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Microsoft takes major loss on Surface tablets

Microsoft takes major loss on Surface tablets

Microsoft's Surface RT and Surface Pro tablets have made a serious loss for the company, failing to even cover the cost of advertising.

Microsoft has finally revealed revenue figures for its Surface tablet experiment, and they make troublesome reading for those who had hoped the company may continue to push its Windows RT operating system.

Rumours have been circulating for months that Microsoft's Surface RT and Surface Pro products aren't selling, but the company has been silent on precise figures. The closest it came was the admission, in its most recent earnings call, that it was taking a $900 million write-down on unsold Surface RT inventory following a price cut designed to boost adoption of the device.

Now, however, the truth regarding just how expensive an experiment the Surface devices have been is revealed. In its latest Form 10-K filing, an annual report US companies are required to make to the Securities and Exchange Commission, the company has been forced to admit that it has made just $853 million in revenue from its Surface RT and Surface Pro devices - less than the write-down made on unsold inventory.

The revenue figures represent sales made globally between the launch of the Surface RT and Surface Pro and the end of the company's financial year on the 30th of June. While unit shipment figures do not form part of the report, the value would appear to suggest that previous estimates of around 1.5 million units sold are accurate.

The story doesn't end there, however: while $853 million in revenue - not, it must be remembered, profit - for an at-the-time unproven entry into a seemingly saturated market may seem relatively impressive, it fails to even cover the cost of advertising; according to the document, Microsoft's advertising budget rose $898 million over the financial year as a direct result of a marketing push for Surface RT, Surface Pro and Windows 8.

The form does not detail the margin Microsoft makes on each Surface device sold, but even at a 50 per cent mark-up - which the company would be hard-pushed to achieve, given the hardware and retail price - it's obvious that the company's foray into the tablet market has been an expensive loss.

Previously, it had been claimed that Microsoft was looking to launch a refreshed Surface RT device in the coming months - but given these figures, coupled with the announcement that its hardware partner Asus is to join others in abandoning the Windows RT platform, few could blame Microsoft if it decided to bury the Surface line altogether.

20 Comments

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will_123 31st July 2013, 10:55 Quote
ouch.
Nexxo 31st July 2013, 10:56 Quote
Interestingly since the price cut, Wallmart has sold out its Surface RT stock. Perhaps as Google already knows, price is a more important selling point than ecosystem.
Gareth Halfacree 31st July 2013, 11:00 Quote
Quote:
Originally Posted by Nexxo
Interestingly since the price cut, Wallmart has sold out its Surface RT stock. Perhaps as Google already knows, price is a more important selling point than ecosystem.
The price cut could help shift the unsold stock, but whether it'll help Microsoft depends on how much profit it's making at the new price. If the price cut has wiped out its profit margin, then it's screwed - it might as well do an Atari and dump the things in landfill. (Well, ignoring the possibility of future revenue from the Windows Store, of course.)
Mentai 31st July 2013, 11:40 Quote
It will be a shame if this ends up killing the Surface Pro as well. I love the form factor of my iPad but still need a desktop to supplement it for a whole heap of legacy stuff. If I were to travel more (work overseas etc) and not be able to take a desktop with me, I would genuinely consider getting a Surface Pro over any other type of laptop.

Not the Surface RT though. I have no idea who is in the market for a windows device with zero legacy use and an underdeveloped app store. Looks like there isn't anybody.
rollo 31st July 2013, 11:50 Quote
Surface rt can die. Would like to see a haswell surface pro.

Enough feel we will now see niether. They have basically lost a billion on a tablet no one wants to buy. The surface pro is ment to be 75% of that sold number as well if the rumours are accurate.

Surface rt like the 100 tablets before it on andriod has no future.

Surface pro on the other hand would be nice to see version 2 launched in a timely manner not just USA gets it then 6 months later the uk gets it that's not helpful.
GeorgeStorm 31st July 2013, 12:03 Quote
Bought my mum a surface RT earlier this year, and she seems to love it, does what she wants it to from what I can tell (she no longer uses the family laptop)

The choice was between that and an ipad and we went for it since we got it 2nd hand (cheaper yet hardly used), and because the interface was far more familiar.

The only 'advantage' of the ipad we saw was the number of apps, and that wasn't really an advantage.

I hope Microsoft don't pull out of the tablet market completely, since the new interface suits touch screen devices.
Nexxo 31st July 2013, 12:03 Quote
Quote:
Originally Posted by Gareth Halfacree
The price cut could help shift the unsold stock, but whether it'll help Microsoft depends on how much profit it's making at the new price. If the price cut has wiped out its profit margin, then it's screwed - it might as well do an Atari and dump the things in landfill. (Well, ignoring the possibility of future revenue from the Windows Store, of course.)
If Microsoft can sell it at cost, it will break (close to) even, and establish enough of a presence to create a valid ecosystem. If it dumps them in a landfill, it will make a significant loss and incidentally signal that it is giving up on its own product --which is a sure-fire way to kill its credibility and future in the mobile devices market altogether. So selling is the way to go.
Quote:
Originally Posted by Mentai
Not the Surface RT though. I have no idea who is in the market for a windows device with zero legacy use and an underdeveloped app store. Looks like there isn't anybody.

Microsoft should never have locked the Windows RT desktop. Publishers could have easily ported their legacy software to ARM, rather than rewriting it from the ground up in WinRT. This would have allowed a gradual move to WinRT apps as they are more touch-friendly over the next few years.

Still, as I said before, since the price drop the RT is actually selling. So people are interested, but not at the price of a solid laptop.
rollo 31st July 2013, 12:15 Quote
People who tore them down did a estimate of cost and from what I remember the Bill of Materials was about $300. Dont know what they are selling it for. But did they not say the write down was because they dropped the price in the first place? ( acording to the linked stuff on bit tech that is the case)

So that would mean the Bill of Materials is higher than the price they are selling it for if they are loosing the best part of $900million.

What they have lost is just too much for most business to ignore. Wether or not Microsoft will absorb that hit and continue to make the Surface RT and Surface Pro we will see soon enough in the next 4-5months since that is likely the release date of the Surface RT 2 and Surface pro 2 if we are going to see them at all.

If we dont see either pre 2014 then the product is Dead and thats the end of that.
Nexxo 31st July 2013, 12:29 Quote
Nope, the $900 billion loss is loss of projected profits. By dropping it to $350,-- (32Gb model) they still make $50,-- profit.

Microsoft needs to accept that this is their Nexus 7. Sell at rock-bottom price to invest in establishing a presence and an ecosystem for future sales. It also totally screwed the pooch on marketing: it is one thing to put out asinine adverts of people dancing and clicking about; it's another to actually put product on tables in physical shops. Apple understands this (thanks to Steve Jobs).

Microsoft needs to pull its head out of its arse. It consists of a bunch of middle-aged millionaires who got fat and complacent on Windows and Office for too long. The mobile market is a young people's game. The new players are more flexible, more responsive, more visionary and creative. They understand that you have to run to crawl forward, not sit on your fat arse assuming that people will keep coming to you because you had a few successes twenty years ago.
Phil Rhodes 31st July 2013, 13:03 Quote
Bear in mind that for tax purposes I'm sure they have every reason to make it look as if the product is doing as badly as possible.
V3ctor 31st July 2013, 13:58 Quote
Could it be a Windows 8 rejection too?
Don't buy the tablet because it has Win8?
Niftyrat 31st July 2013, 14:04 Quote
Not sure what the BOM is for the pro but if they could sell one at £200-300 with the fancy cover and a decent storage and battery life it would be a no brainer. Problem that would do is to eat into the OEM licensing fees for windows as people would buy the pro rather then cheap laptops. The hope would be people would buy from the app store, but how likely would that be for?

Bold steps required or else another market will disappear for Microsoft I feel. Apple are seemingly also getting complacent as well, what's going to be the next big thing to get there teeth into? Surely they don't think that small upgrades on iPhones/iPads will keep them going. Look at the big incumbents in the mobile space from 10years ago and you will see there profits eroding
rollo 31st July 2013, 14:30 Quote
Apple and samsungs next big things are watches if the rumours are true. Probably followed by some version of google glasses.

Not really sure how many people will keep buying updated phones if all they give is faster hardware for most people there phone is alot faster than they need.
Nexxo 31st July 2013, 14:33 Quote
Quote:
Originally Posted by V3ctor
Could it be a Windows 8 rejection too?
Don't buy the tablet because it has Win8?

I seriously doubt it. They tried Windows XP tablets back in 2003 and they flopped. Windows 8 is really good for touch --even its critics agree on that.
RichCreedy 31st July 2013, 15:12 Quote
part of the problem is the devices were not available for resale by everyone, only big stores could get them, I know my local pc shop would have loved to get their hands on them to sell, when we quizzed ms uk, we were told soon, that was a couple of months ago, but still no news for resellers
azazel1024 31st July 2013, 16:24 Quote
No suprise Windows RT flopped. It would have been a much better decision to never have develped RT and had simply produced a "lightweight" surface tablet based around a Saltwell arch Atom chip. It probably would have saved a fair amount in developement, outreach, etc to have never developed Windows RT and an x86 based light weight Surface tablet with an Atom processor probably also would have sold a lot better, if maybe not mutiple times better.

Heck, take the Surface RT, put one of the upcoming Baytrail processors in it and make the price $499 and have full windows WITH the keyboard cover and I would GLADLY buy it.

Windows RT is just too limited and for little reason. Windows 8's touch limitations also didn't help it (if Windows 8 had been released with the functionality that 8.1 promises, it probably would have done at least a little better).
Xir 31st July 2013, 16:44 Quote
At some point, car manufacturers haven't realised this yet (expensive niche products I'm looking at you), at some point, you can only saturate the market deeper with lower prices.

The surface initially looks nice, then they charge a LOT for the touch cover thingy (which is what sets it apart from the rest) and presto, price/performance is shot.
Quote:
it fails to even cover the cost of advertising
Not to mention, the ads show nothing of the device except "ooh colourfull"
Nexxo 1st August 2013, 00:32 Quote
Quote:
Originally Posted by azazel1024
No suprise Windows RT flopped. It would have been a much better decision to never have develped RT and had simply produced a "lightweight" surface tablet based around a Saltwell arch Atom chip. It probably would have saved a fair amount in developement, outreach, etc to have never developed Windows RT and an x86 based light weight Surface tablet with an Atom processor probably also would have sold a lot better, if maybe not mutiple times better.

Heck, take the Surface RT, put one of the upcoming Baytrail processors in it and make the price $499 and have full windows WITH the keyboard cover and I would GLADLY buy it.

Windows RT is just too limited and for little reason. Windows 8's touch limitations also didn't help it (if Windows 8 had been released with the functionality that 8.1 promises, it probably would have done at least a little better).

Problem is, Intel didn't really pull its finger out and produce a decent Atom chip until Microsoft ported Windows to ARM. By the time the new Atom hit the market, the Surface RT was all but finished and ready to ship.

I do agree that Microsoft should build the next Surface RT around an Atom CPU, but I suspect that it simply wants to hedge its bets. The Atom is getting better but ARM chip manufacturers are not sitting still either. The Tegra 5 and next Qualcom CPUs are going to be tough acts to beat.
impar 1st August 2013, 00:36 Quote
Greetings!
Quote:
Originally Posted by Nexxo
I do agree that Microsoft should build the next Surface RT around an Atom CPU, ...
Surface RT on x86?
Nexxo 1st August 2013, 12:37 Quote
Technically it wouldn't be a Surface RT because it would run full-fat Windows 8. But basically something with the performance, battery life, size and weight of a Surface RT but running on an Atom CPU. Then you could simply differentiate between the Surface LT (Light) and the high-performance, shorter battery life Surface Pro.

I would do that. It would totally sell. You'd get the app ecosystem to follow suit, and over time publishers would gradually move from Win32 to the more touch-friendly WinRT framework anyway, but you wouldn't sacrifice legacy compatibility.

Then I'd focus on merging Windows RT with WP8 --which eventually would bridge to Windows 8 when x68 has caught up sufficiently in the smartphone market.
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