Microsoft, Surface Tablets and Fool's Gold

By Tony Rizzo July 31, 2013

Well, now that the Surface RT bloom is fully off the rose (more accurately now that we've all formally acknowledged that the rose never actually bloomed), and following Microsoft's announcement at its most recent earnings call of a $900 million write down on the Surface RT, the company has finally come around to releasing the actual Surface RT sales figures. Needless to say, it ain't a pretty picture.

Duly noted in Microsoft's annual 10-K report for the SEC, the company reported and released actual "total" Surface revenue figures for the first time. For the company's full fiscal 2013 year (which covers July 1, 2012 through June 30, 2013) revenue from all Surface sources came in at $853 million. This is a disastrous number in many ways, and we will note that it is $47 million less than the actual write off of $900 million. Can you guess why we put quotes around the word "total" in the first sentence of this paragraph?

Here's a hint: Surface tablets come in two flavors. The first is the consumer-focused Surface RT, which runs on ARM processors and can only support Windows RT. The second is, of course, the Surface Pro, which runs the full Windows 8. Alas, for Microsoft the total reported revenue for Surface tablets is not only for the Surface RT - which was the device CEO Steve Ballmer focused on in his recent comments on Surface sales. The revenue number includes all Surface Pro sales as well.

Microsoft Surface RT (image via CNET)

That means in fact that RT sales (which began in late October 2012) were even worse than what Ballmer hinted at. Nor does it bode well for the Surface Pro, which has been out long enough now (most of 2013 to date) to get a sense of where the trajectory for its sales are (another hint: they are not looking like a positive hockey stick curve). The good news in all of this is that MSFT hasn't tanked as badly as some of us thought it might. It has not fallen back to the now 12 year average level of $27 per share, but has been beaten back to $32 per share or so - a mere $3 to $4 drop from its recent high of $36.43.

Hubris and Microsoft Marketing Stupidity

It would be an understatement to say that we ourselves, let alone the rest of the tech and financial worlds, are entirely pissed off (sorry - those are the only words that capture it) at Microsoft. The company had a once in a lifetime opportunity to seed the marketplace with two tablets that were/are in fact very cool devices. That opportunity is now gone - completely.

When Microsoft first announced them, we noted at the time that there was a lack of Microsoft's usual hubris around the event (the fact that Ballmer himself was less of a voice for that event than is typically the case certainly saved the day then) - something we thought was a very good thing indeed. It gave us hope that Microsoft had veered onto (by plan or by accident) the right road to market and sell the tablets.

But once the pricing for the tablets was announced - which we condemned as purely idiotic - we immediately saw the hubris return. And that hubris had Ballmer's fingerprints all over it. We've written a number of articles ongoing exhorting Microsoft to deliver frictionless price points and to focus on seeding the market. What is particularly perturbing, aside from the general failure to make those price points low enough (along with giving away the keyboards), is that Microsoft set aside an enormous number of marketing dollars in the neighborhood of $1 billion to market the Surface tablets and Windows 8. What an enormous failure! We've commented on Microsoft's marketing budget for Windows 8 elsewhere and as we predicted, Ballmer and company were not able to move beyond their comfort zones (or beyond Ballmer's hubris).

So in the end we are left with Ballmer uttering the following: "We built a few more devices than we could sell…We're not selling as many Windows devices as we want to." Ballmer misses the reality entirely - they could easily have sold out and created unheard of demand for the Surface tablets had they looked to seed the market instead of trying to make a few bucks off of them out the door. Now we get the $150 RT price cut!

Stupid, stupid, stupid - the Surface tablets literally became Ballmer's Fool's Gold!

Forgive us if we don't put much faith in Ballmer's recently announced re-org. In the end, he's still there ruling the roost - a great value stock CEO protecting old assets but who continues to utterly fail to deliver meaningful innovation into today's mobile marketplace.

Edited by Alisen Downey

TechZone360 Senior Editor

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