Microsoft Writes Down $900 Million for Surface Debacle (I Told You So)

| Analysis

Microsoft reported earnings on Thursday, and included in the bad news was the fact the company wrote down US$900 million related to its failed Surface tablet strategy. While Wall Street is focused most closely on the company's miss, it's the Surface debacle that is emblematic of Big Redmond's central problem, the lack of product vision, something I've been harping on for a while.

First, the numbers: Microsoft reported revenues of $19.9 billion, with profits of $4.97 billion, or earnings per share (EPS) of $0.59. Wall Street had been expecting revenues of $20.73 billion and EPS of $0.75, a big miss for the company.

Shares of $MSFT ended the day at $35.44, down $0.30 (-0.84 percent) on heavy volume. After the bell (and Microsoft's earnings announcement), shares dropped another 4.4 percent in after hours trading. Note that after hours trading tends to be just as exaggerated for other companies as it is for Apple.

A Tale of Two Cities Supporting the Empire

Microsoft's empire was built on the success of Windows and Office. These two product families have financed everything else; the problem is that PC sales are expected to decline 10 percent this year, something that affects sales of both Windows and Office.

On top of this, Microsoft is a non-player in the smartphone and tablet markets holding a tiny share in either market, and Microsoft's catastrophic mistakes have only compounded the problem.

On the smartphone front, I am happy to give Microsoft credit for taking an innovative approach with Windows Phone. It has a unique and interesting interface and offers users a different approach to consuming content than iPhone or Android.

Android is free, however, and that has made hardware makers keen to embrace it. For those keeping score at home, this was the same technique that Microsoft used to destroy the market for browsers in the mid 1990s, but this time, Big Redmond is the victim of the strategy.

The tablet market—and I mean the media tablet market created by Apple's iPad—is a whole other matter. Here, Microsoft has made one mistake after another, each more disastrous than the last, all culminating with the Surface.

The Trouble with Surface

I have written and spoken about this on multiple occasions, so I'll recap here:

1.) Surface was designed first and foremost to protect and extend Microsoft's desktop legacy PC business. This hobbled both Surface and Windows 8 on the desktop, a solid lose-lose scenario that has exacerbated the slowdown in PC sales and the lack of demand for Surface.

2.) Surface was late to market, in part because of the effort needed to accomplish (and fail at) the first point. This allowed iPad to dominate the market for devices people use and for Android to carve out a new market for devices no one does anything with.

3.) Microsoft tried to make Surface more desirable by limiting Office on tablets to the Surface. Guess what? No one gave a rat's ass and they bought iPads instead. Not only did this not help sales of Surface, it has kept Microsoft from making money selling Office on iPad and iPhone.

The harsh reality is that Microsoft could make more money selling Office for Android smartphones than it will make with idiotic products like Surface.

No Vision, No Future

Which all comes down to the fact that Microsoft has no product vision. Products are conceived and developed from the standpoint of how they will help Microsoft—or worse, how they can perpetuate legacy products—rather than how they might disrupt a market or even meet a known consumer need.

This starts at the top, and the company's recent rearranging-the-chairs-on-the-Titanic reorganization isn't going to solve this problem. Microsoft needs a CEO who knows products, knows what he or she wants, knows how to get it, and has vision and taste.

I've been going on about this for a long time, but Thursday's $900 million write-down should be the proof that Microsoft's board of directors needs to make a change at the top.

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24 Comments Leave Your Own

Lancashire-Witch

Great Microsoft “train wreck” illustration, Bryan. Where can I get one? A wooden toy, that is; not a real MS Surface wreck.

 

daemon

Well they could increase the number of women on the board. Maybe go all ten members female.

That’ll completely make Microsoft a market sucess with phones,  tablets,  laptops,  and computers.

mhikl

Bryan, here’s a thought: What if MS does to Google (aka Android) what it did to MS—supply MS Office to Apple’s iOS only. That would certainly hurt Android similarly as Android was originally meant to trim MS’s sails. Supporting iOS and not Android would set in motion the boomerang effect of the old adage: What Goes Around Comes Around. And wouldn’t it be mostly enterprise that would use Office? Doesn’t the iPhone rule there? Is there need in the consumer market for Office?

Regarding MS building so many Surfaces I suspect Ballmer logic ran thus: If we build them they will buy them. However, this kind of logic works only at the cinema and in dreams.

Bryan Chaffin

mhikl, my take is that Microsoft can make the most money by keeping Office the dominant/default office suite, particularly with Word, Excel, and PowerPoint. To that end, the company should embrace iOS for sure, and possibly Android. The fragmentation issue on the Android side could be problematic for software as big as the Office apps.

I don’t think Microsoft has much to gain by teaching Android a lesson—that wouldn’t help Office or Windows Phone.

jecrawford

“These two product families have financed everything else; the problem is that PC sales are expected to decline 10 percent this year, something that effects sales of both Windows and Office.”

Something that “affects” sales ……… is surely what you intended here Bryan?

jecrawford

“devices no one actually doesn’t anything with.”

Surely this should read “devices no one does anything with” ?

Or alternatively: “devices no one doesn’t do anything with” ? But I’m not comfortable with the double negatives.

Bryan Chaffin

Ack! Thanks for catching those, jecrawford. I wrote that at the end of a long day (not an excuse, of course!) and did a piss-poor job of editing. I appreciate the notes. smile

William Murphy

I visited the Microsoft Store with the Surface prominently displayed near the entrance.  I thought, “Why not?” I stepped up to the Surface RT with its integrated cover/keyboard.  The salesman tried to get me interested in two things: 1) The keyboard is a part of the device and attaches with magnets and 2) Look at the cool kick stand that is so unobtrusive on the back.  So it runs Office.  I tried typing with the cover keyboard. The keyboard was atrocious.  I missed lots of letters - rather it missed me typing lots of letters.  I switched to the slightly thicker keyboard that has actual keys - So much better!  But RT?  now it only deals with apps that are from the MS-Appstore.  You must get Surface Pro in order to run the real workhorse apps like number crunchers and so on.  Good Luck Micro$oft ! I think I would rather buy another Mac and purchase M$ Office. Oh wait, I did that recently.

cubefan

Bryan,  a great piece,  I have long considered that everything Microsoft do is driven by an overwhelming motivation to prop up the share price. 

Apple have done a great job by quietly constructing a framework of easy interoperability between their products - Airplay, iCloud, iTunes - they all just work as if they were architected to do so, and it is of course no accident that these components interconnect so transparently.

geoduck

my take is that Microsoft can make the most money by keeping Office the dominant/default office suite, particularly with Word, Excel, and PowerPoint.

Remember however, that Microsoft is pushing hard to move Office to the cloud: Office365. They want to turn it into a subscription service. This means that while Office is almost their only product that people want, they are making a change that will drive a lot of customers away. At my company we’re laying in all the copies of Office 2010 that we can get. There is no way our private data is going to be stored on a cloud. Not confidential engineering data, not private sales correspondence, not personnel information. Just ain’t going to happen and I think we’re not alone in this. I suspect that The Cloud is going to be rejected by a LOT of companies and agencies. Even Office 2013 has too many cloud hooks in it. It tries really hard to push your documents out to an unknown server of undefined security. This will cost MS dearly.

So while Microsoft may have no product vision, eg Surface and the aborted attempt to add a blanket of DRM to the XBox, they are aggressively screwing up the only products that were selling well, by turning them into Windows8 and Office365.

I need to get a bowl of popcorn. It’s tradition whenever I’m watching a disaster movie.

palenoue

Losing a billion with the Kin, $900 million with the Surface, and who knows how much they lost with the Zune.  Why aren’t the shareholders rampaging in mobs with torches and pitchforks?

Lee Dronick

  I need to get a bowl of popcorn. It’s tradition whenever I’m watching a disaster movie.

Officenado smile

 

webjprgm

@geoduck I wonder if it would work to offer a locally-hosted version of Office365 where companies still pay MS a subscription but host the data and application on their own servers rather than MS’s cloud.  This would be similar to organizations using things like Citrix to host apps on centralized servers.

I also wonder if switching to the cloud is just an excuse to switch to a subscription model. Surely they could keep the same client-installed Office software and just add a subscription model onto it, similar to phone-home and update downloading systems used by anti-virus (Norton, McAfee), Steam, and Blizzard. Or even Microsoft’s “Genuine Advantage” thing, just tie it to a subscription instead of only a one-time purchase of a serial number.

There are two separate things customers may be rejecting:
1. Subscription software, and
2. Cloud software.

Which is worse? It seems that comments on this article fear #2 the most.

farmboy

Geo, I have to agree completely. I work in an FDA-regulated firm and there is no way we’ll ever put any data in the cloud, or rely on it for security, storage and retrieval. We are also grabbing extra Mac and PC versions of Office to install on any new units we buy in the near future, as Office 365 is a non-starter.

akcarver

I think it bears saying again, Bryan. You need a proofreader. I can be had for not a lot of money, or at least what most people would say is not a lot of money.

daemon

Office 2013 professional is also available for a single payment of $400.

http://office.microsoft.com/en-us/buy-microsoft-office-professional-2013-FX102918381.aspx?WT.intid1=ODC_ENUS_FX101785584_XT104029222&WT;.intid2=ODC_ENUS_FX102759646_XT103926347#FAQs

Course, Office 365 subscriptions come with Office 2013 too…. And you don’t have to save your files to the cloud.

RonMacGuy

I just smile picturing M$‘s leadership sitting around the big executive table all shaking their heads in disbelief that the Surface hasn’t disrupted all other tablet sales yet. Wondering what’s wrong with the average American consumer. Totally clueless.

Christopher Columbus

I guess I’m crazy to think a Mac based blog wouldn’t be biased.  These articles all stink of Mac fanboyism.  People aren’t doing anything on Android devices?  That’s the biggest joke I’ve ever heard.  Android devices are way more functional than the iPad or iPhone.  People are playing actual games with third party controllers,  since there’s native controller support.  They get apps for free through cracked apps and that’s why app purchases aren’t as much as Apple… since Apple devices require jailbreak (which is getting harder to do) just to get cracked apps.

Nobody pays for music anymore…sorry to burst your bubble.  So touting iTunes purchases is a joke.  Surfing the web is way better on android devices and I don’t even own one anymore.  I own an iPhone 5 and it sucks for web browsing and typing.  The screen is too cramped.

For a tablet I refuse to get the iPad because it’s a crippled device and has no purpose other than for people who play Angry Birds and use
Facebook all day.  I got the Surface Pro 128GB and I love it.  Especially now that I installed the Windows 8.1 preview on it.  Those saying the touch cover is hard to type on are clearly not even giving it a chance.  It takes a few days to get used to it and then it becomes second nature and a real joy to type on.  If you don’t want that you can use the Type cover which has a great chiclet key feedback to it.

I think the magnetic keyboard covers are genius and make it much more portable.  Plus once you purchase a case for the Surface Pro it makes it so you can set the tablet at any angle you want without even using the kickstand and it holds the stylus.  Solves that issue and it’s easy to use on your lap.

I think the concept of a tablet with a compromised tablet OS is ridiculous.  If I’m going to carry around a device of that size (ex; an iPad) then I want to be able to run full fledged x86 and x64 legacy programs.  That’s where the Surface comes in and offers both the laptop and tablet experience in one.

When I’m on the go I use the Metro interface and when I’m at home at a desk I use the desktop interface.  The Metro apps and interface are so smooth and well designed.  Windows 8 is even smoother than iOS and has better scrolling.  Microsoft’s only problems with Surface are that the battery life is lacking and the Windows Store doesn’t have enough apps yet.

But with the new iterations of Surface Pro 2 and a possible 7” Surface,  along with Windows 8.1 RTM it will be WAY better. 

You have to realize this was their FIRST tablet versus Apple’s current & upcoming 4th and 5th generation of their tablet.  The first iPad is a piece of crap and has an awful screen and lots of issues.  So let’s stop pretending the latest iPad is comparable to the Surface Pro.  They are not even in the same category of devices.  Surface is more of a hybrid super laptop and the iPad is a TOY for Facebook/Instagram users.

wab95

@Christopher Columbus:

You’ve objected to the article’s citations, dismissing referenced data with personal anecdote. Can you provide published data that refute two key points:

1) Comscore’s and Chitika’s publications that the iPad accounted for just less than 90% of online Black Friday purchases this past year and nearly 80% of tablet-based traffic, or GoGo’s data that iOS devices account for 84% of their airline Wi-Fi sales? Perhaps you have access to more recent data, and these are simply out of date, in which case, an update is in order.

2) MS’s own earnings report of poor Surface sales performance or the emerging consensus, as reported on Bloomberg West on Thursday 18 July, that both the Surface and Windows 8 are failures, based on current sales and market share, with little sign of improvement ahead.

I, for one, welcome a stronger performance by both MS and Google, as this pushes competition, which in turn drives development of better products for consumers. The published usage data that I’ve seen do not support the notion that Android devices are being used in the same manner, and to the same extent, as iOS devices, despite superiority of numbers (most of which, by the way, are located in developing countries with emerging markets and limited internet infrastructure); and as for the MS quarterly earnings report, it does not support the notion that the Surface, or Windows 8, are popularly perceived as great products, let alone superior ones.

Actual data that refute these reports would be welcome indeed.

RonMacGuy

Actual data that refute these reports would be welcome indeed.

LOL wab95, you expect a lot from trolls!!

think the concept of a tablet with a compromised tablet OS is ridiculous.  If I’m going to carry around a device of that size (ex; an iPad) then I want to be able to run full fledged x86 and x64 legacy programs.  That’s where the Surface comes in and offers both the laptop and tablet experience in one.

Wow, sounds like a freaking commercial for Surface!!  Can you say “Microsoft employee” boys and girls?  I knew that you could.

The first iPad is a piece of crap and has an awful screen and lots of issues.

HEY!!  My Gen 1 iPad still works great to this day!!  Hardly a piece of crap.  I’d love to see the first gen Surface last as long as my iPad and still function!!  Go back to work, MSBoy!!  You have a lot of work to do on Surface 2!!

 

wab95

Hello Ron:

I think you might have misunderstood the nature of my post. Although posed as questions, they were anything but, nor was Christopher Columbus the target, even though he was the one ostensibly addressed. I would have been pleasantly surprised, indeed pleased, had he responded with anything remotely resembling a thoughtful response.

However, your point is well-taken.

wab95

Bryan:

I started to post this, then withheld it. Now, on second thought, I’d like to see this through an MS lens.

Apple comes out with the iPad. MS says, ‘Meh’. MS remind everyone that they had a tablet first - years ago in fact. It ran Windows. Real Windows. It tanked. Critics said that was because it ran Windows. MS doesn’t comment.

The iPad makes inroads into both the consumer and enterprise spaces. MS owns the enterprise space, and although not happy about iPads, doesn’t feel threatened. Still, the iPad must die. MS’s strategy to kill it is to withhold Office; death by suffocation, or weaken it to the point where MS’s OEMs can deploy their fleet of elite iPad-killers, armed with Windows and Office, terminate the iPad menace, and preserve the balance of power.

iPad sales soar. Not only does the iPad further encroach on the enterprise space, it cannibalises PC sales. MS’s strike team of OEM tablets are deployed. Some explode at launch, others auto-destruct in mid-fight. Situation analysis: It’s a clusterflop. Unbowed, MS strike back with their own tablet. After all, when one wants something done right, one has to do it oneself.

Strategy: Protect Windows. To do so, the tablet should be built around Office on a Windows platform. Any tablet worth having should be Office-centric. This is what everyone really wants in a tablet. (Record iPad sales quarter on quarter, which don’t run Office, can be dismissed as an anomaly; and will be overwhelmed by real Windows tablets with real Office). After all, Windows is the dominant desktop PC OS.

MS dismiss talk of the post-PC era. Apple fanboy propaganda. 

MS ignore critics of older Windows-based tablets. The iPad uses touch interface? Fine. We’ll give ‘em touch. Touch this: Windows 8 with touch interface. No derivative of Windows, like iOS is to OSX, but the real thing. MS will create not one but two flavours of tablet - a consumer version and a pro version. Why? Because the consumer version is half-baked and won’t fly in the enterprise space. (Note to team: Strike that comment).

Houston, Windows 8 has a problem. Actually, several. But let’s ignore those warning lights for now. We’ve a tablet to deploy. Among other things, the touch interface doesn’t access all of Office’s functionality. Actually, none of it. No worries. The consumer tablet won’t run Office. What about that ‘building a tablet around Office’ strategy? Not needed for the consumer version. They’ll just run apps. Or, at least they would if we had any. No worries. We’ll get developers to make some. The touch interface still has problems, it can’t do Office for the pro version. No worries. We’ll add a keyboard, and stick it on both the consumer and pro versions. All functions can be accessed through the keyboard. Isn’t a tablet supposed to run with a touch interface? No, because people really like keyboards. And they like the desktop motif. To wit: we’ll add a USB port for physical media, just like a PC. If people like their PCs, they’ll love this PC-like Windows/Office tablet with its keyboard and USB port. MS declare that it’s not the post-PC era, it’s the Windows 8 era.

MS launch the consumer tablet. The trajectory is…low. No worries. The pro version with Office will provide a halo effect and the trajectory will climb. The pro version launches. The trajectory is…‘classified’.

Houston, we really need to discuss those problems. The interface; people find it confusing.  It’s contrary to legacy. Even if they figure it out, there are no apps. Not many anyway. So, consumers are not having fun. And the workhorse pro tablet? The keyboard is suboptimal. It’s hard to get Office to be as responsive as on the desktop. So, we have consumer tablet with a confusing interface and no apps. We have a pro tablet with a dodgy keyboard, which creates a suboptimal Office user experience. Could these problems be correlated with poor sales performance? No.

Besides, we have a new fix. We’ll bring back the Start button. We’ll call it, Windows 8.1. What about the ‘no apps’ problem? What about the dodgy keyboard and suboptimal Office user experience problem? Answer: we’ll get developers to write apps. Problem: how to do so without sales? Solution: We’ll remind them that we’re MS and we have Windows. We’ll lampoon the iPad and tell people that they’re not as happy with it as they think they are. That should bring everyone, consumers, the enterprise and developers to the Surface.

While this scenario mightn’t be entirely accurate, MS making tablets is reminiscent of Jack Skellington ‘making Christmas’, or worse, Humpty Dumpty on the wall.

RonMacGuy

Hi wab95, hope you are well.

I detected a bit more in your post than the obvious.  Thanks for the clarification!!  You take the same approach as I do at times…  I was a bit harsh this time around, I suppose.

BTW, your last post was beautiful!!  Gave me a good chuckle.  Thanks.  You should take a shot at the android side of the iPad competition!!

wab95

Many thanks, Ron.

Thus far, there isn’t much to say about the Android tablet effort, although it has shown some momentum of late, but not functional competition by usage data.

The vexing element in MS’s poor performance is that Windows 8 is original, as is MS’s phone OS. One therefore wishes to see that effort rewarded with uptake. On the other hand, whom would that be? The early adopters, who are the most facile in adaptability and finding solutions within incomplete ecosystems have already committed to either iOS or Android. Those who now comprise the potential Windows market are less likely to be of the same ilk as those hardy explorers and first adopters, and therefore, if they want the same services and functionality as their iOS counterparts in the face of fewer apps and music offerings, are more likely to simple choose iOS, perhaps Android.

MS have further confounded their efforts by providing hardware solutions (tablets) that defy consensus on what a tablet should be by lashing it to yesteryear’s PC motif, albeit endowed with a measure of touch interface. This is akin offering a motorcycle customer a three-wheeler replete with a chassis and steering column, and oh yes, a passenger seat. Clearly more car than bike, a negative sales response shouldn’t be a surprise.

In any case, I openly question (and have questioned in John’s PD column) whether it is in MS’s DNA to effectively compete in the post-PC era with an ultraportable solution that people want. The window of opportunity is fast closing.

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