Microsoft Bleeds Cash On Tablet Business, Losses Hit $1.7 Billion

By Steve Anderson August 06, 2014

Microsoft's transition into other markets besides the PC market has not exactly gone smoothly. Windows Phone is making something like a decent showing, but it's clearly competing for third place behind entrenched rivals Apple and Android. The Xbox business is doing passably well, if a bit under fire from Sony in recent months. But the Surface tablet business has not been good to Microsoft of late, and the red ink just keeps on flowing when it comes to Microsoft and tablets.

The new reports suggest that, since the device launched back in 2012, the Surface has lost around $1.7 billion for the company. While the company's recent 8-K statement filed with the Securities and Exchange Commission (SEC) shows that the Surface brought in $409 million in revenue for the quarter that ended June 30, what the 8-K doesn't note is just what the cost of that revenue was, or rather, what kind of profit it generated. That's a departure from previous quarters, where Microsoft reportedly included the cost of revenue for the Surface. However, some have taken another report from Microsoft—the 10-K report, specifically—and performed estimates on the cost of that $409 million in revenue.

The projections, as staged by Computerworld, suggest that that $409 million in revenue actually cost Microsoft around $772 million to realize, suggesting a net loss of $363 million which, if accurate, would represent the single largest quarterly loss for the Surface since Microsoft actually started tracking those numbers. That's not universal, however, as Jackdaw Research's Jan Dawson suggested that the loss was closer to $324 million instead, but either way, it's not good news for Microsoft. Of course, word of a write-off for the production of a quantity of Surface Mini tablets didn't help matters, nor did initial production costs for the Surface Pro 3, which didn't actually start selling even in limited numbers until almost the end of the quarter, so it's clear there were some extenuating circumstances going into this quarter's terrible numbers.

Essentially, things aren't looking good for the Surface, and it's becoming increasingly clear that something either needs to happen, and soon, or Microsoft might well end up pulling the entire operation's collective plug, at least as far as tablets go. Granted, Surface's losses aren't a big part of the picture—the loss represented about three percent of the company's gross margin for fiscal year 2014, and less than nine percent of the Devices and Consumer division's overall picture—but losses are losses, and current word suggests that new CEO Satya Nadella is much more risk-averse than Steve Ballmer was.

Two important things are about to crop up over the rest of this year that are tailor-made for pushing tablet sales. One, back to school shopping season is about to hit, and if Microsoft can get the marketing to circle the wagons around the concept of Surface as the must-have item for students, that could be a big push that Microsoft sorely needs right now. But beyond that is the holiday shopping season, and Microsoft making Surface the Christmas gift—or Hanukkah or Kwanzaa gift—of choice could really drive some sales in the field, and make Surface a viable alternative coming up.

Only time will tell just what ultimately happens to the Surface, whether it will turn its numbers around or end up as a footnote in Microsoft's long history. But there's room here for either to happen—or even something completely different—and seeing just what happens should prove quite exciting.



Contributing TechZone360 Writer

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