Surface to Air: how Microsoft took on Apple and won
In a rare interview, Microsoft chief product officer Panos Panay tells technology editor Adrian Weckler that the tech giant's Surface hardware division is here for good and may look to the kitchen next
Among all of the controversies and technological advances that occurred in 2018, an interesting thing happened: Microsoft overtook Apple as the world's most valuable company.
At the time of going to press, Microsoft was valued at $790bn with Apple next at $778bn. That is a fine margin which could change with the next product launch cycle or quarterly results. But it's highly significant.
Apple has been the king of the world for five years, briefly valued at over $1trn a few months back.
While Tim Cook's company built an empire based on smartphones, Microsoft spent the last decade attempting to redefine its own future, moving from music to phones to online services.
Everyone agrees that its main turnaround success has come in remodelling itself as a cloud company, specialising in services like Azure. But it has also become a trendsetter in a market few would have guessed: computer hardware.
Its Surface lines of laptops, desktops and other devices have been a noticeable hit in the six years since they were introduced. They have worked so well that the company is now expanding the Surface brand into things like headphones.
Who would have thought that Microsoft, the company most associated with Word and Windows, would have come up with premium laptops that people might choose over MacBooks or the best that Dell, HP and Lenovo have to offer?
Well, Panos Panay.
For those who lust after the latest, greatest gadgets, Microsoft's chief product officer is the company's star executive. The American has been the key figure within Microsoft leading the design and manufacturing of the firm's coveted computing devices.
In doing so, he looks to have achieved something highly improbable: converting loyal users of high-end rivals into customers. Even die-hard Apple Mac fans ooh and aah at the company's new designer-friendly 28-inch Studio 2 PC, shortly to be launched in the Irish market.
And the Surface Pro range is now considered as best-in-class for hybrid laptop-tablets, having led that market for a while.
Indeed, the Surface line has reportedly reached $5bn in annual sales, growing between 20 and 30pc each year in a market where overall PC sales have stagnated or fallen. One market estimate now places Surface sales at around 20pc of Apple's entire Mac sales, a pretty amazing achievement for a hardware line first released just six years ago.
It hasn't all been plain sailing. Microsoft took a $1bn hit on one of its earliest models, the Surface RT.
And not everyone thinks it will remain a core part of Microsoft's product roadmap, with some senior analysts still insisting that it doesn't make sense for Microsoft to be in the hardware game.
But Microsoft is in it for the long haul, says Panay. Hardware is now "core" to what the company is and does.
"It's not just a core part of our strategy and at the centre of Microsoft, it's also a core part of how we build products at Microsoft," he says. "It's important that that resonates. It's important for me to say it."
So the Surface line is there for the long run? "Yes, one hundred per cent. Without hesitation. I think if you asked me five years ago, we were still learning. We were still trying to figure out what hardware should do to bring software to life. But now it's not just a core part of the strategy."
Of course, Microsoft isn't completely new to hardware. It has over 10 years' experience producing one of the world's most popular gaming systems, the Xbox.
But it has had some significant hardware-related issues to get over.
Arguably its most high-profile flop in recent years has been smartphones. It invested in a Windows Mobile operating system, paid billions to make it the exclusive operating system on Nokia smartphones and then bought the Finnish phone company before seeing it slip away into irrelevance. On paper, it cost the company some $10bn.
Were there any lessons that the company learned from its Nokia Lumia experience in how it approaches hardware research and design now?
"I think we learned quite a bit," says Panay. "Lumia, of course, was a challenge. We can take those product lessons and customer lessons and move them forward. I think we have. Satya [Nadella, Microsoft CEO] talks about the growth mindset, about how we can learn as fast as we can through our successes and, mainly, our failures. When you fail, you are in a true learning mode. You are in a tremendous growth phase. And this is something we take to heart."
Aside from updating the Surface laptop and PC lines, perhaps the most interesting part of Microsoft's recent product release cycle was the introduction of headphones. Although not yet released in the Irish market, the noise-cancelling headphones - designed and priced to compete with premium models from Bose and Sony - have attracted largely positive reviews from the US and UK press.
But aren't headphones a consumer device? Does this signal that Microsoft is now expanding beyond its work-tech remit with the Surface line?
Not necessarily, says Panay. Headphones, especially those with noise-cancelling technology to filter out the din of distractions, are now common as tools for those trying to work. "Think about headphones as completing an experience for the way people are working," he says.
"So many people now work in cafes, trains, airplanes or in the back of a taxi. And you might switch in and out of modes, because you're seeing work and life blend. When we designed the product, that's the way we thought about it."
So if Panay's plan has brought Microsoft to designing headphones, might it extend further into other hardware categories? A smart speaker, for instance? To better leverage Microsoft's considerable investment in its own voice-recognition technology, Cortana?
"I can't really reveal the product roadmap, but let me just come at it from a higher level," he says.
"Are we completing experiences for people at work and at home? The answer is yes. So will you see new form factors that can do that, or need to do that? The answer is absolutely. And that's how it kind of comes together. For me, work and home equals life, whether the device is in the kitchen at home, in the home office, in your work office or on your body. They're coming together. So yeah, you'll see more products that focus on where our customers are going to be."
Finally, there is Microsoft's new status as the world's most valuable company. Is this significant to Panay?
"There's a bit of a cool factor," he says. "I'll be honest with you, it feels good. But it's also quite humbling. We believe we're making a difference. We have a team and a company that is inspired. And we're not slowing down. I feel that as a company, we're just hitting our stride in a big way. We'll keep pushing."