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?