$2 billion revenue for Surface Pro 3 in three months (maybe)

Wonder how well the Surface Pro 3 sold? Microsoft may have generated over $2 billion in sales from the Surface Pro 3 in the past three months alone. This estimate is partly based on a study AdDuplex conducted for share of Windows 8 devices.

Adduplex

AdDuplex is an ad network specializing in modern Windows apps. The chart above was based on 941 apps on the network, and a device is measured only when a user opened one with AdDuplex ads…on September 22, 2014 specifically. So it’s a biased sample as results likely favor Windows RT devices, which only have modern apps.

These disclaimers aside, the results are interesting. The sample suggests that Microsoft has nearly 15% market share of all Windows 8 devices with the Surface line. That’s pretty good. The Surface Pro 3 is off to a decent start with 0.92% share, or the same share as the Surface Pro.

Let’s assume these numbers are close enough to the truth. What kind of unit sales are we talking about here?

According to Net Applications, Windows 8 and 8.1 have about a 13.4% market share of desktop PCs. Microsoft claimed that 200 million Windows 8 devices were sold earlier in February this year. Let’s be extremely conservative and assume that as the denominator; this implies 1.5 billion PCs on the market.

This suggests the following:

Device W8 Share PC Share Units
Surface RT 9.8% 1.3% 19.6
Surface Pro 0.9% 0.1% 1.9
Surface 2 2.4% 0.3% 4.8
Surface Pro 2 0.7% 0.1% 1.4
Surface Pro 3 0.9% 0.1% 1.8
Total 15% 2% 30

 

So the Surface Pro 3, just about 3 months in the market, has sold about 1.8 million units. That’s not bad considering its high price. Assuming the average price point of all Surface Pro 3s sold is the i5, 128 GB version plus a Type Cover, that’s revenue north of $2 billion! This is a conservative estimate of course, given that many more would buy a higher end, expensive version than the entry level i3 version. And that’s only in three months.

As a sanity check, we know Microsoft produced more than $2 billion of Surface sales the previous fiscal year and $409 million of the Surface Pro 3 over just 10 days in the US and Canada. From that lens, $2 billion for the Surface Pro 3 in three months seems plausible.

Note that the $2 billion refers to gross revenue — it may not be the revenue number Microsoft reports for Surface, as the company might count revenue net of what retailers and distributors keep. If anyone knows for sure, please comment below.

The other noteworthy numbers from the chart are Surface RT and the Surface 2. You’ve probably heard that Microsoft wrote down $900 million in inventory for the Surface RT, but the company also gave away and sold the device at deeply discounted prices — that likely explains its high share.

As for the Surface 2, it’s a device that deserves to do better. I own one and have been happy with it. For the budget conscious person who can’t live without Office, it’s the perfect travel device.

Update (October 24, 2014): Microsoft just announced its quarterly results and shared that the Surface generated $908 million in revenue. That may look like we’re way off, but it actually might be pretty close.

It’s not clear whether Microsoft reports net revenue or gross revenue for hardware — the latter is basically units x retail price which is how we got our $2 billion, the former is units x wholesale price. Given how Microsoft has traditionally been conservative in the way they account for revenue, it’s likely that Microsoft’s number is revenue net of retail markups.

Retailers and wholesalers typically have a 50% markup.

Even though there is no hard and fast rule for pricing merchandise, most retailers use a 50 percent markup, known in the trade as keystone. What this means, in plain language, is doubling your cost to establish the retail price. Because markup is figured as a percentage of the sales price, doubling the cost means a 50 percent markup. For example, if your cost on an item is $1, your selling price will be $2. Fifty percent of $2 is $1, which is your markup.

So our $2 billion estimate is really more like $1 billion on Microsoft’s books. However, not all sales were through retail channels; Microsoft sold direct too, which would not incur the keystone. I don’t know what the percentage sold direct is, so let’s assume it’s 20%.

If that’s the case, we arrive at (80% x $2b x 50%) + (20% x $2b) = $1.2 billion.

Moreover, our estimate was total Surface Pro 3 sales. Microsoft had reported $409 million revenue from the Surface Pro 3 in the previous quarter, which means our estimate should translate to $800 million this quarter.

Now we’re under the official $908 million number, but the latter includes Surface 2s and accessories. Our initial $2 billion estimate had only included the keyboard.

All in all, we’re probably not too far off!

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