Microsoft's Real Problem Lies Beneath the Surface

Last week Microsoft (NASDAQ: MSFT  ) dropped a bomb on investors. The company announced $0.59 EPS, quarterly revenue that increased by 10% from last year to $19.8 billion, and revenue for fiscal 2013 was up 6% from the year before... and also announced a $900 million "inventory adjustment" for Surface RTs. Ouch.

But the real issue isn't that Microsoft made too many RTs and can't sell them -- it’s the fact that the company didn't have the insight to see that consumers wouldn't want it in the first place.

Microsoft Surface RT. Source: Microsoft.

The company's inventory adjustment basically means that Microsoft miscalculated demand for the Surface RT, and now many of the devices are sitting in inventory stockpiles, the total amount being as high as 6 million units by some estimates.

Give 'em what they want the first time
This isn't the first time over the past few months that Microsoft realized it misjudged what consumers want. After strong user demand, the company released the Windows 8.1 Preview upgrade last month that brought the Start button back to its OS and an easier way to access the desktop. Around the same time, Microsoft completely back-pedaled on game-sharing restrictions and always-on Internet requirements for its upcoming Xbox One after the gaming community lashed out against the company.

Microsoft cut the Surface RT price last week by $150 because consumers don't want a $500 Surface RT -- and Microsoft can't even be sure they want one for $350.

How can a tech company survive on making products that people don't want? The obvious answer is that it can't. At some point Microsoft needs to stop thinking it knows what users want and actually create a tablet device that they do want. A quick glimpse at the iPad or Samsung's Android tablets would be a good place to start.

But looking to the competition for inspiration seems to be difficult for Microsoft. I think the company is taking an old-guard approach and believes that it should be the No. 1 mobile software OS because it held that top spot in the desktop business for decades.

Microsoft needs to shed a bit of its overconfidence if it wants to move ahead with its products. Investors may be able to stomach the $900 million inventory adjustment, but I can't imagine that it hasn't made them at least a little uneasy. Microsoft has failed to take the simple and straightforward mobile OS approach that Apple and Google have, and the company's paying for it. Instead of thinking of itself as a tech dominator, maybe Microsoft should consider itself the underdog fighting for mobile relevancy. At least then the company would have the right perspective.

While Microsoft's tablets are having a rocky start, it doesn't mean the company is out of the competition just yet. But four other tech companies will duke it out for the top spot -- so Microsoft needs to kick its tactics into high gear. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free tech report. Click here now to get free access.

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  • Report this Comment On July 22, 2013, at 9:26 PM, giveu2tictacs wrote:

    This is what I have noticed with product. Windows 8 is not at all what consumers like at all. Customers want simple. This product is not simple to them. It ends up confusing comparing it to Microsoft's previous OS, Droid based tablets, and Apple based OS. Even those like me who have a Window's OS PC find 8 to be something I would not load on my computer and will keep my OS for as long as I can. What Microsoft should have done was keep their previous OS except place Icons as buttons, shape the folders as tabs making it more flowing. 8 is garbage.

  • Report this Comment On July 22, 2013, at 9:39 PM, marv08 wrote:

    "But looking to the competition for inspiration seems to be difficult for Microsoft."

    Well, I am pretty certain that there are tons of engineers within MS who see that clearly. And seriously, doing a tablet version of Windows Phone (analogous to what Apple and Google have done) would have been a no-brainer. There is at least "a" user base, but more importantly: there are developers and more than 100k apps for it. What would have been required: An updated WP SDK (ideally with provisions for "universal" binaries supporting phones and tablets with individual GUIs, maybe some updated GUI controls and, most importantly, a true touch-endabled and ARM-ready version of MS Office (which the Office version included with the RT clearly isn't). Something Apple has been able to do flawlessly, and even the pretty small and cash-stripped Palm-then-HP WebOS developers achieved.

    So, why does MS not get it right? Certainly not because they can't get inspiration from others (the history of MS is nothing else than a series of rip-offs, from DOS = CP/M to Windows 7's OS X Dock). It is all about Ballmer and his "Windows Everywhere" idiocy. Windows is a productivity system for cheap computers, windowing and a cursor-driven = precise input system are core and center.

    There are no windows or precision input requirements on phones, tablets or TV sets. There are no windows in Windows Phone or Surface RT or Windows 8's modern GUI. Ballmer does not even understand a simple adage like "horses for courses". During his Keynote opening the last developer conference, he made a big point about how important and helpful touch interfaces are on laptops and desktops, but then failed 100% at providing even one valid example (because there is none).

    MS could be a much more serious competitor for Apple and Google, if they would get rid of that Ballmer guy and let somebody with the faintest understanding of usability and the own products handle the matter.

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