Microsoft

[techbeck]

There?s been quite a bit of interesting financial commentary on Microsoft?s Surface line of tablet-hybrids published recently. The Surface project loses money. Understanding the magnitude of those deficits is important.

 

The analysis led to the Verge?s Tom Warren asking the somewhat provocative question of whether Surface is the new Zune, a product line that improved throughout its life, but never achieved escape velocity.

 

Let?s take a look at the history of Surface, Microsoft?s comments on its vision for the product line, stack those next to its current losses, and then compare the product line to another Microsoft hardware project and see where we end up.

 

A Real Business

When I first encountered Surface in Redmond back in 2012, I was told along with the rest of the assembled press that the hardware line was ?a real business.? That?s to say that it wasn?t a hobby, and that Microsoft expected it to perform financially.

 

Microsoft reiterated the business line to me in an interview, conducted before the release of the Surface 2 and Surface Pro 2, immediately after I had first held the devices, again in Redmond.

 

This quote, from Brian Hall of the Surface team is worth meditating on:

 

Hall: 

We are running this as a business. But we also are running it as a long-term business. Which means that there are different priorities at different times.

Take dropping the price of [the first-generation Surface RT] to $349. That was to primarily get it into more people?s hands. That?s because we knew that the most strategic thing is more Surface users. People that used it loved it and became good advocates. And we had to get that seed planted, watered, and fertilized.

We want to have a great portfolio. We recognize that people start from price points in their head. And I think that they will see that each of these at its price point is an amazing value. If there is someone who wants a tablet that can really be productive.

 

That was the company?s vision when the Surface Pro 3 was presumably under development, along with whatever the Surface Mini was going to be. The latter, of course, has been shelved.

Mounting Losses

 

ComputerWorld did solid work digging into Microsoft?s earnings reports to suss out how much money the company has lost on Surface by comparing revenue statements with cost of revenue numbers when possible, and estimates of cost of revenue when not.

 

The gist is not pretty: ?Microsoft has lost $1.73 billion ($676 million plus $1.049 billion) on the new hardware.? It?s actually worse than that, in my estimation, as ?cost of revenue? calculations don?t include certain expenses like advertising, something that Microsoft has spent heavily on for the Surface line.

 

ComputerWorld?s chart, even if it only takes into account cost of revenue, is worth ruminating on:

 

What?s visible is an improving gross margin using cost of revenue as the measuring stick, and a growing influx of revenue.

 

So, are the losses too staggering for Microsoft? There is a small tension here between Ballmer?s Microsoft, and Satya?s¹ Microsoft: Ballmer was willing to plow billions into hardware, as evinced by the Nokia deal and his support of Surface?s early days ? Satya just inherited the stuff. I?ve heard some rumbling that Microsoft?s new CEO wasn?t as big a fan of the Nokia acquisition, but I haven?t heard that he was at all inclined to jump off the Surface bandwagon.

 

I think it?s fair to say that Microsoft?s hardware efforts are not islands, and that the company?s work producing Windows Phone handsets isn?t utterly distinct from its Surface investments. As such, we can view them from something approaching the same perspective.

 

In both cases, Microsoft is working to build what it considers to be the best hardware for its platform. A platform it?s no longer exclusively tied to anymore, certainly, but still a platform into which it?s willing to pour money to help make it succeed.

 

More....

http://techcrunch.com/2014/08/07/microsofts-surface-and-the-fine-line-between-investment-and-loss/

[greenwizard88]

As long as Microsoft considers Windows to be a primary focus, Surface will be an investment no matter how much it loses.

[+Warwagon MVC]

Microsoft is planing for the future, by working with developers and creating it's own hardware, to create a great user experience for the consumer :laugh:

 

... I don't work at Microsoft, I swear, but I did just run out of Microsoft Key words

[+Red King Subscriber²]

It is an uphill battle, fight or die.

[+virtorio MVC]

 

Microsoft is planing for the future, by working with developers and creating it's own hardware, to create a great user experience for the consumer :laugh:

 

... I don't work at Microsoft, I swear, but I did just run out of Microsoft Key words

 

A real Microsoft employee would have fit "the cloud" in there somewhere.

[guru]

to be fair Microsoft brought this "uphill battle" and "investment" upon themselves.

 

there was a criminal lack of market realities from 2005 onwards. the last major success for MS was Win7. Zune, Kin, Bing , XBOX one, Win8 . Surface, WP  have all been major loss making ventures but more importantly a failure of vision. 

 

Microsoft once had a vision 'Computers running windows on very desk'. There was never a expansion of that vision to internet age.

Believe it or not MS had smartwatch, smartphone  and tablet in 2003 but none of these had a vision - a killer usecase for consumers. Microsoft is the new Xerox labs from which people "copy" and bring the tech to consumers.

 

ok they have had minor successes or still in play - outlook.com, Kinect, Azure, SQL server and Dynamix CRM. but none of these match the failure of microsoft in mobile OS.

[Guest]

but none of these match the failure of microsoft in mobile OS.

 

What failure?

[guru]

What failure?

Android in 80% of phones, 50% tablets , cars, wearables and thermostats vs WP in 4% phones and none in rest 

is probably worse than failure but lets be  generous :)

[Guest]

Android in 80% of phones, 50% tablets , cars, wearables and thermostats vs WP in 4% phones and none in rest 

is probably worse than failure but lets be  generous :)

 

Then Linux, BSD, OS X are considered worse than failures too.

 

/sigh Why does everything that is not #1 have to be a failure? :rolleyes:

[Darrian]

I really don't care if they're taking a loss.  They are the only company that is willing to make the tablet I've always dreamed about a reality.  I only hope that they keep making them until I can actually afford one.  It would be nice to get one before they disappear.

[guru]

I really don't care if they're taking a loss.  They are the only company that is willing to make the tablet I've always dreamed about a reality.  I only hope that they keep making them until I can actually afford one.  It would be nice to get one before they disappear.

+1 Surface pro 3 for half the price would be awesome. I guess the world is waiting for Core M series of chips from intel for that to happen

 

Then Linux, BSD, OS X are considered worse than failures too.

 

/sigh Why does everything that is not #1 have to be a failure? :rolleyes:

Linux and BSD have their niches where they are near 100% share like super computers.

Linux is widely used in everywhere from consumer routers to web servers but on consumer desktop - with its  1% share vs 90% of windows isnt exactly a roaring success.

 

my general is point was about lack of vision in MS,  thinkers and creative ones were probably the first ones to be let go due to their brutal stack ranking system for decades (i knows its been removed this year)

[grik]

The thin line of the Surface utility, between a bad tablet and a small PC.

The OS isnt well conceived its an adaptation and its too expensive for a small net PC, and too small to be a production machine.

 

Its a thin line between beeing great to beeing a waste of money.

 

MS as a ton of enthusiasts like me that love to test, beta test for free and they dont use the community for simple new things.

[DeadEndAccount]

+1 Surface pro 3 for half the price would be awesome. I guess the world is waiting for Core M series of chips from intel for that to happen

 

Linux and BSD have their niches where they are near 100% share like super computers.

Linux is widely used in everywhere from consumer routers to web servers but on consumer desktop - with its  1% share vs 90% of windows isnt exactly a roaring success.

 

my general is point was about lack of vision in MS,  thinkers and creative ones were probably the first ones to be let go due to their brutal stack ranking system for decades (i knows its been removed this year)

 

You're assuming that the Surface Pro 3 is the drag when in reality I question why they've kept their Surface RT around - was there some deal they made with ARM? I would have thought with Intel's own low powered SoC's that maybe the best thing for Microsoft to do would be to kill off the Surface RT and create a low end Intel based model (based on the Intel SoC (Airmont and Goldmont) - heavily optimise Windows 8.1 to perform better on those low powered x86 CPU's and take advantage of the fact the Surface is a tablet and laptop replacement.

[simplezz]

Android in 80% of phones, 50% tablets , cars, wearables and thermostats vs WP in 4% phones and none in rest 

is probably worse than failure but lets be  generous :)

4%? Microsoft wishes. 2% and falling according to the latest figures. Even units shipped has declined YOY this quarter.

 

Things are looking bleak for Microsoft's Phone OS. No developer traction, poor quality and selection of apps, unpopular Metro tile UI, lack of features that are present in every other major OS, no long term support and abandoning of users (WP7), inferior hardware, poor selection, only one major OEM (Microsoft). Could it really get any worse?

[simplezz]

Then Linux, BSD, OS X are considered worse than failures too.

 

/sigh Why does everything that is not #1 have to be a failure? :rolleyes:

OS X has about 10% of the PC market, hardly a failure. Besides, Apple sells premium hardware with high margins. What does Microsoft sell? Cheap 520's (probably at a loss) and only has 2% marketshare. I know which one I'd deem a failure, and it isn't OS X.

 

GNU/Linux and BSD can't be compared because the major OEM's don't really support / push them. Nor is there a billion $ advertising budget and PR machine behind them. Still, there's not much difference in marketshare between WP and GNU/Linux. Considering that millions of computer users go out of their way to install it on existing hardware, I'd say GNU/Linux is doing rather well.

[sc302 Veteran]

Understand that this is a extremely uphill battle for MS.  They are late comers, as they often are, so they need to make something unique and worthwhile but at a price point the same or better than the competition regardless of what it costs them.  The surface is in such demand that it is sold out on the high end.  Either that they didn't make enough or didn't plan enough.  The RT, IMO, should have never seen the light of day as it is too watered down (the people coming in at that price point want to install things like itunes and other non microsoft products that can't be installed on RT).  The PRO is where it is at, and they should continue with this, possibly making a home version that has the full functionality of the OS without the business functionality of the PRO.  They need to get people into the PRO's if they want them to be successful, but at a price point where they can be afforded. 

[neufuse Veteran]

OS X has about 10% of the PC market, hardly a failure. Besides, Apple sells premium hardware with high margins. What does Microsoft sell? Cheap 520's (probably at a loss) and only has 2% marketshare. I know which one I'd deem a failure, and it isn't OS X.

 

GNU/Linux and BSD can't be compared because the major OEM's don't really support / push them. Nor is there a billion $ advertising budget and PR machine behind them. Still, there's not much difference in marketshare between WP and GNU/Linux. Considering that millions of computer users go out of their way to install it on existing hardware, I'd say GNU/Linux is doing rather well.

Last I checked (which wasn't that long ago) OSX was barely keeping 6% of the PC market share, unless you do what some shady reporters do and include IOS as "OSX" to pad the numbers on "PC" sales and don't segment it out as phone and tablet markets also.... and Windows had around 92% of the market share

[simplezz]

Last I checked (which wasn't that long ago) OSX was barely keeping 6% of the PC market share, unless you do what some shady reporters do and include IOS as "OSX" to pad the numbers on "PC" sales and don't segment it out as phone and tablet markets also.... and Windows had around 92% of the market share

You could be right. Perhaps I'm getting confused with the US marketshare. Regardless, 6% is still larger than 2%. And Apple does sell premium hardware at high margins, unlike the low end Lumia's which constitute the bulk of WP devices.

[Ironman273]

You could be right. Perhaps I'm getting confused with the US marketshare. Regardless, 6% is still larger than 2%. And Apple does sell premium hardware at high margins, unlike the low end Lumia's which constitute the bulk of WP devices.

So where's the line?  2% is a failure but 6% isn't?

 

I'm glad that Microsoft has stuck with it.  It allowed me to get the best laptop/tablet available in the market (for my needs).

[DeltaXray]

The thing with Surface is it has only now with v3 reached the point where it has become really attractive for business and personal users alike. The latest device looks incredible so hopefully it will start to reverse that trend.

 

Then there is marketing. In the UK the previous surface ads were pretty annoying and didn't show off many of the actual benefits of the device.  For v3, there is no marketing to be seen. Perhaps because it still hasn't been released here yet (Why?!) but they are missing a trick here.

[neufuse Veteran]

You could be right. Perhaps I'm getting confused with the US marketshare. Regardless, 6% is still larger than 2%. And Apple does sell premium hardware at high margins, unlike the low end Lumia's which constitute the bulk of WP devices.

Apple's OSX market share has always been in the 4-6% range, it really hasn't ever moved much in many years... it's even had a decrease recently, but they cover it up by saying look how great IOS is selling! then merge the numbers to look like OSX sales are going up...

[+LogicalApex MVC]

Then Linux, BSD, OS X are considered worse than failures too.

 

/sigh Why does everything that is not #1 have to be a failure? :rolleyes:

Success is measured relative toward the goals of the project... Linux is a roaring success. The only market it isn't leading is Desktops. It is leading in embedded, servers, mobile, super computing, and a very long list. With the future of computing comprising heavily in mobile and embedded systems it is Microsoft that is staring down a dark road...

 

Microsoft makes money licensing Windows. If they can't sell licenses they can't win. As such, they need their software on as many devices as possible to ensure they have a revenue stream. Windows Phone and Windows 8 added new revenue streams via the "store", but you can't make that work without users and developers buying into the platform...

 

Microsoft is in a very dark place right now. We will see how they navigate it over time, but they have not been able to establish any real foothold in the new areas of excitement in computing. That is a severe problem for them as if they fail to do so they will lose every advantage they have enjoyed in computing and more. Windows will likely lead Desktops for a long time, but the sheer growth of mobile and embedded will eventually force Microsoft to make Windows accommodate those systems and not the other way around (as used to be the norm). Meaning, MS might have to resort to running Linux/Android apps on Windows devices to compete and etc.

 

It is obvious that MS needs to keep making the Surface. Their biggest failure is not selling them cheap enough to actually get some traction in the market. They really should be burning money on them to carve out a spot.

[Dashel]

All necessary investments if they would have been handled competently.  Ballmer's mismanagement ######ed the first two gens just like he did with WP7, not that there was any thing faulty or fatal about either from my perspective.  That's where the loss is from.  I don't see why at worst it can't be a break even product.

 

MS can't fix stupid so lets enjoy Surface's niche as the more elegant product.  Let the partners fight over the entry devices with strong incentives.

[DeltaXray]

Success is measured relative toward the goals of the project... Linux is a roaring success. The only market it isn't leading is Desktops. It is leading in embedded, servers, mobile, super computing, and a very long list. With the future of computing comprising heavily in mobile and embedded systems it is Microsoft that is staring down a dark road...

 

It is amazing the amount of people who always forget this. Although I am not a Linux 'user' , if I just look around my home almost everything is powered by it. My satellite STB runs Linux, my games console runs a flavour of *nix, so is my TV, modem,  router, NAS, and even my thermostat.  There's even a flavour of linux running in my car, it is used literally everywhere.  In terms of overall usage Linux has been exploded way past any other OS.

[simplezz]

Apple's OSX market share has always been in the 4-6% range, it really hasn't ever moved much in many years... it's even had a decrease recently, but they cover it up by saying look how great IOS is selling! then merge the numbers to look like OSX sales are going up...

My point was Apple makes money, quite a lot of it in fact from their hardware offerings. Microsoft doesn't. Surface, Zune, Kin, Xbox, Kinect, Lumia. None of them make a profit.