Microsoft Lost $900 Million on Surface RT in Q1

Today, as part of its Q4 earnings report, Microsoft announced that it has incurred a $900 million loss due to its struggling Surface RT tablet. While the company otherwise reported $4.97 billion in earnings from $19.9 billion in revenue, the Surface RT cost the company a significant sum as a result of "inventory adjustments."

The news comes on the heels of Microsoft's $150 price drop on the Surface RT, now carrying a $349 MSRP for the 32GB model and $449 for the 64GB version. While Microsoft has not released specific sales statistics, IDC figures for Q1 placed Surface sales at under a million, with the Surface Pro accounting for a majority of total units sold.

Based on a stripped down version of Windows 8 and running apps optimized for touchscreen interfaces, the Surface RT acts as Microsoft's alternative to the iPad and Android-based tablets. However, with a limited array of compatible apps and the Surface Pro offering a far greater level of versatility, the Surface RT has struggled to find an audience.

For more, check out our comprehensive reviews of the Microsoft Surface RT and Surface Pro.

Scott Lowe is IGN's resident tech expert and Executive Editor of IGN Tech. You can follow him on Twitter at @ScottLowe and on MyIGN at Scott-IGN.

Bits Blog: Why the Surface RT Failed and the iPad Did Not

The Microsoft Surface RT, left, and the Apple iPad.

At first glance, to most consumers, the Apple iPad and Microsoft Surface RT tablet computer look somewhat similar. They are both rectangular, have crisp screens and can boast a slick and clean design interface.

Yet on Thursday Microsoft announced that it was taking a $900 million write-down to reflect unsold inventory of the Surface RT. That’s a stark comparison to Apple’s iPad, which continues to break record sales and has sold more than 100 million devices.

So why is one still succeeding while the other has failed? I have a theory. But it begins with a story.

I often receive tech support phone calls from family members — my dad, grandfather, cousins — seeking help with a variety of computer problems. A few months ago I received such a call from my sister. She was having an issue with her iMac, and I started to walk her through a number of steps to diagnose the problem. Halfway though my narration, I asked her, “O.K., what’s the computer doing now?”

“My computer is restarting,” she said, triumphantly.

“Why, what happened?” I said, confused. “Did it crash?”

“No, I just got impatient so I unplugged it and plugged it back in.”

This is exactly one reason the Microsoft Surface RT failed to garner large sales: Impatience.

When Steve Ballmer, Microsoft’s chief executive, announced the Surface tablets last year, he stood on stage and touted a number of new and exciting features to try to separate the company’s offerings from the iPad. Among the new gizmos were additional ports, a USB drive, a microSD memory card slot, the ability to use a pen with the Surface Pro and a built-in flip-up stand. Pens sold by Microsoft also work with the Surface RT.

Just thinking about all those options is enough to make your head spin.

Today’s consumers don’t want options. They are impatient. They want to tear their new shiny gadget from the box and immediately start using it. They don’t have time to think about SD cards or USB drives or pens or flip stands.

The Surface RT didn’t allow that. Customers had to think about it.

Even the ads for the iPad and Surface RT are different. Apple simply shows the device, making the iPad the hero. Microsoft usually unveils snazzy ads that make the ads the hero, not the product.

Last year when the Surface RT was announced I wrote a post noting that one of the device’s new features did look appealing: the flap that doubled as a keyboard and might make it easier to type on a tablet. But Sarah Rotman Epps, an analyst with Forrester Research who specializes in tablets, reminded me that too many options could easily overwhelm consumers.

“Microsoft will be its own worst enemy in this market,” Ms. Rotman Epps wrote at the time. “More so than Apple or Google. Apple gets this, and limits options to connectivity, storage and black… or white.”

Maybe it’s time for Microsoft to do the same thing. It could even skip the black or white option.

This post has been revised to reflect the following correction:

Correction: July 19, 2013

An image associated with earlier version of this post misidentified one of Microsoft's tablets. It was the Surface Pro, not the Surface RT.

Microsoft Profit Misses as Surface Tablets Languish; Shares Drop

The stock fell 5 percent after hours from 5-year highs.

The massive charge underlines the struggles of the world's largest software company, which last week announced a deep reorganization to transform itself into a "devices and services" leader, but is struggling to make mobile computing as attractive as Apple Inc or Google Inc.

"That's the biggest miss we've ever seen from Microsoft, the biggest that I could remember," said Brendan Barnicle, an analyst at Pacific Crest Securities. "It looks like everything was weak."

Before the sell-off late Thursday, Microsoft shares had risen 32 percent this year, beating a 19 percent rise in the Standard & Poor's 500 index.

Microsoft said the $900 million charge was related to its Surface RT tablet, the version of its tablet running on ARM Holdings-designed chips. The Surface was meant to challenge Apple's iPad when it was launched alongside Windows 8 in October, but has not sold well.

Earlier this week, Microsoft said it was drastically cutting prices and expanding distribution of the model to entice buyers, reducing the value of Surface devices in its inventory.

"We do know we have to do better, particular in mobile devices," Amy Hood, Microsoft's new chief financial officer, said in a telephone interview. "That's a big reason we made the strategic organizational changes last week."

Microsoft's biggest shake-up in five years, unveiled by Chief Executive Steve Ballmer last week, creates a single devices unit for the first time at the company, suggesting that it will double down on its so-far unsuccessful move into hardware.

Redmond, Washington-based Microsoft reported fiscal fourth-quarter profit of 59 cents per share, compared with a 6 cents per share loss in the year-ago quarter when it wrote off the cost of a failed acquisition.

Wall Street had estimated earnings of 75 cents per share, on average, according to Thomson Reuters I/B/E/S. Excluding the Surface charge, Microsoft reported 66 cents per share profit, a less drastic miss.

Revenue rose 10 percent to $19.9 billion, helped by sales of Microsoft's Office suite of applications, but fell short of analysts' average estimate of $20.7 billion.

Sales of Windows rose slightly, but only because of the inclusion of some deferred revenue, weighed down by an estimated 11 percent dip in PC sales in the quarter.

Microsoft's Windows 8 has sold more than 100 million licenses since launching in October, but is struggling to win over many consumers confused by the new design which is more suited to tablets than traditional PCs. Acknowledging this, Microsoft is releasing a revamped version of the system called Windows 8.1 later this year, which brings back the iconic 'start' button.

(Additional reporting by Liana Baker in New York; Editing by Richard Chang)

Bits Blog: Microsoft Showcases Windows 8 and Surface

The Surface tablet from Microsoft.

Microsoft threw a coming-out party on Thursday for Windows 8 and the Surface tablet, its most significant new products in years. At an event in New York, the company’s chief executive, Steve Ballmer, showcased the tablet and new devices from its hardware partners that run Windows 8, a version of its flagship operating system that Microsoft has reinvented for touch-screen devices. Updates from the event are below.

Well, that’s it for the Windows 8 portion of the presentation. Microsoft will be showing more of its Surface product a bit later. Thanks for following along.

Mr. Ballmer leaves the stage, the lights come up, people are leaving their seats. But Microsoft executives had earlier left the impression that there would be a deeper demonstration of Surface.

Mr. Ballmer talks about the launch of the Windows Store, which could be another source of confusion in its messaging. I keep thinking he’s talking about the company’s retail stores, which are known as Microsoft Stores. Apple avoids this by calling its online software store the App Store.

Mr. Ballmer and other Microsoft executives are sprinkling in references to business-friendly security and other features in Windows 8, but this event is heavily speaking to regular people, not I.T. managers.

Mr. Ballmer describes the essence of Microsoft’s bet with Windows 8: one-size-fits-all devices, from PCs to tablets. Or really two-sizes-fit-all if you include Windows RT. Mr. Ballmer does not mention this issue, which complicates the messaging of Windows 8.

For the first time, Windows has “first rate” tablets, Mr. Ballmer says, acknowledging that past Windows tablets have been second-rate. Mr. Ballmer is repeating the refrain that Windows 8 will be great for people with conventional keyboard-and-mouse PCs, but will shine even more on touch-based devices.

Mr. Ballmer is going through the checklist of Windows 8 features, emphasizing how the “live tile” interface funnels information from the Internet constantly, including from social networks. Picture your start screen filled with pictures of people most important to you, Mr. Ballmer says.

Steve Ballmer, Microsoft’s chief executive, takes the stage and scares everyone a little with the volume of his voice. “I’m a little excited,” Mr. Ballmer jokes.

Mr. Angiulo finally shows Surface, Microsoft’s tablet. They’ve spent nearly all of the first part of the demo on hardware from partners. (A caption with an earlier version of this entry misidentified the device shown. It was the Lenovo ThinkPad Tablet 2, not the Microsoft Surface.)

Ms. Larson-Green and Mr. Angiulo keep describing the array of PCs in front of them as the best PCs ever. If they don’t remind people, will everybody assume that the new Windows 8 devices are slightly worse than the previous generation?

Lucas Jackson/Reuters

Mr. Angiulo is emphasizing the performance benefits of Windows 8 if installed on older Windows 7 PCs that don’t have touchscreens. He shows a Windows 7 laptop that he says starts up 33 percent faster with Windows 8.

Two other Windows executives, Mike Angiulo and Julie Larson-Green, step onto the stage for a demonstration of Windows 8 devices.

Lucas Jackson/ReutersSteven Sinofsky, president of Microsoft’s Windows division.

Mr. Sinofsky segues to Windows RT, a variation of Windows 8 that runs on mobile-friendly ARM processors but can’t run older Windows applications. He talks about how Windows RT devices will maintain their performance over time because users can only download applications from the Windows Store. The implication, unstated, is that Windows 8 will not have the same benefit because it is more open to older applications.

Windows Store represents a major new opportunity for developers, Mr. Sinofsky says. App developers will have the greatest potential number of devices in Windows 8 and the best financial terms, he says.

To ease the move to Windows 8, it will come with a “simple how-to.” No need for manuals, Mr. Sinofsky says. Over 1,000 PCs have been certified for use with Windows 8. There will be fully capable PCs that use Windows 8 priced at less than $300, he says. So far, Mr. Sinofsky has not mentioned Windows RT, a Windows 8-like operating system that will run primarily on tablets.

Windows 8 has been through 1.24 billion hours of pre-release testing by users, according to Mr. Sinofsky. “No product anywhere receives this level of external testing and usage,” he says.

With Windows 8, Microsoft “shunned the incremental,” Mr. Sinofsky says. He heralds the “grand opening” of Windows Store, Microsoft’s equivalent of the Apple App Store.

The world that led to Windows 7 began back in the 1990s, with Windows ’95, which was designed in the pre-Internet era when “we lived in caves,” Mr. Sinofsky says.

Microsoft has sold 670 million licenses of Windows 7 to businesses and consumers, Mr. Sinfosky says.

Steven Sinofsky, president of Microsoft’s Windows division, takes the stage. He heralds “a new era of Windows and Windows-powered PCs.” Three years ago this week, Windows 7 was released.

Lucas Jackson/ReutersSteve Ballmer arrives on Thursday.

The event is commencing with a video of Windows 8 events around the world, accompanied by ear-splitting music.

Microsoft’s Windows 8 event is taking place on an enormous pier over the Hudson that the company has organized into various showcases for Windows 8 devices. The highlight is a scale model of Manhattan built of plywood with Windows tablets resting on top of the buildings.

Gadgetwise Blog: Review of Reviews: The Surface

The Surface tablet from Microsoft.

David Pogue of The New York Times liked the hardware but spotted problems with the software in his review of the Surface.

Here is what others thought.

Matt Buchanan at Buzzfeed wrote, “Surface should be the answer, a tablet that is capable of so much more. It simply isn’t.” He takes a broad look at what Surface is supposed to do for Microsoft in the home and isn’t tickled.

Deadlier still, a lot of what the New Microsoft promises is a total unity across Windows, Xbox and Windows Phone, but my experience with SmartGlass, the new application that connects an Xbox to a Windows device, was not exactly fantastic. The music and video apps baked into Surface were designed and built by the Xbox team, but music, particularly in concert with my Xbox, was totally confounding to use.

Mathew Honan at Wired writes, “This is one of the most exciting pieces of hardware I’ve ever used. It is extremely well-designed; meticulous even.” But he hates the keyboard cover and junky cameras, and calls the display weak. He did like the software:

I’m already addicted to the charms — the five options for search, share, start, devices and settings that fire with a right-side swipe, or via dedicated keys on the Touch and Type Covers. The Search Charm, which lets you search both universally and within specific apps, is particularly hot.

Joshua Topolsky at The Verge was comprehensive but oddly more tentative than the others.

So what to make of this strange hybrid? Is it the next logical step in computing — a transmutable slab which offers the best of the past and the present — or is it something else? A half-step, a feint, a compromise? Can you really have it all, as Microsoft suggests, or is the Surface trying to go in too many directions at once?

Even at the end:

The whole thing is honestly perplexing. If this device is not as good as (or better than) the best tablet, and not a complete alternative to a laptop — who is this for? What is it supposed to be?

Walt Mossberg at AllThingsD said:

I like it. It’s beautifully and solidly built and it’s the purest expression of Microsoft’s new Windows 8 touch screen operating system which, like the Surface, goes on sale on Friday. The new operating system also works on laptops and desktops. It can be operated with a mouse or touch pad, but its dramatically different, touch-optimized user interface begs to be used on a touch screen tablet.

O.K. That may be the outlier. Sam Biddle at Gizmodo seemed to sum up the consensus:

We hadn’t looked forward to something this much in a long, long time. Now it’s here. And it’s been just as long a time since a gadget has been so disappointing. Surface is good, but Surface RT sure isn’t the future. Not yet.

State of the Art: Microsoft Unveils the Surface, Its First Tablet - Review

That’s the sort of choice Microsoft is asking you to make with the spectacularly designed, wildly controversial Surface tablet.

Now, for the very first tablet it has ever manufactured (in fact, its very first computer), Microsoft could have just made another iPad ripoff. But it aimed much higher. It wanted to build a tablet that’s just as good at creating work as it is at organizing it.

On the hardware front, Microsoft has succeeded brilliantly. Read the specs and try not to drool on your keyboard.

The Surface shares some measurements with the full-size iPad (1.5 pounds, 0.4 inches thick). But at 10.8 by 6.7 inches, it’s a wider, thinner rectangle, a better fit for movie playback. It has stereo speakers instead of mono. Both front and back video cameras are 720p high definition.

It has ports and jacks that iPad owners can only dream about: a memory-card slot to expand the storage, a video output jack and a USB 2.0 jack. You can connect almost any USB device: keyboard, mouse, flash drive, speakers, hard drive and so on.

Each Surface model has double the storage of the same-price iPad. For example, the $500 Surface offers 32 gigabytes; the 64-gig Surface is $600.

There are some disappointments on the spec sheet. The battery life is advertised as eight to 10 hours, less than the iPad. There’s no cellular version; it’s Wi-Fi only. The screen is very sharp (1,366 by 768 pixels), but it doesn’t approach the iPad’s Retina screen clarity (2,048 by 1,536 pixels).

And you can charge the Surface only from its wall adapter — not from a computer’s USB jack. Microsoft’s reasoning is that you won’t have a computer to charge from, since your days of carrying both a tablet and a laptop are over. Besides, a wall outlet recharges far faster than USB can.

The front is all touch screen. The edges of the black magnesium body are angled and crisp, like a prop from a Batman movie.

Then there’s the kickstand. The lower half of the back is a hinged panel, held shut magnetically until you pop it out with a fingernail. It snaps to a 22-degree angle, ready to prop the tablet sturdily upright.

A lesser kickstand would add weight, bulk or ugliness. But this one is razor-thin and disappears completely when you’re not using it.

You do use it, though — especially when you flip open the optional keyboard.

Yes, keyboard. You know Apple’s magnetically hinged iPad cover? Microsoft’s Touch Cover is the same idea — same magnet hinge — except that on the inside, there are key shapes, and even a trackpad, formed from slightly raised, fuzzy material. Flip the cover open, flip out the kickstand and boom: you have what amounts to a 1.5-pound PC that sets up anywhere.

This is nothing like those Bluetooth keyboard cases for the iPad. First, the Touch Cover is much, much thinner, 0.13 inches, cardboard thin. Second, it’s not Bluetooth; there’s no setup and no battery hit. The magnet clicks, and keyboard is ready for typing. Third, when you want just a tablet, the keyboard flips around against the back. The Surface automatically disables its keys and displays the on-screen keyboard when it’s time to type.

You can buy this cover, in a choice of colors, with the Surface for $100, or later for $120.

It’s an incredibly slick idea, but the keys don’t move. You’re pounding a flat surface. If you type too fast, the keyboard skips letters. (“If you type 80 words a minute on a keyboard and 20-30 on glass, you should be in the 50s on the Touch Cover,” says a Microsoft representative.)

Halo 4 to Work With Microsoft Surface

Microsoft exec Don Mattrick has revealed that the company's recently announced Surface tablet will work with Halo 4.

According to VentureBeat, the president for interactive entertainment business made the announcement during a panel at the GameBeat 2012 conference.

He didn't make it clear how the Surface tablet would integrate with Halo 4, though it's possible that the company will make use of SmartGlass technology shown at E3 to create a secondary touch-screen display for the console. Mattrick also suggested that Surface tablets will work with titles on future Microsoft consoles, as well as those on Xbox 360.

If Microsoft manage to do this on the Xbox 360, it'd be a huge step towards extending the console's lifespan in the face of the Wii U's release. Nintendo's version of a tablet controller, the GamePad, will require a whole new system to use.

Halo 4 is due out on November 6, while Microsoft has previously stated the surface will release by the end of October.