Will Surface soon be bigger than smartphones for Microsoft?

Will revenue from hybrid PCs like the Surface Pro 4 soon overtake those from Microsoft's smartphones? Image: Microsoft

Microsoft's smartphones and laptop/tablet hybrid PCs seem to be on very different trajectories.

In its last set of financial results -- Q1 2016 -- Microsoft noted that its phone revenue had declined 54 percent "reflecting our updated strategy". A reminder of that strategy: back in July the company cut 7,800 jobs, mostly in its phone business, and announced it would take a $7.6 billion writedown on the acquisition of the Nokia devices and services business. Its phone revenue has now been sliding for the last five quarters.

While Microsoft's Surface revenue also dropped $236 million, or 26 percent, in the same quarter, Microsoft blamed this on the release of the Surface Pro 3 in June 2014. This year's iteration, the Surface Pro 4 and Surface Book (both well reviewed), didn't arrive until October, so will likely give the Q2 results, due in January, a boost.

So far that second quarter, which covers the holiday season, has seen the strongest revenue performance for the Surface devices, which seem to be on an upward trend overall (see chart below).

Microsoft's revenues from Surface devices and smartphones. Image: ZDNet

Microsoft has also just launched, to mixed reviews, a Lumia flagship phone -- the first for two years. The Lumia 950 (to be followed by the 950 XL) introduces the 'Continuum' feature that allows the smartphone to act like a PC when connected to a keyboard and monitor.

However it doesn't seem to herald a huge breakthrough for Microsoft, which means there's every chance that Surface revenues will overtake smartphone revenues sometime soon -- perhaps as soon as the next quarter.

Market dynamics

This reflects the difference in the smartphone and PC markets. Right now, the smartphone market is all about Android and iOS, and that's not going to change anytime soon. It's hard for Microsoft to break in at the Apple-dominated premium end of the market without a big app ecosystem, while the slim margins in the Android world make that just as tough a place to compete.

The PC market is obviously home territory for Microsoft: Windows remains the dominant operating system by far, and now that the threat from tablets -- in the enterprise at least -- seems to have receded somewhat, consumers seem interested in trying out new PC form factors. And Microsoft has had better ideas about remaking the PC than its traditional hardware partners so far.

But what does that mean for Microsoft and mobile? Mobile is still the huge device growth area, whatever way you look at it. The PC isn't going away, but is increasingly just one device among many, and perhaps one of the less-used ones at that. That Surface is growing will be some comfort to Microsoft, but the challenge of mobile remains.

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