Early Surface Store Sales Validate Microsoft's Strategy: Analyst

Microsoft hasn't revealed unit sales of the new Surface tablet computer. But one analyst says sales prospects look good because Microsoft decided to initially sell Surface only in its own stores and through its Website.

If strong foot traffic and other anecdotal evidence serve as accurate indicators, Microsoft is recording healthy sales of its Surface tablet and can thank its decision to restrict initial sales to its own stores and Website, according to an industry analyst.

Selling Surface only in Microsoft stores, “allows them to really talk about the value proposition of Surface in a very controlled way and drive a lot of traffic to their stores,” said Stephen Baker, vice president of industry analysis at NPD Group.

Microsoft has 65 retail stores in the U.S., including a few in Canada. That total includes 30 temporary “Holiday Stores,” which opened recently but will only operate through the holiday-shopping season.

Microsoft does not have immediate plans to sell Surface at third-party consumer electronics stores such as Best Buy or Fry’s Electronics in the U.S., though that could change, Baker said. But in those stores, Surface would be sharing shelf space with Apple iPads, tablets from Samsung, Acer, Google and other brands, inviting comparisons.

Microsoft declined to disclose specific unit sales figures for Surface, which went on sale Oct. 26. But various reports suggest sales are strong. The financial news Website MarketWatch quoted Phil Winslow, an analyst with Credit Suisse, who stated, in a note to his clients, that he sees strong demand for the product.

“We called or visited all permanent Microsoft Stores this week, and the feedback was that Surface sales have been steady, foot traffic has been above average and restocking shipments have been consistent,” Winslow wrote.

Baker said a Microsoft Store he recently visited was busy with most everyone there looking at a Surface. Lines were also witnessed on launch day at a Microsoft Store in Santa Clara, Calif.

Another sign that Microsoft may have a hit with Surface is a report that Microsoft spends less to manufacture a Surface than Apple spends to make an iPad, thus generating a greater operating margin per device.

Baker thinks lines at stores don’t necessarily transfer into strong sales for a product and that Surface sales do not necessarily come at the expense of other tablet makers like Apple or Samsung.

“It’s always easy to say that X competes with Y, and Y competes with Z,” he said. “But the tablet market is pretty immature; it’s growing, so there’s plenty of room for new products out there that haven’t been in the market before.”

Evidence of the tablet market’s growth is seen in a new forecast Nov. 6 from Gartner that global tablet and smartphone sales are expected to cross the 1 billion units mark sometime in 2013.

It’s also not necessarily an apples to apples comparison of the Surface to other tablets. While many tablets can be connected to physical keyboards, Surface is more of a hybrid tablet/laptop than just a tablet, Baker said.

Surface is available with a peripheral called a Touch Cover that doubles as a cover for the glass screen and as an external keyboard. The Touch Cover attaches to the side of Surface with a magnet and a kickstand tilts out from the back to make it into a laptop. It’s a more seamless transition from tablet to laptop than is possible on other models.

The Touch Cover ably performed its duty as a protector for the screen when a Microsoft employee unintentionally performed a crash test with his Surface. As noted on a Microsoft blog, Kurt Shintaku of Los Angeles told of how he absent-mindedly left his Surface on the roof of his car after he stopped to pick up some pizza. The device rode on the roof for a few blocks but slid off, hit the pavement and was run over by an oncoming car, though the wheels didn’t touch it.

Despite a few nicks on the case, “the glass is fully intact and the device completely functional,” Shintaku wrote. “BTW: I’m an idiot.”