Now that the dust has settled around the Microsoft (MSFT 2.17%) 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 (AAPL 3.40%) 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 (SPLS +0.00%) and Best Buy (BBY 1.42%). 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 (GOOG +1.50%) 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 (INTC +0.30%) 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.
