Following Microsoft's Q4 earnings report everyone knew the Surface tablets had been a failure, but to what extent they failed was still unknown. A filing with the Securities and Exchange Commission has now revealed Microsoft's gross overestimate of what it could sell.
Since the Surface debut last fall, Microsoft has only made $853 million from them, significantly less than the $900 million spent on Surface RT inventory adjustments as well as the $898 million spent on Surface and Windows 8 advertising.
The Surface RT write-down value was first announced in Microsoft's initial Q4 earnings report but at that time there was no Surface revenue with which to compare it. Since the write-down -- which decreased the Surface's value in an attempt to increase -- was worth more than the full-year revenue for the product, Microsoft may have made the wrong decision with its inventory adjustments.
Where it went Awry
From the beginning, the Surface was set as a direct competitor to the iPad, and in 2012 the Surface RT was priced at $499 just as the iPad was. Unfortunately, price matching has not worked for Microsoft. When launching the Zune, Microsoft tried to match the iPod, which resulted in a market failure. The same thing seems to have occurred with the Surface.
Despite some of the specs being higher, along with a higher profit margin, there were multiple things that prevented the Surface RT from selling. One of the largest factors preventing sales was the lack of interest from consumers, who were hooked on the iPad and did not see enough in the Surface that made it worth switching to.
The most important difference between the $499 Surface and $499 iPad was the larger storage capacity on the Surface; however, Microsoft ruined that advantage by taking up almost all the extra storage simply by installing Windows.
Without at least a full version of Windows that could run legacy Windows software, the Surface RT was doomed to fail without anything near the number of apps the iPad had. The primary issue with the Surface ended up being an overstock of the device rather than a lack of sales. By manufacturing millions of units in anticipation of tremendous sales, Microsoft has been left with an estimated 6 million unsold Surface RT tablets.
Not an iPad Competitor
The longstanding feud between the late Steve Jobs and Bill Gates has seemingly forced all Microsoft products into direct competition with their Apple counterparts. By believing the Surface was better or had a chance of selling like the iPad, Microsoft's strategy failed.
"They have not adjusted to a changed marketplace," said analyst Jeff Kagan. "Microsoft still operates in the same heavy-handed way they always did."
Recent reports from Bloomberg and from other analysts have shown that only around 1.5 million Surface RT and Surface Pro tablets have been sold ,whereas 14.6 million iPads have been sold just in one quarter. These types of sales are something that the Surface will have a hard time matching and by overestimating their potential, Microsoft is now dealing with the Surface's failure.
"The problem they have now is overcoming a bad first impression," said Rob Enderle, principal analyst with the Enderle Group. "If you are going to target a product like the iPad you have to be seen as having something clearly better -- not two things, neither of which appear to truly stand out as clearly better."