Microsoft's $900 million Surface RT write-down: How did this happen?

Microsoft's $900 million Surface RT write-down: How did this happen?

Summary: Microsoft's Surface General Manager reiterated the company is committed to Surface RT and Windows RT, in spite of today's write-down of the company's iPad competitor.

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Microsoft announced a $900 million "inventory adjustment" charge for its Surface RTs, parts and accessories on July 18. That write-down completely overshadowed the performance of the rest of the products and services that contributed to the company's Q4 2013 earnings.

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(Among those overshadowed was Office 365 -- the Microsoft subscription service via which it provides Office client and hosted Office server apps. Office 365 is now on a $1.5 billion run rate, up from the $1 billion run rate it hit in Q3 FY2013. Another that got eclipsed: Windows Phone -- plus Android patent licensing -- increased $222 million for the quarter.)

The biggest question, to my mind, about today's unexpected Surface RT write-down is how did Microsoft find itself in this predicament in the first place? How did officials seemingly misestimate the number of Surface RTs they should have made and how much they should have charged for them?

I had a chance to ask Brian Hall, the General Manager of Surface Marketing, that very question. Unsurprisingly, he wouldn't address this. But he did say that Microsoft is 100 percent committed to Surface RT and Windows RT going forward and has no plans to drop work on either product.

At the now-reduced $350 price (plus another $100-plus per keyboard), Microsoft believes it is righly positioned for success with the product, its officials said today. Hall elaborated, by saying that Microsoft officials believe that by getting more Surface RTs into more users' hands, demand will accelerate for the product. 

"We know we need a lot of Surface users to start the fly wheel of people recommending it," Hall said.

In addition to cutting the price, Microsoft also has slowly expanded Surface RT's distribution, most recently adding a handful of resellers to the mix.

But many of the factors beyond price that have contributed to the lackluster demand for the Surface RT haven't changed all that much.

There are still few, if any, "killer" Windows Store apps that might push someone to choose a Surface RT over an iPad or an Android tablet. In fact, the total number of Surface RT apps is still quite low (around 100,000), nine months after the product launched.

The performance of the Surface RT still feels sluggish, thanks to the Tegra ARM processor powering the device -- though it's somewhat better after putting Windows 8.1 preview on the device.

There are still relatively few physical stores where potential Surface RT customers can try out a device to see if they're interested in buying one. Microsoft's Surface ads are nothing to write home about, though they have started to get better -- especially the Siri-centric ones.

But again, why did Microsoft make so many Surface RTs? If some back-of-the-napkin calculations are right, Microsoft may be sitting on an inventory of 6 million unsold Surface RTs. (Microsoft won't say how many devices they made or sold.)

Isn't this a company whose officials have prided themselves on telemetry data and visibility? Yes, it was the first time Microsoft was making its own PCs, but the company has made its own gaming console, mice and keyboards in the past, so there were people at the company who knew a considerable amount about supply chains.

Would a different operating system have made much, if any difference in the success of the Surface RT? Microsoft spent years porting Windows to ARM and finally launched it in the form of Windows RT. Would acceptance of the Surface RT have been better if Microsoft had just used the Windows Phone OS to power Surface RT instead? (I recall hearing that the relative newness of the Windows Phone OS was at least one of the reasons Microsoft decided against using it.) I asked Hall if Microsoft is or might consider putting the Windows Phone OS on a future Surface RT model and was told no comment.

Would opting to wait for a more powerful ARM chip have boosted Surface RT sales, even if it meant Microsoft missed holiday 2012 with the devices? Would launching the Surface Pro ahead of the Surface RT have primed the market any better for a device that couldn't run almost any Win32 apps?

I saw a couple of folks tweet that they now fear that Microsoft will end up discontinuing Surface RT, the same way the company dropped the Zune after finally getting it relatively right with the Zune HD. The damage to the brand and lack of a true competitive product was done by the time Microsoft finally got the mix right. I'd expect the old "we can't hear you" Microsoft to persist with the Surface RT's successors regardless of what the market said/did. The new Microsoft may be less likely to do so, I'd think.

But Hall reiterated that Microsoft has no plans to stop work on Windows RT or Surface RT. He wouldn't drop any hints about what's next for Surface RT, but recently officials said to expect new Surface accessories and a Surface RT update of some unspecified kind to arrive in fiscal 2014, which ends on June 30, 2014. When I asked if a 4G LTE-enabled Surfce RT device was in the pipeline, Hall would only say "we see lots of tablets sold with LTE."

Microsoft plans to push the Surface RT as an iPad competitor, emphasizing its role as a "productivity tablet" running Office -- plus its relatively lower price -- as its main differentiators, Hall said.

Topics: Microsoft Surface, Microsoft, Tablets, ARM, PCs, Windows 8

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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242 comments
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  • Lets not be thick.

    MJF knows that Windows RT8.1 wasn't developed just for existing Surface owners. And we know there is an 8" Surface coming with a Snapdragon 800 processor. There are a lot of silly sensational questions in this blog post.

    Also Windows RT having 100K apps is hardly unimpressive after 9 months. Windows Phone only has 160,000 apps after 33 months. How would WP8 make Surface more desirable? That doesn't even make sense.
    cool8man
    • I read but ....

      Who did not see this coming? It would have been more surprising if MS had not had to do this.
      The RT; a tablet sized netbook with less capability, less functionality, and costs more.

      When the RT was launched, I asked myself what is it about the RT that would make me leave Android or iOS. Not a thing.

      So, once again, who didn't see this one coming?
      rhonin
      • Don't you realise?

        Don't you realise that what you call a 'tablet sized netbook with less capability' could more accurately be described as a tablet with MORE capability.

        I don't know why detractors get hung up on the fact that Windows RT has less functionality than a full PC while ignoring the fact that it has much more functionality than the tablets who share its form factor.

        I have a 9" Android tablet and a 10-inch Surface RT. Both are about the same size/weight and similar form factor. Both run a touch-centric OS. Only one of them lets me plug USB devices in, run two apps on the screen at once, have a desktop available for occasional Office use, etc.

        Why the hell are trolls like you trying so hard to position this extra functionality as a negative?

        Why is everyone so hung up on the iPad definition of a tablet that a tablet that can do MORE is considered a bad thing? That is ridiculous.

        Windows RT has its issues (not a great app selection, immature OS to mention a couple). Having less functionality than a full PC is not considered a problem on iOS or Android, so why should it be for Windows RT?
        allusernamestaken
        • Exactly

          +1

          And please intall 8.1 preview. It is a must and makes a huge difference.
          Asgardii
          • Windows tablet

            I find the idea of a Windows tablet intriguing as I wouldn't have to buy a bunch of apps to turn my Other tablet into a Windows tablet. Unfortunately the Metro interface looks like digital diarrhea to me. I thought I was in the old kook minority with this, but perhaps it's one of those New Coke things that's doomed for a variety of reasons that have nothing to do with the quality of the product.
            Evil Sandmich
          • Digital future, actually

            Considering Apple has come around to a digital-focused style guide, going forward you'll be seeing a lot less of the simulated wood/leather/paper/chrome approach and a lot more of the content-first approach.
            scH4MMER
        • It's not us personally putting down the Surface RT

          It's the entire consumer market.
          akaltman
          • Here is a blast from the past

            Businessweek gushes about the Surface RT: http://www.businessweek.com/articles/2012-06-19/why-microsofts-surface-tablet-should-shame-the-pc-industry
            Zendabecca
        • Less capable

          because of less number of useful software. Don't you realize? Software is what matters. Developers target iOS and Android devices first, leaving little room or hope for Windows RT to be the first in line to get high profile apps, or even app updates.

          It is quite clear, even today, you can do more with netbooks than Surface RT. Why would consumers choose a device that they can do less with, and costs more? Even at $350, it isn't very competitive against many lower priced Android tablets. Nook HD+ has even better screen than Surface RT, but less than half the cost!

          MS should price Surface RT at $250, then it will sell, and will be a wise investment for future. They need to expand the market share first, before they can do anything else.
          conix67
          • Foolishy argument

            Yes, there are less applications, but do you really believe that developers are going to stop writing applications for Windows? Forget tablet specific applications, other than games they are mostly useless anyway. Going forward, any software written for Windows will end up being metro, and the majority of these will run on both Windows Pro and Windows Rt.
            jebailey1120
          • I'm a big Windows 8 fan

            but the consumer isn't going to spend $500 for software that will be written in the next year or 2. I was shopping and bought a touch laptop at Xmas because I wasn't Metro and the desktop. I wanted to be able to use the touch, mouse and keyboard. I paid 539 and got a touch screen with a 500 GB HD and 4 gigs of ram that i increased to 8. I use both Metro and desktop software. I like the Pro but not like $1000 like.
            Orlbuckeye76
          • The problem is decent Apps are NOT comming

            The developers have looked and listened about Microsoft's Windows 8 and Metro. And have respond with a great big 'nah'. Me included, I have developed many games for WP7, because it had a good developer relationship with Silver light and XNA. Windows 8 requires another Developer lisence and does not support XNA.

            So all the developers who told Microsoft so, are sitting back rather bemused at S Ballmers suggestions that we would come running to this platform. There really is no incentive as we share the same feelings about Windows 8 and Microsoft's arrogance.
            JulesVerny
          • The thought that decent apps are not coming is pure rubbish.

            You might as well say tomorrow isn't coming. Tomorrow will indeed arrive no matter what happens and so will new Win8 apps. Its inevitable, like it or not.

            How do we get these radically bizarre opinions?
            Cayble
          • Back to the Mothership, Please...

            Yeah, because we've all got the time, money and desire - to say nothing of employers willing to pay us - to invest, develop applications for a platform whose economic feasibility is unflinchingly near zero and getting no better.

            Cathartic to hear so many others saying so (not that Redmond shows any sign of listening), but I, too, checked out after the contemptible Silverlight debacle and moved on to other platforms. Now watching WinRT and Windows 8 die from the sidelines, just as predicted, and thinking with great sadness, just what might have been, but for the arrogance of those who wrought so much destruction...
            QuantumEntanglement
          • Not so

            I am a Windows developer, and I will not write to the WinRT API. I, like many developers, am too alienated by what was done to Silverlight, .NET, and the lame .NET Metro profile.

            And as a Windows developer, I'm not going to target the small number of Metro users. I'm going to target the vast array of Windows users - from XP on up. Why would it make any economic sense for me to do otherwise?
            Mac_PC_FenceSitter
          • ditto plus plus

            Same here. As a silverlight developer who got knifed in the back by MS, I'm done with native windows clients. I was an MFC ninja, WinForms guru, and pretty competent with Silverlight too. But I'm not gonna do WinRT/metro. It's HTML5 now, baby!.
            glonq
          • html5

            You have a point..

            Maybe on the desktop but html5 development is at least twice as expensive as Xaml for the same look.. There is also a big trend to return to native for hand held apps to save memory and give a better experience through speed.

            That said the WinRT API is the best and most secure API there is.. its an excellent design.
            bklooste
          • will developers write mote desktop or WinRT software?

            That's the big question. If they also want to produce versions for other OSes, desktop is a better choice.

            With enterprises giving Windows 8 a pass since most of them just upgraded to Windows 7, there's unlikely to be many key workplace apps for years. That means most apps are going to be home/leisure/entertainment. In that domain, does the Windows Store have enough to compete against Apple and Google? Maybe not.
            hrlngrv 
          • Foolish?

            You mean Surface Pro and Surface RT? Or Windows RT and Windows 8.x?

            There is a large number of platforms out there that cannot handle Metro apps - called Windows 7. And majority of that is called enterprise market.

            Developers writing Metro apps will still need to write Win32 apps to cover the *larger* market, that appears to stay *larger* for a foreseeable future.

            On top of that, MS having trouble rolling out a Metro app of their own, called MS office, isn't going to convince developers that it's easier to write for Metro than Windows desktop apps.

            Unless Surface RT gains significant chunk of market share, 20% or larger in tablet PC market, many developers will not be interested in Metro apps.
            conix67
          • Re: developers are going to stop writing applications for Windows

            Let's face it. This is NOT Windows.

            Microsoft should have clearly avoided the "Windows" part in the name of this new OS. Had they done so, it could have had some chance...

            WinRT was more or less reasonable copy of the iOS API model, but it is too different from what users and developers know as Windows.
            danbi