Has the Microsoft Surface Really Been a Failure?

Microsoft  (NASDAQ: MSFT  ) has been hammered over the past two weeks because sales of Windows 8 and Microsoft Surface were lower than expected. Yes, the Microsoft Surface RT was a disappointment, and with a $900 million write-,down the device took a big dent out of earnings last quarter, but was the device really a disappointment?

Breaking into the tablet business
One of the biggest goals of the Microsoft Surface was to demonstrate Windows 8's usability on tablets. Up until Windows 8 was released, it was basically a two-man game between Apple (NASDAQ: AAPL  ) iOS and Google's (NASDAQ: GOOGL  ) Android. In the second quarter of last year, the two companies accounted for 98.6% of tablet market share.  

Over the past year, Microsoft has demonstrated the ability to run a mobile operating system, and the Surface helped encourage other manufacturers to use the operating system in their products. According to Strategy Analytics, that has led to a market share increase from 0.5% of the tablet market a year ago to 4.5% in the second quarter of this year. Microsoft isn't a huge player in tablets yet, but it's making inroads that once seemed impossible.

The sacrificial lamb
Microsoft isn't known as a hardware company, and its only real success making physical goods is the Xbox. So, putting high expectations on the Surface, especially the Surface RT, was a bit unfair by investors. The company is learning how to make devices and was really encouraging others to use Windows 8, so the Surface RT can be looked at as a sacrificial device in a lot of ways.

What's more important is that Microsoft continues to gain share against Apple and Google. As Hewlett-Packard, Dell, Asus, and others make more and more compelling devices with Windows 8, the company will take more share and become a bigger player in the tablet space.

Microsoft doesn't need to create a dominant tablet device itself; it just needs to demonstrate that tablets running Windows are possible. Surface did that, even if it wasn't a financial success for Microsoft. Long-term, I think investors should be judging Microsoft's ability to gain mobile operating system market share, not just whether a single device is a success. That's always been Microsoft's bread and butter.

Microsoft is still one of just a few companies that dominate tech, and the rising tide of electronic devices should help each one in different ways. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged among the five kings of tech. Click here to keep reading.


Read/Post Comments (13) | Recommend This Article (4)

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 July 31, 2013, at 10:43 PM, Thompr97 wrote:

    Well, sales of the Surface apparently disappointed Microsoft, and that is an understatement. Given the number of Surface tablets sold since inception and the size of the inventory write off for lowering the asking price by $150, it is clear that Microsoft built at least 3x as many tablets as they sold. If they can't move those remaining even at the lower price, then look for another big write-off.

    Sounds like Surface disappointed the company, so I would say it's completely fair that the investors should be disappointed as well. Actually, I would indeed call it a failure, because it's not even clear why most users would want one of these things. (Some will, of course... but not most.)

    Epic fail.

  • Report this Comment On July 31, 2013, at 11:33 PM, symbolset wrote:

    The point of Surface was to show OEM partners how to get committed to Windows tablets and succeed in a big way. It accomplished one of those two goals.

    An OEM CEO who would dare get committed to Windows tablets after this is just asking to be handed his parachute. Billions of losses on just two models in nine months? Even in the best case margins aren't good enough in the client PC space to make that up in a year. Lenovo, the world's leading PC seller, recorded a profit of only $631 million for their last fiscal year.

    Dell is the last remaining partner for Windows RT, and Michael Dell needs a $2B loan from Microsoft to take his company private.

  • Report this Comment On July 31, 2013, at 11:46 PM, kruger1965 wrote:

    Just ditched my MacBook Pro for the Surface Pro and never looked back since then...

  • Report this Comment On August 01, 2013, at 12:07 AM, flybywire54 wrote:

    This article in my view is quite accurate . The main goal of Microsoft with the Surface line was to ignite a fire under its OEM , so to speak, so that they would start releasing more and more products using Windows 8 . Selling many surfaces would be a bonus not the primary goal . That is happening , I just bought an Asus vivo touch screen laptop with an I5 and Win 8 64 bits for 650$ , it is an astonishing laptop for the price , and there are many other brands . That is why also Surface RT or Pro were priced quite high so that Microsoft would not enter in direct competition with its OEM , everyone remembers the complains by Acer CEO . Only issue is that Microsoft has to clear or reduce stocks of unsold surface RT , thus some price reductions , but no hurry . Overall Microsoft has been rather successful in creating advanced tablets/combo for everyone to emulate particularly talking about the surface pro

  • Report this Comment On August 01, 2013, at 1:25 AM, SimchaStein wrote:

    Microsoft fails until it eventually succeeds - at least most of the time. Surface will succeed because it's an extension of the Windows franchise. Still iPad will not be un-seated in the enterprise because they have such a big head-start. Google's Android and/or Chrome will further marginalize Surface in the Enterprise. Indeed, Microsoft must provide "Office" on the other platforms or risk losing that franchise.

    Not a failure, but a struggle to get a bronze medal.

  • Report this Comment On August 01, 2013, at 1:47 AM, JoeLemon wrote:

    They keep saying Surface when they are really only talking about the RT. The Pro was actually sold out for a while. The problem is Microsoft is confusing people with the RT and pro. People don't know what is what.

    Dump the RT and just have the Pro.

  • Report this Comment On August 01, 2013, at 1:59 AM, le2o wrote:

    @Kruger

    You fail. Have the Mac Pro. Integrates with my iDevices perfectly.

  • Report this Comment On August 01, 2013, at 2:01 AM, le2o wrote:

    Oh I forgot. How's the battery life of your Surface? My Mac runs up to 7 hrs of battery.

  • Report this Comment On August 01, 2013, at 3:26 AM, Gorkom wrote:

    ACHTUNG! M$ troll detected under "kruger1965"

  • Report this Comment On August 01, 2013, at 3:27 AM, Gorkom wrote:

    kruger1965: welcome to your 1st ever comment.

    (Just in case: this is my 2nd comment on fool.com)

  • Report this Comment On August 01, 2013, at 3:31 AM, Gorkom wrote:

    Surface pro: Drivers, Antivirus, Boot time... Add more.

    Mr kruger1965, I have a tip for you: Release 20" Surface Pro (PRO!!!) and market will adopt them as a Kiosk Standard. At least...

  • Report this Comment On August 01, 2013, at 4:17 AM, ronindaosohei wrote:

    The problem with the Surface was never the hardware...it was the software. Windows 8 pretty much sucks, it's a step back from Windows 7 in so many ways, which is reflected not just in tablet sales but in PC sales and sales of Windows 8 in general.

  • Report this Comment On August 01, 2013, at 7:32 AM, tjalsma wrote:

    Xbox was a failure while the Xbox 360 is not.

    Vista was a failure while Windows 7 was not.

    Windows Phone 7 was a failure while Windows Phone 8 is starting to gain momentum.

    Etc. etc. etc. etc.

    Microsoft has almost always learned from their mistakes after an initial "failure".

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2571377, ~/Articles/ArticleHandler.aspx, 10/1/2014 11:09:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 hour ago Sponsored by:
DOW 16,804.71 -238.19 -1.40%
S&P 500 1,946.16 -26.13 -1.32%
NASD 4,422.09 -71.31 -1.59%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/1/2014 3:59 PM
MSFT $45.90 Down -0.46 -0.99%
Microsoft CAPS Rating: ***
AAPL $99.18 Down -1.57 -1.56%
Apple CAPS Rating: ****
GOOGL $579.63 Down -8.78 -1.49%
Google (A shares) CAPS Rating: ****

Advertisement