How Microsoft Jumped on Apple’s Laptop Stumbles

The software giant now has a chance to steal customers and establish itself as a gadget powerhouse.

One of Microsoft’s new Surface laptops sits in a soundproof anechoic chamber used for development of the device’s speakers, at the hardware lab in Building 87 on Microsoft’s main campus in Redmond, Wash. on Thursday, April 20th, 2017.

Photographer: Mike Kane/Bloomberg

Starting about three years ago, Microsoft hardware chief Terry Myerson began showing a slide during meetings with the board, executives and his own team. It depicted a classroom full of college kids—all using Apple products. Myerson’s message was simple enough: the company needed to make drastic changes or risk losing the next generation of customers to its long-time rival. 

On Tuesday, Microsoft Corp. unveiled a sleek, lightweight laptop that looks every bit as good as anything Apple has built. The machine, which boots up in seconds and features a new version of Windows, is the latest product to appear under the Surface brand, which already sells a popular line of tablets and an all-in-one desktop. Myerson is betting the new laptop will go a long way toward persuading Mac loyalists to give his company a try. Microsoft is targeting college students it believes are eager for a premium $1,000 laptop that they can use for four years without worrying that it will become obsolete before they graduate.

The laptop will go on sale next month, and it’s too soon to predict how well it will sell. But that it exists at all shows how far Microsoft’s hardware ambitions have come in the past five years. Before the turnaround, the division had racked up a depressing body count–almost $10 billion in writedowns, tens of thousands of firings, infuriated partners, frustrated investors and the breakup of Bill Gates’s and Steve Ballmer’s 40-year bromance, which Ballmer says disintegrated in part over his push into hardware.

Under Myerson and Chief Executive Officer Satya Nadella, Microsoft has taken a disciplined approach to hardware, focusing largely on uncrowded market segments or creating new categories, including the company’s "mixed-reality" HoloLens goggles that let wearers project 3-D holograms onto their surroundings and interact with them. Everything else Microsoft leaves to partners like Dell, Lenovo and Hewlett-Packard. The Surface brand generated more than $4 billion in sales last fiscal year; last month, for the first time, Microsoft topped the J.D. Power U.S. Tablet Satisfaction survey. “We have grown up so much in the last two years,” says hardware marketing chief Yusuf Mehdi. “It’s night and day.”

Microsoft hasn’t entirely mastered hardware. Last week, quarterly sales fell short because Surface revenue declined 26 percent. The company had expected a dip because its Surface Pro models are aging, but the slide was more drastic than executives anticipated. It’s a reminder that a company relatively new to the computer market still needs to learn how often to refresh the product lineup and how much to cut prices to move old inventory. Executives are taking the setback in stride and say they remain committed to the Surface brand and other gadgets.

Nadella
Photographer: Jason Alden/Bloomberg

Microsoft’s emergence as a hardware player coincides with a perceived lack of innovation at Apple, where Macs have been taking a back seat to the iPhone. It has been almost seven years since Apple last redesigned the Macbook Air, the computer most similar to Microsoft’s laptop. The latest MacBook Pro, released more than 500 days after its predecessor, was panned by professionals who deemed it underpowered and too hard to use. Apple, which once poked fun at Microsoft during developer conferences with the tagline, “Redmond, start your photocopiers,” recently acknowledged it had alienated Mac loyalists and pledged to do better. The upshot: Microsoft has an opportunity to steal Apple’s customers and establish itself as a gadget powerhouse. 

When Nadella became CEO in February 2014, it wasn’t clear Microsoft should be in the hardware business at all. Fourteen months earlier, the Surface RT tablet had flopped. Successive products didn't fare much better. Meanwhile, Microsoft could no longer rely on its Windows monopoly because consumers had abandoned the PC for tablets and smartphones. Nadella needed to find a way to remain relevant.

At the time, the hardware team was preparing two new tablets for a spring release: the Surface Mini and an improved version of the Surface Pro, a category-busting machine that included a keyboard and detachable screen. Nadella told them the next device was make-or-break. “His point was ‘this product has to be great,” says Panos Panay, a vice president who oversees Surface products. “This is either our entry or exit to the hardware business.’”

The team killed the Surface Mini because it wasn’t sufficiently different from what was already out there. Instead, they focused on the other tablet, which became the hot-selling Surface Pro 3. Nadella also ordered the team to speed up development of a top-secret project that eventually became HoloLens, an entirely new category.

A photographic object mapping chamber at the hardware lab in Building 87 on Microsoft’s main campus in Redmond, Wash. on Thursday, April 20th, 2017.
Photographer: Mike Kane/Bloomberg

The new CEO made significant operational changes as well. First Nadella acknowledged Microsoft's 2014 purchase of Nokia's handset unit was a failure; he fired more than 15,000 people, wrote down the acquisition and largely exited the phone business. Then he handed the remains of the hardware unit and its demoralized workers to Myerson, who was already charged with reviving Windows. Now software and hardware engineers and designers would work in tandem to create a seamless user experience, a philosophy pioneered at Apple decades ago. 

Industrial designers once relegated to a warren of rooms in a parking garage were moved into their own building on Microsoft’s campus. In a 100,000-square-foot lab they use state-of-the-art 3-D printers and computer-controlled machines to rapidly build prototypes until everything’s right. In one wing, which resembles a biology classroom with skulls, a skeleton and a 36-camera scanning rig, the team tests gadgetry ergonomics on variously sized heads, wrists and bodies. Microsoft perfects the audio in an “anechoic” chamber that absorbs sound so effectively the Guinness book rated it as the quietest place on earth. The new Surface laptop required extensive testing because it dispenses with speaker holes and instead transmits sound through the keyboard. 

The New Microsoft Surface Laptop: An Exclusive Look

Early on, a colleague recommended that Myerson watch a Ted Talk given in 2009 by author and motivational speaker Simon Sinek. The topic was what makes leaders great. Sinek posited that good companies know what they do and how they do it, but great companies know why. Watching the video online, Myerson asked himself why Microsoft builds Windows. It was a hell of a question for the guy running a division that had been the company’s main profit and revenue engine for more than two decades. But with sales and market share eroding, Myerson was determined to figure out how to make Windows devices unique.

John Morris, Senior Human Factors Engineer, demonstrates body motion tracking equipment at the human factors lab in Building 87 on Microsoft’s main campus in Redmond, Wash. on Thursday, April 20th, 2017.
Photographer: Mike Kane/Bloomberg

His team learned by observing how customers use the products, divining their needs and trying to mesh them with painting programs and a stylus designed to work with the Surface (an innovation followed later by Apple). While Apple long ago endeared itself to the creative community (though less so lately), Microsoft is now trying to forge its own relationship with artists, designers and architects with the Surface Studio. “There is so much human creativity coming out on Windows,” Myerson says. That focus helped the team design. “It’s so wonderful from a craftsmanship perspective,” he says. “It inspires so many new ideas and things we can do.”

Before long, a company whose hardware mostly consisted of peripherals like keyboards and mice (and briefly a line of plush, interactive Barney and Teletubbies dolls) was turning out sleek, brushed-metal machines that, if not revolutionary, were inventive and consumer-friendly.

The Surface Book had a fulcrum hinge designed like a watch band that lets a laptop stay open at any angle, and a screen that detaches to use as a tablet. The Surface Dial, a $100 stand-alone wireless knob that went on sale last fall, lets users do a range of things from turning up the sound to changing colors and zooming in and out of blueprints. The Surface Studio is a high-end all-in-one computer with a massive screen that can fold down into a digital drafting table. With the $3,000 HoloLens, Microsoft is furthest along among the big companies trying their luck in augmented reality, even if it's currently too pricey to become a mass-market phenomenon. And Microsoft’s work in new categories like combo tablet-laptops has opened the door for partners like Lenovo, helping boost Windows’ market share.

There’s one glaring hole in Microsoft’s gadget lineup: a mobile phone. But even though an estimated 1.5 billion-plus smartphones will be sold this year, the company says it's content to stay on the sidelines unless it has something really different to offer. “We’re not going to come out with another device that someone’s done,”  says marketing chief Mehdi. Anyway, smartphones are yesterday’s news, says HoloLens inventor and in-house futurist Alex Kipman. “The phone is already dead,” he says. “People just haven’t realized.” Kipman is convinced some kind of mixed-reality device like the HoloLens will replace the phone—a theory echoed over at Apple. 

A pair of Microsoft HoloLens devices sit on a desk in the human factors lab in Building 87 on Microsoft’s main campus in Redmond, Wash. on Thursday, April 20th, 2017.
Photographer: Mike Kane/Bloomberg

Microsoft has faltered here and there. It killed off a fitness band after two versions never quite got the fit or the pricing and performance right, despite all the work on measuring wrists in the hardware lab. The first Surface Book high-end laptop had too much space between the screen and the keyboard when closed, prompting complaints it let in dust and dirt. The quarterly revenue miss followed a slide in Surface tablet sales last year, according to IDC, as Apple seized back some share and Microsoft opted not to update the Surface Pro line last Christmas. Meanwhile, Myerson says, Nadella is pushing for the business to generate more sales and profit. 

Microsoft’s hardware team is cautiously optimistic. The new products “are loved,” Panay says. But “I say that to you humbly. Remember I am also the person who went through the writedown. I am also the person who stood on stage and launched Surface RT.”