Microsoft Surface business model is the punchline to a joke

Microsoft (MSFT) loses money on each Surface tablet it sells, but as the old business joke goes, it hopes to make that up with higher volume.

The Redmond, Wash.-based company revealed late Thursday that it took a $900 million charge to fiscal fourth-quarter earnings, equal to 7 cents a share, to write down inventory of its poorly selling Surface RT tablets.

The "inventory adjustments" for Surface RT mostly stemmed from $150 discounts Microsoft started offering to move units, Chief Financial Officer Amy Hood said on a conference call with analysts. The $900 million is equal to $150 discounts on 6 million base model Surface RT tablets.

Microsoft's Surface RT tablet with 32-gigabytes of storage was reduced to $349, from its October launch price of $499. A model with 64 GB of storage now costs $449, down from its original price of $599. The attachable keyboard still costs an extra $100.

The fire sale prices led observers to speculate the company might discontinue the line, so it could put its weight behind Surface Pro tablets, which run the full Windows PC operating system.

But Microsoft gave no indication that it plans to discontinue the Windows RT tablet, which prominent tech writer Paul Thurrott called a "piece of junk ."

"We believe this pricing adjustment will accelerate Surface RT adoption and position us better for long-term success," Hood said. "We also increased retail distribution this quarter. Surface is now available in 29 markets and more than 10,000 retail locations."

Microsoft's double-down strategy with Surface also includes expanding availability of the product to business and institutional customers and authorizing more resellers to distribute the tablet.

Brian Hall, Microsoft's general manager of Surface marketing, told ZDNet writer Mary Jo Foley that the company is "100% committed to Surface RT and Windows RT going forward and has no plans to drop work on either product."

Microsoft developed its Surface tablets to take on Apple 's (AAPL) iPad and Google (GOOG) Android-based tablets from Amazon (AMZN), Samsung and others. But Surface RT and Surface Pro run different versions of Windows. RT was designed for low-power ARM (ARMH)-based processors and requires specially written apps, of which there are relatively few. Surface Pro runs Windows 8 and has competitive disadvantages against regular notebooks and rival tablets.

Microsoft now has two big money-losing businesses: its longtime black hole of online services, including Bing and MSN, and Surface tablets.

Last year, Microsoft's online services division lost $1.28 billion on sales of $3.2 billion. In the past five years alone, the online services group has lost $16.1 billion.

Source: http://feedproxy.google.com/~r/InternetTechnologyRss/~3/lM2IG93ureg/microsoft-losing-big-money-on-surface-tablets.htm

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