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Microsoft deepens enterprise roots with new subscription service

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Microsoft deepens enterprise roots with new subscription service

Microsoft Corp.'smove to create a subscriptionservice for Surface tablets and Windows 10 is a sign that the company is retrenchingaround its enterprise roots, but analysts are mixed on whether the program willpay off.

Microsoft said it is moving to attract smaller businesses to its ecosystemwith the new program by authorizing cloud solution providers to bundle leased Surfacedevices with Office 365 and Windows 10. The move is in line with the company's broaderembrace of cloud computing under CEO Satya Nadella.

After years of trying to compete with Apple Inc. for consumer market share, S&P Global MarketIntelligence analyst Scott Kessler said Microsoft's new Surface leasing programis another sign that the company is realizing it should focus on its core enterprisecustomers. The company earlier soldoff its phone hardware business after restructuringand writing off the segment in July 2015.

The typical Surface user is not a casual consumer but rather someonewho receives it as a work tool, Kessler noted.

"I think they're kind of acknowledging or embracing the fact thatthis is going to be a business use case," he said. "You're basically puttingtogether the hardware and software for those particular individuals. It's a continuationof that, and they see opportunities."

In its restructuring, Microsoft shifted its focus to emphasize a Windowsecosystem to connect its hardware. It also went from reporting consumer and commercialrevenues for various software and services separately to consolidating both underthree broader segments. Since then, Nadella has emphasized the growth of the company'scloud computing segment while stressing the opportunity for its enterprise business.

"Organizations using digital technology to transform and drivenew growth increasingly choose Microsoft as a partner. As these organizations turnto us, we're seeing momentum across Microsoft's cloud services and with Windows10," Nadella said in an April 21 filing.

Alongside the new device leasing program came announcements about partnershipswith IBM and Booz Allen Hamilton, each of which will develop capabilities for theSurface tailored to the healthcare, government and other enterprise sectors.

Sales of Surface devices increased 61% in constant currency year overyear for the March 2016 quarter. Microsoft's Corporate Vice President of Windowsand Devices Yusuf Mehdi said in the July 12 announcement that the Surface has gonefrom $1 billion in revenue per year to $1 billion per quarter.

The "Surface as a Service" subscription program is anotherway to strengthen the ties between devices and cloud services, analysts say.

"I just think it's their way of cultivating a greater followingfor an install base, for Surface in particular," Kessler said.

Reactions as to the value of a tablet subscription service were mixed.In an article for Forbes, Tony Bradley,community manager for the internet security company Tenable Network Security, wroteabout his approval of a subscription model generally, saying that the cost of leasingthe device should be low enough to allow for several years of use before surpassingthe cost of simply buying the product.

"In theory, it seems like it could be a great deal," he wrote.

However, Ovum analyst Francesco Radicati said device leasing programsgenerally lack transparency around key issues.

"Microsoft needs to communicate whether it's offering some formof insurance in case something happens to the tablet, and on whether it can effectivelyfirewall company information from personal use," he said, noting two such examples.

Additionally, those who lease devices miss out on the potential trade-invalue later, the analyst noted.

"It's early, but … given other manufacturers' and carriers' experiencewith this model, I don't believe it will be particularly successful," Radicatisaid.