According to Microsoft Corp. (NASDAQ: MSFT), its Surface tablet business lost money in the past fiscal year. One clue that the product was in trouble was the disclosure that Microsoft wrote down $900 million for Surface inventory last year.
In the 10K, Microsoft made several comments about the product:
Also includes a charge for Surface RT inventory adjustments recorded in the fourth quarter of fiscal year 2013, which decreased operating income by $900 million, net income by $596 million, and diluted earnings per share by $0.07. Sales and marketing expenses increased $1.4 billion or 10%, reflecting advertising of Windows 8 and Surface.
Windows Division revenue increased $839 million. Surface revenue was $853 million.
Windows Division operating income decreased, primarily due to higher cost of revenue and sales and marketing expenses, offset in part by revenue growth. Cost of revenue increased $1.8 billion, reflecting a $1.6 billion increase in product costs associated with Surface and Windows 8, including a charge for Surface RT inventory adjustments of approximately $900 million. Sales and marketing expenses increased $1.0 billion or 34%, reflecting an $898 million increase in advertising costs associated primarily with Windows 8 and Surface.
Microsoft hoped that the Surface would move it further into the hardware business, as well as help distribute Windows 8 software, which has done poorly on mobile devices. Microsoft’s other two major initiatives in the sector are alliances with Barnes & Noble Inc.’s (NYSE: BKS) Nook product and handsets built by Nokia Corp. (NYSE: NOK). The Nook has failed, as Barnes & Noble’s most recent earnings report showed. Nokia’s line of Lumia handsets, which also run Windows 8, have been a failure, based on sales.
Microsoft’s belief that it might take market share in tablets is based to some extent on the Xbox line, which has competed effectively with Sony Corp.’s (NYSE: SNE) PlayStation and with products from Nintendo. The Surface never gained anywhere near that adoption level.
Microsoft also wanted to compete with arch rival Apple Inc. (NASDAQ: AAPL), which has had a wild success with the iPad. The iPad has a tremendous share of market, but even it has faced struggling sales. In Apple’s most recent quarter, iPad sales were below expectations.
Despite an aggressive launch by Steve Ballmer, followed by tens of millions of dollars in marketing, the Surface never got off the ground. Many analysts were pessimistic about the Surface. Now they can boast that they were right.