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7/31/2013
11:44 AM
Michael Endler
Michael Endler
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Can Microsoft Rebound From Surface Flop?

Clearly, Microsoft's Surface tablets have bombed. Now what will the company do about it, and what does it mean for customers?

Tablet Buying Demystified: 10 Tips
(click image for larger view and for slideshow)
Tablet Buying Demystified: 10 Tips
Like an overmatched but determined boxer, Microsoft's Surface line has been absorbing abuse for months -- and on Tuesday, the devices took a punch straight to the chin.

In its annual 10-K report to the SEC, Microsoft revealed that its Surface products are hemorrhaging even more cash than previously thought. CEO Steve Ballmer's reorganized company now faces a tough question: Can it increase adoption before its Surface line -- particularly the RT model -- is down for the count?

Tuesday's report added new dimension to the scope of Microsoft's problem. The company evidently took in only $853 million in Surface-related revenue in all of its fiscal 2013, which started in July 2012. That's almost $50 million less than the $900 million write-down Microsoft recently took to accommodate a $150 Surface RT price reduction.

What's more, Microsoft increased its marketing budget by almost $1 billion during the reported period, mostly to advertise Windows 8 and the Surface products. Because Windows 8 and the Surface RT didn't hit the market until late October, Microsoft's tablet revenue represents only two-thirds of the fiscal year, which means that in only 8 months, the company spent a gargantuan amount of money attempting -- and failing -- to attract consumers.

[ Windows 8.1 Enterprise includes a lot to assuage business users, but plenty of questions remain. Read Microsoft Releases Windows 8.1 Enterprise Preview. ]

To be fair, there are only a few tech companies that can casually absorb billion-dollar losses, and Microsoft is one of them. Still, the situation is bleak for several reasons.

The $853 million in revenue includes both the Surface Pro and the Surface RT. In May, IDC estimated that Microsoft sold about 900,000 combined Surface units in the first three months of the year. This is a relatively paltry sum (IDC estimated that Apple sold 19 million iPads over the same period), but some had speculated that the Surface Pro, which arrived months after the RT model and was initially subject to stock shortages, was selling better than its sibling. Microsoft's disclosure suggests that both tablets have struggled, however.

The SEC report is also just the latest in a two-week barrage of negative Windows RT news. Other examples include Steve Ballmer's uncharacteristically direct admission that the device has underperformed, as well as Asus's decision to abandon development of Win RT products. Asus chairman Jonny Shih told All Things D that the OS is "not very promising," and virtually all of Microsoft's OEM partners have now dumped their Windows RT plans.

With the PC market in disarray and Windows 8 still struggling, Microsoft's Surface woes are only one facet of the company's larger challenges. The company hopes to improve sales of both PCs and tablets with Windows 8.1, however, and Ballmer confirmed in July that new Surface models are in development. The OS update should help Windows 8 overall -- but the question still remains: How is Microsoft going to reverse the Surface's dreadful performance?

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DDURBIN1
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DDURBIN1,
User Rank: Ninja
7/31/2013 | 8:01:09 PM
re: Can Microsoft Rebound From Surface Flop?
Microsoft should change it's slogan to " too little too late". I doubt we see an updated Surface anytime this year since the Xbox has been on the market for over five years.
Bob Gill
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Bob Gill,
User Rank: Apprentice
7/31/2013 | 8:00:40 PM
re: Can Microsoft Rebound From Surface Flop?
We have 4 or 5 Surface Pros here. They are great. People love them and I'm hopefully 8.1 and Haswell will make them even better.

RT? Yes, I get the point of having a low cost iPad competitor, but it's way too confusing for the marketplace.
DDURBIN1
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DDURBIN1,
User Rank: Ninja
7/31/2013 | 7:55:02 PM
re: Can Microsoft Rebound From Surface Flop?
When Amazon introduced the Kindle, it took a bit of a lose on the sale price to capture the on going content purchases, something HP does with printers to capture on going ink sales. Microsoft should have taken the same approach with the Surface RT but instead went the greedier route charging a high end price. Plus the Metro Store doesn't offer anything close to Amazon's content. To add insult to injury the technology employed in the RT is out dated compared to iPads and most high end Android tablets. I don't see Microsoft correcting this strategic blunder even with the next version of the RT. RIP RT.
Aroper-VEC
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Aroper-VEC,
User Rank: Apprentice
7/31/2013 | 7:52:14 PM
re: Can Microsoft Rebound From Surface Flop?
MS missed the boat on tablets and now they are trying to catch up. The problem is, they jumped in the water after the boat left the dock and now they are swimming against a rip-tide. Apple was the first to do what others had failed miserably to achieve; a simple-to-use computing device that was light, versatile, and had a long battery life. Apple's issue was a lack of Enterprise support and no MS Office. Had MS been ready at this time with a good product, they may have been able to gain traction on Apple back in 2009. But, they waited two and a half years to port a desktop OS to a tablet device and they couldn't even do that properly. I get the whole single OS ecosystem, but Apple has achieved this without using a singular OS train. Mac OS X and iOS are capable of interchanging data and sharing some applications, but they are different operating systems tailored to their respective hardware platforms. As such, they run beautifully and for long periods of time and users can switch between devices effortlessly and still access their data. The issue here is that this was the focus for Apple from the outset and not something that was decided on only after it was proven that there was a market for such innovations. And now, you have Samsung doing the same thing, more quickly, using Android, and they are filling in the gaps opened up by Apple. Where, realistically, is there room for Microsoft?
Shane M. O'Neill
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Shane M. O'Neill,
User Rank: Author
7/31/2013 | 6:14:13 PM
re: Can Microsoft Rebound From Surface Flop?
Great analysis of Microsoft's increasingly dire problem: Windows 8 indifference (and dislike). Dropping Surface Pro and RT prices seems to be the only solution at this point. That will come with the negative perception of admitting failure and backtracking, but at least it will help sell some units and get people using the Modern UI. If Surface Pro gets Haswell chips and improved battery life and RT shrinks down to compete with Nexus 7 and iPad Mini, people may get interested, especially if they feel like they're getting a deal. But still, such adjustments are not game-changers. It will be hard for Microsoft to reroute the rudderless Surface after months and months of shrugs. MS seems intent on plowing forward with advertising money and the hope that Windows 8.1 will save the day. It's Einstein's definition of insanity on full display. I guess Microsoft can afford to be insane -- for now.
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