-based system builder, agrees with the approach Microsoft is taking even though it's not a like-for-like comparison.

"I think it's a wise strategy to go after Apple head-to-head the way that Microsoft has been doing," Swank told CRN. "The Surface revenue numbers show that it's the right strategy, and it does seem like people have gained a respect for Surface."

Based on Surface's success, Nadella said he's confident about Microsoft's ability to "create new categories" of devices in the future.

Last week, Microsoft unveiled Surface Hub, a giant touch display for meetings and videoconferencing, and Hololens, a wearable computer that lets users see and interact with holograms in their environments.

PUBLISHED JAN. 27, 2015

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