The Future of Microsoft Surface, Part 2

In part 1 I discussed how Microsoft Surface seems to be an extremely unprofitable venture. It combines the least profitable aspects of the Windows and Xbox business models. But there are good reasons for this.

My explanation is don't think of Microsoft Surface like Windows or Xbox. Think of it as a research and development investment on steroids. Think of it like a prototype SmartPhone.

The Windows Mobile business model is almost exactly the same as the regular Windows business model, with two exceptions:

1) Windows Mobile runs on specific hardware that is manufactured by third-party hardware manufacturers
2) Microsoft (just like NVidia, Intel, and others) creates reference hardware prototypes to show hardware manufacturers the basic features. Manufacturers take the reference design, create their own, embellish and elaborate, then sell sell sell, all with Windows Mobile on it.

There is also a chicken-and-egg problem with getting hardware manufacturers to buy into new products like SmartPhones running Windows Mobile. Manufacturers must invest a great deal into creating and marketing new hardware, and they won't bother unless there is a reasonable guarantee that they will be able to sell it in large quantities. Microsoft will provide market studies and the reference prototype to manufacturers for this reason.

So should anyone bother investing in a prototype? The answer in this case is absolutely, and the reasons why are in part 3.