3 Failures From the Surface Launch

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Now that the dust has settled around the Microsoft (NASDAQ: MSFT  ) Surface launch, we can take a moment to reflect on how poorly Team Redmond handled this whole affair. From the CEO himself, the Surface is "starting off modestly" in terms of sales. Given Microsoft's struggle to build market share in an increasingly mobile computing world, the words of Steve Ballmer failed to encourage investors that the Surface launch was a success. Unfortunately, this comment drives home how much more successful the Surface launch could have been.

It's too darn high
According to research firm Park Associates, 45% of consumers surveyed expressed interest in the Surface before the pricing was announced. This same survey was conducted after the $599 bundled keyboard price was announced, and only 21% of respondents were still interested.

According to IHS, the same $599 bundled package cost $287 to build. That fancy keyboard-cover-case, which retails for $119, is estimated to cost $16 in parts. This is a great divergence from the company that has a history of product subsidies to boost market share. Perhaps Microsoft has Apple (NASDAQ: AAPL  ) iEnvy, compelling it to place a higher priority on profits?

Before the Surface launch, Microsoft had zero tablet market share, making a strong case for a more aggressive stance on pricing. It could have easily sacrificed some profit to price it the same as the $499 entry-level iPad with Retina Display -- the de facto premium tablet. Based on this estimate, Microsoft could afford to price the Surface to the $329 iPad Mini, potentially killing Apple's iMomentum. Doesn't Microsoft know iEnvy is a deadly sin?

Poor distribution
Initially, the Surface was made available only though Microsoft's online and retail stores. For those keeping track at home, there are only 60 Microsoft retail outlets across the United States. It wasn't until about six weeks after release that the Surface was made available at large-footprint retailers Staples (NASDAQ: SPLS  ) and Best Buy (NYSE: BBY  ) . While that's an improvement, the retail channel is still relatively small compared with Apple's iPad, for which you can also walk into your local Wal-Mart, Target, RadioShack, and then some to see the device in person. Getting back to that whole zero-tablet-market-share thing, a smaller channel does not improve the chances of success. Undoubtedly, this is something Microsoft could have improved on before the launch.

Untrained employees
I live close to one of Microsoft's pop-up kiosks in Denver, and I'm a huge advocate of Peter Lynch's "invest in what you know" philosophy. This was the perfect opportunity for me to do some investigative research to see how the Surface was faring firsthand. I visited the kiosk on numerous occasions to get a general feel how Microsoft sells the idea of the Surface to consumers. I came armed with questions about the Surface against the competition, and about Windows RT versus Windows 8. When I started getting technical, two sales representatives gave away how poorly trained they were. I asked them why I should buy the Surface RT over the $249 Google (NASDAQ: GOOGL  ) Chromebook, and neither sales representative even knew what a Chromebook was. A Chromebook is a Google-branded laptop that features Chrome OS, essentially a bare-bones laptop that uses the Chrome browser as its operating system. For simple computing needs, it makes a compelling case against other light computing devices.

To begin with, the Surface RT is a confusing sell because it features the completely new Windows RT operating system that offers no backwards compatibility with previous versions of Windows. All existing Windows apps have to be repurposed for Windows RT, making it extremely important for Microsoft's sales force to deeply understand the product they are selling and how it fits into the competitive landscape.

Validating my feelings of disappointment, The Verge experienced similar findings that Microsoft failed to adequately train its employees. The author spoke with eight of Microsoft's sales representatives and found that half gave wrong information about the Surface, Windows RT, and its differences from full-blown Windows 8.

What this means for investors
Execution is just as important as engineering. If the Surface launch was any indication, Microsoft needs to invest more time on its delivery of new products. Pricing issues aside, Microsoft could benefit from improving its distribution channel and developing a more robust employee training manual.

Come next year, Microsoft will do it all over again by releasing a Pro version of the Surface, featuring full-blown Windows 8, and an Intel (NASDAQ: INTC  ) processor. According to Gartner, worldwide PC shipments declined 8% in the third quarter since last year, increasing the importance of Microsoft's role as a PC supply-chain savior. These factors have cast a cloud of doubt around the future trajectory of Microsoft's shares. In the end, if Microsoft wants to improve shareholder perception, it ought to work harder at improving its chances of success. And until that happens, this hold rating stands.

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

Read/Post Comments (10) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2012, at 2:33 PM, DoctorLewis4 wrote:

    Was at a mall that had both Microsoft Store and Apple Store. Microsoft store had more employees then customers. Apple store, of course, was a mob scene.

  • Report this Comment On December 29, 2012, at 4:04 PM, bsimpsen wrote:

    Had Microsoft priced the Surface at $329, how many third party PC manufacturers do you think would join the Windows tablet camp, knowing that the BOM + Windows license fee would likely have them selling at a loss to compete?

    Unless Microsoft can offer a mobile value proposition that's more compelling than Android or Apple, it's not going anywhere. I don't yet see how they can do that.

  • Report this Comment On December 29, 2012, at 5:04 PM, herky46q wrote:

    Once I finally got my hands on a Surface at a Best Buy, I wanted to like it but could not. The iPad is tons better.

  • Report this Comment On December 29, 2012, at 5:21 PM, marv08 wrote:

    Well, you can't base a sales price on the BOM alone. MS learned that with the Xbox RROD disaster. They had to write off billions of Dollars.

    The Surface RT offers not much of after sales opportunities for MS (there are no higher OS versions to upsell to, Office is already included and internationally, MS share in book, movie and music sales is abysmal).

    With a brand new product line you have to factor in R&D cost (moving Windows to an ARM architecture did not come for free), risk of above average returns and failures, huge marketing budget etc. Selling the device at $329 would mean an effective loss. Selling at a loss would certainly get the competition watchdogs alerted, MS is still under watch in quite a few places. E.g. the EU will certainly have some questions and eventually fines for the sheer fact that you can't install a competing browser...

    The distribution argument does not work either. All analysts reported that sales did not improve significantly after the distribution went bigger.

    The device is simply not compelling. It is neither a good tablet (too heavy, not good for portrait orientation, not enough tablet apps), nor a good laptop replacement (no support for real Windows applications, substandard keyboard, flimsy trackpad, unusable on the lap). And all that at a price that is above better tablets and better notebooks.

  • Report this Comment On December 29, 2012, at 6:06 PM, toddtrevor wrote:

    Once the Surface is available at Costco and other suppliers and the Win 8 version is out there I will purchase my tablet just waiting for the other Surface model, already have ipad works great but want something completely new that works with my PC I am no great computer savvy person I just like what I see and hope MS Signature version and other high quality hardware with all there software does the trick

  • Report this Comment On December 30, 2012, at 12:02 AM, jhf678 wrote:

    I like the Surface very much after I saw the ad on TV. The Keyboard is very nice. I can work during the day and do reading in bed at night. Love it. I know there are some iPad faithful oht there don't want to give it a try. I also have the iPad but Surface is more professional.

  • Report this Comment On December 30, 2012, at 12:36 AM, RandomMeaning wrote:

    Microsoft was hoping that loyalists would buy the Surface sight-unseen from their website because they knew that once people were able to compare the Surface with any decent tablet or laptop currently available, its many deficiencies would be highly evident.

    And the whole "MS graciously chose a higher price to allow their poor little lost lamb partners room to hawk their wares" is clearly ridiculous. If MS were concerned about their partners, they would have handed the blue prints over to them instead of directly competing against them.

    MS can no longer blame their partners for their mishaps. They have launched their best effort in OS and hardware. And people just aren't buying it. Their payed posters can spin it all they want but the truth is highly evident to all. The post pros are actually doing more harm to MS's reputation than good.

  • Report this Comment On December 30, 2012, at 1:18 AM, tychicum wrote:

    Even the name is stupid.

  • Report this Comment On December 30, 2012, at 2:47 AM, TheSourceX wrote:

    Could be worse. Anyone remember the RIM playbook?

    Yes HPD, I just went there...

  • Report this Comment On December 30, 2012, at 9:56 AM, RandomMeaning wrote:

    whsteffan, your posts are nonsensical (not to mention errant in your conjectures). Also, your attempts to bully others into silence undercuts whatever tech point you were trying to make. Stick to the topic if you have any actual substance to offer.

    Interesting how Microsoft's supporters often have difficulty with simple punctuation, grammar, and spelling. The last one is particularly surprising given that just about any modern device should be able to handle basic spelling. Kind of makes you wonder about how bad their tech must be . . .

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