Microsoft's Surface hardware business shrunk by $285 million -- and it's weirdly a good thing for Microsoft

Surface pro 4 on lapMelia Robinson/Business InsiderMicrosoft Surface Book

Microsoft reported earnings today, showing solid growth in its all-important Office 365 and Microsoft Azure cloud computing businesses. Still, it wasn’t all good news.

The Microsoft Surface hardware business, encompassing the Surface Pro tablet, Surface Book laptop, and Surface Studio desktop PC, shrunk revenues 26%, a $US285 million decrease, over the same period in 2016.

The reason for the decline, according to Microsoft: “increased price competition in the premium 2-in-1 category and product end-of-lifecycle dynamics.”

No doubt, that’s not great news for the Surface business. Still, in a weird but real way, it’s good news for Microsoft.

“Increased price competition” just means that other manufacturers are building their own Surface-style, high-end convertible tablet/PC devices, and selling them for less than Microsoft’s own product lineup.

This would be a problem if, like Apple, Microsoft was a hardware company. But the whole point of the Surface products in the first place was to get PC manufacturers building more touch-friendly, stylus-friendly Windows tablets and computers.

Microsoft surface pro 4MicrosoftMicrosoft Surface Pro 4

So if every PC manufacturer out there is building lots and lots of Windows PCs that compete with the Surface…well, again, that’s bad for the Surface business, but good news for the Windows business. Given the overall shrinkage of the PC market, Windows is fighting against Apple’s Macs for a bigger piece of a smaller pie — and its tactics appear to be working.

Apple isn’t sitting idle, pitching its iPad Pro tablet as a laptop alternative, trying to match the sales pitch for the Surface Pro. Users haven’t exactly come along for the ride, though, with the iPad still lacking the right mix of features to replace a laptop.

As for the bit about “product end-of-lifecycle dynamics,” that could refer to the fact that the Surface Pro 4 tablet is now over a year and a half old, possibly hinting at a rumoured Microsoft Surface Pro 5 yet to come.

In the meanwhile, Microsoft is holding an event in New York City on May 2nd. And while the Surface Pro 5 is unlikely to make an appearance, expect some kind of update on the Microsoft hardware front.

Get the latest Microsoft stock price here.

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