Microsoft Surface and the multibillion-dollar boondoggle

The first financial results for Microsoft's Surface tablet are in, and they aren't pretty

Microsoft just filed its annual 10-K report, and while the overall picture look very good indeed, the few numbers disclosed for Microsoft's Surface initiative point to an effort that's gone so far awry it's hard to believe the "devices" part of "devices and services" will ever get its head above water.

Make no mistake, Surface is just a tiny part of Microsoft's vast operation: $78 billion in revenue with $22 billion in net income, 99,000 employees, and 30.6 million shares repurchased this past year. The company's doing better financially than it ever has. With $77 billion in cash and equivalents, Microsoft's even richer than Croesus adjusted for inflation. Its stock is no longer sliding into oblivion. But the Surface numbers, disclosed for the first time in this report, aren't good at all:

  • Surface Pro and RT revenue combined ran $853 million from launch day, Oct. 26, 2012, through the end of June (page 28)
  • A "$898 million increase in advertising costs associated primarily with Windows 8 and Surface" (pages 28 and 34)
  • "Surface RT inventory adjustments recorded in the [second quarter of calendar 2013], which decreased operating income by $900 million" (page 23)

Apparently the $900 million operating income write-off associated with Windows RT, which we learned about in July, was actually put on the books in June.

I also discovered two statements that I found hard to reconcile with those headline numbers:

  • "[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" (page 28). The report gives no indication of how the other $700 million splits out between Windows 8 and Surface.
  • "Sales and marketing expenses increased $1.4 billion or 10%, reflecting advertising of Windows 8 and Surface" (page 27). There is no reconciliation between that $1.4 billion figure and the $898 million mentioned above.

It's mind-boggling to me. Microsoft alienated all of its hardware "partners" by turning into a bad-mouthing Win8 competitor, sold just $853 million in hardware while boosting its advertising by $898 million, and took a Windows RT operating income write-off of $900 million. There's still no word yet on how much Surface Pro inventory sits in warehouses.

Clearly, Surface has been a multi-billion-dollar failure to date.

This article, "Microsoft Surface and the multibillion-dollar boondoggle," was originally published at InfoWorld.com. Follow the latest developments in business technology news and get a digest of the key stories each day in the InfoWorld Daily newsletter. For the latest developments in business technology news, follow InfoWorld.com on Twitter.

Copyright © 2013 IDG Communications, Inc.