Why Microsofts New Plan for Surface Pro 3 Devices Is Pretty Smart

By Markets Fool.com

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Microsoft Surface Pro 3. Source: Flickr user Scott Akerman.

If you've been following the tablet market, you probably have noticed the days of eye-popping growth rates are a thing of the past. For those who aren't following, research firm Gartner outlines the projected slowdown: The company recently released projections that estimate worldwide tablet shipments will increase only 7.8% this year versus 68% just two years prior.

For Gartner, the slowdown's reasons can be explained by one key feature: a slower upgrade cycle. Gartner's research director Ranjit Atwal provides more detail:

The steep drop can be explained by several factors. One is that the lifetime of tablets is being extended -- they are shared out among family members and software upgrades, especially for iOS devices, keep the tablets current. Another factor includes the lack of innovation in hardware which refrains customers from upgrading.

For Microsoft, tablet success has been particularly hard to come by
For Microsoft , this is added bad news for its beleaguered Surface tablet line. Famously considered the final straw that hastened CEO Steve Ballmer's exit from the company, the initial Surface rollout -- more specifically, the functionally limited Surface RT -- led to an inventory writedown of $900 million. In the end, it seemed like Microsoft was late to the party by launching its tablet in late 2012, more than two-and-a-half years after the market-defining Apple iPad.

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But it should be noted the Surface Pro line has improved to producing nearly $1 billion in revenue during the last two quarters. And although Microsoft doesn't specifically break out its cost of revenue for the Surface, ComputerWorld estimated the Surface was finally profitable in its first-fiscal quarter of 2015.

During the recently reported second fiscal quarter of 2015, CFO Amy Hood mentioned the Surface had improved gross margins, supporting and building upon ComputerWorld's estimate of a profitable product on a gross-margin basis. But Microsoft's newest move could lead to even more Surface-related revenue.

A trade-in program could increase the upgrade cycle... and pressure rivals
Microsoft's newest Surface sales offer, a Surface trade-in program, could spur an upgrade cycle among existing Microsoft Surface users. Microsoft is planning to offer as low as $84 for the aforementioned Surface RT -- up to $361 for a 512 GB Surface Pro 2 -- to upgrade to a new Surface Pro 3. In addition to the inducement for existing users, there's also a hidden trend that could push Android tablet makers at the low-end: the rise of the used/refurbished market.

Another Gartner study shows how big this market is becoming. This week, a study came out that the refurbished smartphone market will grow from 56 million units in 2014 to 120 million in 2017 good for annualized growth of 29%. And while it's important to note Gartner only surveyed smartphones and not tablets, it isn't out of bounds to expect growth in used/refurbished tablets going forward.

In the event Microsoft is able to introduce new users into its tablet ecosystem with a low-cost Surface via a centralized, corporate-run refurbished operation, and to retain current users with lower upgrade costs, it could put pressure on both Android and Apple in a slowing-growth market.In the end, Microsoft investors should be encouraged by Microsoft's Surface turnaround and subsequent moves in the greater tablet space.

The article Why Microsofts New Plan for Surface Pro 3 Devices Is Pretty Smart originally appeared on Fool.com.

Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple and Gartner. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.