Can Microsoft Rebound From Surface Flop? - InformationWeek

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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?

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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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Michael Endler
Michael Endler,
User Rank: Author
8/1/2013 | 6:32:39 PM
re: Can Microsoft Rebound From Surface Flop?
Agreed, with a few minor caveats.

I know some people aren't bothered by the small screen, but I wonder if this group of people will ever constitute more than a niche community. Personally, I use my Win 8 tablet's desktop mode in specific situations--e.g. on a train or airplane, the tablet is more portable than my laptop, so even though the laptop makes it easier to use Word, the tablet is the one I bring. I actually use the tablet's Modern UI substantially more than I use its desktop side. When I want to use a desktop app, I'm most likely to use my Windows 7 laptop or my iMac.

All that side, I've been surprised at how effectively I've been able to use Adobe Lightroom on a Surface Pro. The touch support is a bit awkward-- but at least it's there, which is more than I can say of any other desktop apps. It's actually possible to process and edit a RAW file with a few taps, which is pretty cool-- and not something an iPad can do. I wouldn't attempt pixel-level edits or anything, but if you were, say, a photographer or journalist working on the road, the Surface is a more viable tool than I would have thought. All things being equal, I'd rather fire up Lightroom on a 30-inch monitor, though. Again, niche uses, but not mass market appeal.

Your point about apps-- spot on. Microsoft made news when it announced Win 8 will get a native Facebook app-- and it should have, since Microsoft needs consumers too. But what Windows 8 really lacks are tablet-optimized enterprise apps. For desktop software, I suspect a lot of enterprise users will keep using traditional desktops, at least most of the time, and for at least the next few years. So if Microsoft wants to produce the best business tablet, it needs applications suited to the form factor. For Win 8 tablets, legacy software access has to be a perk, not the primary appeal.
Shane M. O'Neill
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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