Surface sales plunge, and you should be celebrating

You know it’s a tough quarter for the PC market when Microsoft Surface revenue drops by 30 percent…and that’s good.

Microsoft reported better-than-expected revenues for the first calendar quarter of 2023, but Microsoft’s More Personal Computing remained a black mark: It was the only division to experience a revenue drop, down 9 percent to $13.3 billion.

Of all the various businesses grouped together in that business unit, two numbers stuck out: Windows OEM revenue fell 28 percent, and Devices (Surface) revenue fell by 30 percent. That’s a signal that Microsoft’s PC customers saw about a 28 percent drop in sales, while Surface devices fell by 30 percent, or slightly more. IDC (owned by PCWorld’s parent, IDG) previously reported that PC sales fell by 29 percent to 56.9 million during the first quarter of 2023.

So it was a little surprising to hear chief financial officer Amy Hood present those numbers to analysts, then add that they were actually ahead of expectations. Hood explained that Microsoft actually saw better than expected PC demand, particularly in the commercial segment. Unfortunately for Microsoft, revenue was “negatively impacted by elevated channel inventory levels.”

That’s bad, if you’re a Microsoft shareholder. But that’s great news if you’re a consumer, since “elevated channel inventory” simply means “there’s a lot of unsold PCs sitting on store shelves.” To get rid of those unsold PCs, the traditional way has been through sales, discounts, promotions, bundles—all ways to entice you to buy. There’s a reason why we track the best deals that you can find on laptops, almost daily.

Hood also told analysts that conditions in the PC market should persist: Revenue should tick up slightly to between $13.35 to $13.75 billion, but PC demand should remain unchanged and channel inventory should remain elevated. The bottom line: Expect laptop sales to continue.

“Though channel inventory has depleted in the last few months, it’s still well above the healthy four to six week range,” said Jitesh Ubrani, research manager for IDC’s Mobility and Consumer Device Trackers, earlier this month. “Even with heavy discounting, channels and PC makers can expect elevated inventory to persist into the middle of the year and potentially into the third quarter.”

Those sales (actual sales!) may extend to Xbox as well. Xbox hardware revenue fell by a whopping 30 percent—in Hood’s words, because of “increased console supply,” and offset by better than expected monetization. Translated, that means that Xbox hardware is finally outselling consumer demand, implying more sales are on their way. If there’s any downside, it’s that game makers are finding ways to lure gamers into buying additional add-ons—which may be DLC, or not.

It’s sometimes easy to fall into the language that Wall Street employs: earnings are down, so it’s time to break out the waterworks. In this case, both consumers and Microsoft have something to cheer about: Microsoft’s cloud business continued to buoy revenues and profits, so that Microsoft reported net income ($18.3 billion, up 9 percent) and revenue ($52.9 billion, up 7 percent) that exceeded expectations.

But for you, the future seems assured: The PC sales will continue until sales improve.