Why Microsoft's Tablet Is Officially a Flop

Remember when Microsoft (NASDAQ: MSFT  ) unveiled the Surface last year? Ads for its answer to Apple's (NASDAQ: AAPL  ) iPad seemed to be everywhere, with business-casual breakdancers flying across TV screens, the Internet, billboards, and pretty much any other place you can stick a commercial. Given how heavily plugged it was, you might think the slick new tablet would perform outstandingly since its October release.

You would be very wrong.

The Surface's sales figures are out, and they're far below Microsoft's expectations. Should Microsoft be concerned, and will this affect its strength as an investment?

Breaking down the stats
According to Bloomberg, Microsoft originally purchased 3 million Surfaces from its manufacturers, and within the past five months, the company has sold only 1.5 million. Ouch.

Out of the total amount of Surfaces sold, 0.4 million units have been the Surface Pro, while 1.1 million have been the cheaper Surface RT. This might look like a depressing stat for the Pro, but the more expensive version was released four months after the RT, and so far the Pro is selling at a faster rate. The Pro has sold 0.4 million units in little over a month, while it took five months for the Surface RT to sell 2.75 times that amount.

If the Pro and RT continue at this rate, Microsoft will be able to sell off the rest of its Surface inventory by October. But when Apple is selling 58.31 million iPads annually, Microsoft's Surface is hardly taking a bite out of the market share.

But what I really want to do is make pens
Surface's sales stats aren't good news for Microsoft's foray into hardware, but the tech giant's CEO, Steve Ballmer, doesn't appear to be worried. In a recent interview with MIT's Technology Review, Ballmer said he was "super-glad [Microsoft] did Surface," but that the company was trying to use this product as a gateway to a new idea: the computerized pen.

Huh?

"We've been talking about pen computing for years, but it was hard to do that with OEMs who were not equally incentivized," Ballmer said. "Now we're trying to lead a little bit with Surface Pro. We have a model that allows OEMs to move with us." In other words, Microsoft created Surface to be a playing field for the company's new ambitious device.

Going beneath the Surface
These disappointing Surface statistics are certainly a loss for Microsoft, but that's no reason to rule out the company. Internet Explorer is still the dominant force in Web browsers, and Microsoft Office Suite is practically the default administrative tool belt for offices everywhere. And now, according to its CEO, the company's tablet was less an attempt to rip off Apple's iPad and more a springboard for a new innovation. We'll see how this holds up in time. For now, it's hard to deny that the Surface looks and acts like an iPad, but certainly doesn't sell like one.

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 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 (9) | Recommend This Article (2)

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  • Report this Comment On March 30, 2013, at 8:44 PM, normcf wrote:

    So, they spent > $1B advertising a "gateway to a new idea"? They didn't need to spend that much to scare the OEMs. Now that the OEMs see how desirable microsoft's vision is after a huge marketing campaign, are they likelier to build more of the same. A lot of OEMs are taking a "wait and see" attitude. By the time W8 is proven a hit, the competitors will have changed the market forever.

  • Report this Comment On March 30, 2013, at 10:56 PM, techy46 wrote:

    Nice try but Bloomberg and the Fools are using sales figures pieced together from 2nd and 3rd hand sources with no sales numbers relased from Microsoft yet. I'm not saying they sold more then the 1.5 milion quoted but it doesn't matter anyway. See most Windows users, and I'm one, have looked around and decided that if you're a mobile road warrior the Surface Pro is the best buy but if you're really doing work then somethinh like Lenovo's Z400 (14") or 500 (15") Touch is really what's needed. I holding until I see if Intel new Haswell chips really make a difference but I'll probably get the Z400 and then a Surface Pro later just as a mToy.

  • Report this Comment On March 31, 2013, at 6:14 AM, H3D wrote:

    @techy46

    Come on , your bigger than that.

    It could have been worse. It could have been another Kin.

    But get real. Microsoft no longer carry any real weight other than for continuity in a handful of legacy products.

    They have zero capacity to set the agenda going forward.

    Expect to see sales falling and margins falling from here on in.

  • Report this Comment On March 31, 2013, at 7:07 AM, u1w1e wrote:

    Surface Pro was launched in the US & Canada only with very limited availability in the first 2-3 weeks. If they managed to sell 400000 in the first 5 weeks, that is maybe really not to bad. Sounds like a multi-billion dollar business on an anual basis. Obviously the surface marketing has space to grow in terms of channels, device types and global reach ...

    At this point of time the current surface line lacks in some aspects the appeal of the iPad. It is not a good replacement for expensive earrings you give to your wife. But e.g. for mobile workers surface can make a lot of sense: In your office you connect it to a usb3 docking station and have a full-blown pc. While traveling you have an ultra-light and ultra-stable device that for many is a good-enough tablet as well.

    It certainly was a tough decision with regard to the potential conflict with the OEMs. Personally I think the OEMs deserved that lesson. MSFT had to show them how to do it.

    MSFT does not need to become Apple. Unlike Apple that depends 90% on their gadget sales, MSFT actually also sells some software and they do that very successful at any level of enterprise computing.

  • Report this Comment On March 31, 2013, at 12:44 PM, BTschannen wrote:

    I don't believe Microsoft is as concerned as the public when it comes to the Surface sales. They know that the people that are buying it are happy with the purchase. Keep in mind that every Surface Pro sold, there is about an 80% chance that the consumer is buying Microsoft Office 2013 because it does not come on the surface. Microsoft is not trying to become AAPL in this space.

  • Report this Comment On March 31, 2013, at 8:31 PM, ConstableOdo wrote:

    Microsoft already explained that their tablets were just tools to show how their OEM's should build tablet products. MS isn't making much money from computer hardware, anyway, so their gamble merely didn't pay off as well as could be expected. Microsoft still has a long life ahead of it despite slow tablet sales.

  • Report this Comment On March 31, 2013, at 8:55 PM, RandomMeaning wrote:

    "Keep in mind that every Surface Pro sold, there is about an 80% chance that the consumer is buying Microsoft Office 2013 because it does not come on the surface."

    I would say that there's about a 100% chance that anyone who owns a Surface Pro already has Microsoft Office on a laptop and quite probably a desktop too. Much more effectively due to almost certainly larger screens, better keyboards, and a better mouse or touchpad. Not too mention a better chipset and more ports.

    Essentially, Surface Pro is a poor man's netbook at a premium price with the questionable honor of sometimes using it as tablet (which few people are doing based on discussions and observations) and a one position kickstand. I'm sure there's a niche for such a device but it seems to about the same as the tablet devotees of 10 years ago.

  • Report this Comment On March 31, 2013, at 10:28 PM, butthead2u wrote:

    People who understand design understand that flops/failures are opportunities to learn valuable lessons. At least Ballmer knows when to cut his losses and walk away rather than to continue to dump money into a bad product.

    People often point to Zune as a failure but Zune brought the metro interface and is still in use in the phone. Why would you sell the Zune and the phones when phones are subsidized?

    This race has just started, I think Microsoft will come out with another killer feature like Kinect was for Xbox and set themselves apart from the rest of the crowd. Perhaps this is why Michael Dell wants to buy back Dell computer.

    Want to talk about flops? How about Newton, Pippin and the fifteen years before iPod?

  • Report this Comment On March 31, 2013, at 11:39 PM, DrewWilliams wrote:

    "Why Microsoft's Tablet Is Officially a Flop"... wow... a little impatient maybe? I've been using the Surface Pro for about a month now. It's the best business device I've come across (and have tried them all). I love this thing. I have a hard time believing that this much goodness won't find an audience... especially among a very significant Windows user base. Check back in a year.

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