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

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.