Microsoft's silver lining: Surface loses, but Windows wins

Stephen Nellis

April 27 (Reuters) - Microsoft Corp's lineup of

Surface tablets, laptops and desktop computers has always been a

paradox.

The software company's surprise foray into hardware became a

billion-dollar-plus business and even managed to outclass

longtime rival Apple Inc with its Surface Studio

desktop machine last fall, according to some tech critics.

At the same time, the Surface range competes with

Microsoft's longstanding PC maker partners, such as Dell

Technologies, Lenovo Group Ltd and HP Inc,

which pay billions of dollars to license Windows, Microsoft's

traditional cash cow.

Those two facets came into sharp relief in the latest

quarter, when Surface sales suffered while Microsoft's own

Windows licensing customers prospered.

Surface revenue declined 26 percent to $831 million, its

lowest tally in a year. Meanwhile, the overall PC industry

staged a slight comeback, notching a 0.6 percent gain in

shipments for the first time in years, according to IDC. That

helped drive Microsoft's Windows licensing revenue up 5 percent

this quarter.

Effectively, Microsoft lost in Surface sales, but it gained

in Windows licensing.

It has always been part of Microsoft's Surface strategy to

release flagship models that goad the rest of the PC industry to

improve its products, said Microsoft investor relations director

Zack Moxcey.

He said competition from PC makers selling lower-priced

hardware, along with some Surface hardware nearing time for an

upgrade, led to the lower Surface sales.

"It's definitely about driving the health and performance of

the broader windows ecosystem," Moxcey said.

Buried in the supplemental information Microsoft provides

investors, there was further silver lining. The company said

sales of Windows licenses destined for consumer PCs was down 1

percent, but revenue for more lucrative Windows licenses for

business and educational computers was up 10 percent.

Moxcey said this was attributable to sales of higher-priced

machines, especially for businesses. "That carries a higher

revenue-per-license for us," he said.

The data fits with Dell's latest results, as the PC maker's

sales of computers to businesses rose 11.6 percent year over

year to $6.6 billion in its last quarter, versus 8.5 percent

growth for consumer PCs.

Rebounding sales of Windows PCs to schools and businesses is

a boon for Microsoft, which is staking its comeback on business

and productivity software.

And higher Windows revenue per license means that the

Surface strategy - to pull the PC industry back upmarket with

expensive flagship machines after a years-long race to the

bottom on prices - might be getting some traction.

(Reporting by Stephen Nellis; Editing by Bill Rigby)