It's been a rough two weeks for Microsoft and Windows 8.
The company revealed that its Windows 8-based Surface products generated only $853 million in sales in fiscal 2013, and that it took a $900 million write-down because of unsold Surface RT devices. Not the returns Microsoft was hoping for.
For perspective, research firm IDC estimated that Apple sold 19 million iPads in the first three months of 2013, adding up to an annual run rate of roughly $38 billion.
One InformationWeek reader, commenting on a story about the Surface slump by Michael Endler, put it succinctly (even if he overdid the nautical metaphors):
"Microsoft 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 riptide."
[ Microsoft's latest OS update addresses many concerns for business users, but questions remain. Read Microsoft Releases Windows 8.1 Enterprise Preview. ]
What can Microsoft do? Cutting prices is a good first step. Many will accuse Microsoft of admitting failure. Too bad. The market has spoken and the Surface devices are overpriced. Microsoft wisely decided to cut the price of the dead-in-the-water Surface RT by 20% to 30%, depending on the model. The 32-GB model is now $349, down from $499. Microsoft may need to keep cutting to spark Surface RT's inertia.
The 64-GB Surface Pro is priced at $899 ($1,000 with keyboard cover!) and needs to be on par with or less than the iPad's $600 to $800 price range. As for those $120 keyboard covers that cost $18 to make: Include them for free.
Microsoft will have to take a hit on the sale price to get people using the Windows 8 Modern UI and buying apps and content from the Windows Store. That's what Amazon had to do with the Kindle Fire. To overdo a baseball metaphor, Microsoft thought it could price high and get into the tablet game on third base. But it has to step up to the plate like everyone else.
In pushing a product very few people want, a big part of Microsoft's solution is to hang tough and make incremental changes. But another part, unfortunately, is to yell louder: "YOU WILL LIKE THE MODERN UI IF WE KEEP ADVERTISING IT! YOU WILL LIKE THE HOMESCREEN TILES! It reminds me of Einstein's definition of insanity.
What about Windows 8.1? It has some solid additions, such as boot-to-desktop mode and a restored Start button. But it's a coat of paint and not real change. It's too late to significantly change Windows 8 anyway. Consumers and business customers didn't bite. Those weak Surface sales numbers speak volumes, as do an unprecedented decline in PC sales this year. As for its overall Windows 8 sales, Microsoft isn't breaking them out in its financial report, but for the fourth quarter, it said that total Windows revenue was down 6% for the quarter and 1% for the entire fiscal year compared with year-earlier periods.
In contrast, the iPad immediately fascinated the buying public when Apple introduced it in the spring of 2010. It didn't take a year to marinate -- it took 5 minutes. Android took longer, but Android operated in the shadows and slowly reached critical mass on smartphones first and is now leading the way on tablets as well. Android currently owns 52.4% of the smartphone market compared to Apple's 39.2%, according to comScore. Meantime, Android accounted for 67% of global tablet shipments in Q2 2013, according to Strategy Analytics. This growth happened organically; the masses (and the hardware makers) came to Android. Unlike Windows 8 and Windows RT, its success wasn't predicated on mass advertising.
Microsoft desperately needed consumers to snatch up Windows Phone smartphones and Surface tablets and bring them to work BYOD-style. That hasn't happened, and it's a serious threat to Windows' enterprise winning streak.
But make no mistake, Microsoft is still comfortably in the black. Last week it reported revenue of $77.85 billion for fiscal 2013, a 6% increase over the previous year. In Microsoft's just-ended fourth quarter, revenue for the company's Business Division (led by Office) grew 14% compared with the year-earlier quarter. It was up 3% for the year. Microsoft stated in its financial report that Office 365 is now on a $1.5 billion annual revenue run rate. The Server & Tools division revenue grew 9% for the quarter and 9% for the full year, driven by double-digit percentage revenue growth in SQL Server and System Center.
With SQL Server, System Center, Windows Azure, Lync and Office 365 product lines all healthy and growing, maybe Microsoft should stop trying to wow consumers and be more like Oracle, with its singular enterprise focus.
But the company's planned reorganization implies Microsoft is trying to be Apple-like by streamlining its portfolio of software, services and devices.
If Microsoft has any chance of becoming an Apple-like player in consumer computing, the best it can do now is retrench on its mobile strategy and re-enter its Surface devices running Windows 8.1 at lower prices and longer battery lives. Microsoft blew it by pricing Surface too high. Come back down to earth. Give buyers a deal. It may be the only way to keep Windows 8 vibrant long term.
Just don't keep doing the same thing and expect a different result.