Surface Tablets Kneecapped Microsoft

by Adam Benjamin | July 19, 2013 12:10 pm

Shares of Microsoft (MSFT[1]) have been taking a beating this morning — off 11% as of this writing — following a disappointing earnings showing after the bell Thursday.

The company reported earnings of 59 cents per share, well below analyst expectations of 75 cents. Sales improved by 10% to $19.9 billion, but that figure fell short of the expected $20.7 billion.

But perhaps worst of all was a $900 million charge “related to Surface RT inventory adjustments” that alone contributed a loss of 7 cents per share.

The company’s Surface tablets didn’t take off the way the company had hoped. Microsoft released two versions of the device: the Surface RT and the Surface Pro. The Surface Pro specifically targets the enterprise space[2], while the Surface RT is the consumer-level version of the device, with a smaller hard drivs and fewer connectivity options than the Surface Pro.

The Windows 8 disaster certainly didn’t help sales. Remember how Microsoft had to completely change the design of the operating system[3] after a torrent of user complaints? As it turns out, that was bad news for a system that was designed specifically for that OS[4]. Customers who didn’t like the interface weren’t inspired to buy tablets before the change, and the redesign takes away from the tablet’s original selling points.

Meanwhile, that $900 million charge means a lot of Surface tablets still are sitting on the shelves. So, in an attempt to boost sales, Microsoft recently knocked down the price of Surface RT[5] by $150, or 30%. That will give it a price advantage against Apple’s (AAPL[6]) retina display iPad, which still costs $500 for the 16GB version, but will hurt the company on margins.

So now Microsoft is facing a rapidly fading PC industry with a tablet it can’t sell well enough at its original price point.

Of course, the company also was forced to back out of its restrictive Xbox One policies earlier this year and is just now recovering from the public uproar. And, according to ComScore, Windows Phones are actually losing market share[7].

So yes, Surface tablets certainly kneecapped Microsoft this quarter … but worse, it’s not the only MSFT product holding a billy club.

Adam Benjamin is an Assistant Editor at InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. MSFT:
  2. specifically targets the enterprise space:
  3. completely change the design of the operating system:
  4. designed specifically for that OS:
  5. knocked down the price of Surface RT:
  6. AAPL:
  7. actually losing market share:

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