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Microsoft Surface: It's on a roll (and why it exists)

Microsoft saw revenue and unit shipments double for its first branded PC when it announced earnings this week. Surface is here to stay, apparently.

Surface Pro 2.
Surface Pro 2

Why does Surface exist and is Microsoft serious about moving forward with the laptop-tablet hybrid? The software giant -- er, device maker -- has answers to those questions.

Microsoft said this week during its earnings conference call that Surface shipments doubled sequentially, though it's a little more complicated than that (i.e., Surface doesn't appear to be profitable yet).

The company is, not surprisingly, encouraged by the numbers and it appears to have no intention to retreat from the strategy to evolve as a device maker.

So, let's pose this existential question: why did Microsoft create Surface? Statements in its Form 10-Q are instructive:

A competing vertically-integrated model, in which a single firm controls the software and hardware elements of a product and related services, has been successful with some consumer products such as personal computers, tablets, mobile phones, gaming consoles, and digital music players. Competitors pursuing this model also earn revenue from services that are integrated with the hardware and software platform. We also offer some vertically-integrated hardware and software products and services; however, our competitors in smartphones and tablets have established significantly larger user bases.

We face substantial competitive challenges from competing platforms developed for new devices and form factors such as smartphones and tablet computers. These devices compete on multiple bases including price and the perceived utility of the device and its platform.

Users are increasingly turning to these devices to perform functions that in the past would have been performed by personal computers...the prevalence of these devices may make it more difficult to attract applications developers to our platforms.

And the downside:

Efforts to compete with the vertically integrated model will increase our cost of revenue and reduce our operating margins.

In addition, Surface competes with products made by our OEM partners, which may affect their commitment to our platform.

But Microsoft seems keen on moving forward with Surface, Amy Hood, Microsoft's chief financial officer, said during the conference call.

With customers recognizing Surface's...value proposition as one device for everything in their life. We feel good about the progress we have made over the past couple of quarters, and are enthusiastic about the overall opportunity ahead with Surface...You know, when we launched Surface just a year ago, our goal was really to create a product that showcased what can happen when you innovate in hardware, in the service, and in the software. And as you know, we've learned a lot over the course of this journey.

Which raises the question, how will Surface and the PC evolve? Are hybrids the future? Is one-device-for-everything a realistic goal? And what about Surface 2, aka, Surface RT? Will that merge into the Windows Phone platform?

Your guess is as good as mine.

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