Why the iPad Pro’s success shouldn’t make Microsoft nervous

The iPad Pro, the newly launched 12.9-inch tablet, has sold as more units than the Surface, according to research firm IDC.

The data, which is based off IDC’s market predictions, calculates that the Surface sold 1.6 million units in the past three months, compared to two million iPad Pros.

This figure is, if anything, unsurprising as backs up reports from late last week that suggested the iPad Pro generated as much revenue for Apple—$1.4 billion—as the Surface did for Microsoft, assuming that the Pro accounts for between 15- and 20% of total iPad sales.

However, should this piece of information—that the Surface and iPad Pro are level-pegging—matter to Microsoft?

There are several arguments either way.

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Apple iPad Pro

The Surface, which launched in 2012, came two years after Apple’s iPad, which launched in 2010. The Surface Pro, the most successful model of the group, launched a year later, in 2013.

The two-year head start for the iPad, which was originally a bulky, heavy device with a low-res screen that many predicted would fail, is important, as it cemented the “iPad” brand in the mind of the customer.

Looking at the Google Trends data, which track consumer interest over time, it’s clear to see that the iPad is, and was, more popular than the Surface, and that is down to its launch date in 2010. By the time the Surface was announced, a lot of people were searching for the iPad, creating a steep hill up which the new tablet had to climb.

In fact, Microsoft has experienced the problem of brand recognition first hand during its $400 million deal for the NFL, the biggest football league in America, to use the Surface tablets court-side. Commentators, despite being told not, have repeatedly referred to the tablet as “an iPad” during games in front of millions of fans.

This head-start is heavily in Apple’s favour and, in some ways, makes it impressive that Microsoft—which does not have a big consumer brand like Apple—could get this far, this quickly. The original iPad was the subject of columns in national newspapers and a lot of airtime on TV and that’s something Microsoft couldn’t match.

The Surface, however, was a far more restrained affair for the media, appearing only on blogs and technology websites that are read by people who are interested in Microsoft already.

But, the Surface has succeeded—after an initially rocky start—because it fits a need that people have: A tablet that can, when needed, work just as well as a laptop.

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The 2-in-1 category is, according to IDC and Gartner, the fastest growing PC-related category and, more importantly, the only one that looks to be escaping from the overall decline. Microsoft, with the Surface, was one of the earliest companies to bet on the 2-in-1, and it bet big, absorbing a $900 million write-down on un-sold stock.

This new market—people who want to work on-the-go—is big business for Microsoft, as Surface-related revenues grew to $1.4 billion in the three months leading up to January, a 29% increase over the previous year in constant currency (which does not account for currency fluctuations and other macroeconomic trends).

Apple’s tablet business shrank, however, even after the success of the iPad Pro is taken into account.

Revenue from the tablet came in at $7.1 billion, down from $11 billion in the same period last year. However, the average selling price of the iPad did rise to $439, up from $433 in the previous quarter and $419 during the same three months last year.

The rise in ARP is small, however, especially considering the iPad Pro starts at $799, a full $300 more than the iPad Air 2 and $400 more than the iPad mini.

Of course, the iPad Pro is a low-volume, high-price device—just like a laptop—but the increase was still too small to make a difference to the bottom line.

Microsoft CEO Satya Nadella speaks during his keynote address at the company's "build" conference in San Francisco, California April 2, 2014. REUTERS/Robert Galbraith

What this means, essentially, is that Apple and Microsoft are now, thanks to the Pro, competing head-to-head for the laptop market, as it stands.

According to data from Gartner, the “ultramobile” laptop market—comprised of high-end devices, like the MacBook Pro—accounts for around 50 million unit sales per year, up a little over the previous year. The market for “ultramobile” tablets—like the Surface and iPad—is around 214 million units per year, down a little over the previous 12 months.

In essence, this means that the Surface and iPad Pro currently take a combined share of 1.3% of the “ultramobile” laptop and tablet market.

When viewed in comparative terms, the sales of the Surface look bad. But, compared to the overall market, the Surface and iPad Pro can both exist happily together, capturing more share every quarter.

Another aspect that is overlooked by looking purely at sales is the partnerships Microsoft has struck with companies such as Dell and HP to distribute the Surface into businesses and the fruit that they could, in the future, bare.

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According to industry analysts, making progress in enterprise—a segment of the market both Apple and Microsoft are vying for—requires good distribution deals, and that’s exactly what Microsoft now has.

Apple recently announced new education software in iOS 9.3, the next version of the operating system, that will help the Pro, mini, and Air appeal to schools, but it’s Microsoft that is already pushing the Surface at companies.

Windows 10, which runs on the Surface, is also a hit with businesses, many of which are looking to upgrade at a faster pace than previous versions of Windows. Being able to buy a tablet that runs an attractive version of the operating system is an appealing prospect for any CTO, and one Microsoft fully intends to cash-in on.

Of course, in an ideal world the Pro would be a flop, leaving the Surface to take the spoils, but that hasn’t happened and the two companies—Microsoft and Apple—now have a long slog ahead to dominate this particular market.

Placing bets on the winner is silly, however, as both have advantages and disadvantages. Apple, for example, can leverage the iPhone while Microsoft can leverage Windows; Apple is well-known and coveted by employees while Microsoft software is reliable; and so on.

But here is the key takeaway: It’s unlikely that one company will win per se, as both can—thanks to the size of the market and quality of the products—exist side-by-side, even if the iPad Pro sold two million units and the Surface sold 400,000 less. So, the answer the question, Microsoft should not be nervous.

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