Microsoft takes a $900 million hit for unsold Surface RT tablets

Microsoft put a lot of time and effort into developing a version of Windows that could run on devices with ARM-based processors. Then the company went all-in and launched its own tablet running the operating system.

And it turns out it’s not selling very well. If the recent $150 price drop wasn’t a good enough sign that Microsoft is having trouble moving its tablets, how about this: in Microsoft’s 4th quarter earnings report, the company says it took a $900 million charge “related to Surface RT inventory adjustments.”

Microsoft Surface RT

That could mean that’s the cost of marking down the price on all the unsold inventory the company still has on hand. If that’s what this “charge” refers to, it would seem to indicate that there are around 6 million Surface RT tablets lying around on store shelves and in warehouses.

Or maybe Microsoft is just marking off the full price of some quantity of devices it doesn’t expect to sell, in which case it’s not clear how many unsold tablets are out there, but there are probably a lot of them.

Overall the company’s revenue was lower for the quarter than had been expected — and the figure was off by just about the cost of that $900 million charge.

Microsoft also has to contend with declining growth in the PC market, which could hurt the bottom line of a company that makes the operating system that runs on most PCs. That’s a large part of why Windows 8 and Windows RT are designed to run on tablets and other touchscreen devices as well as desktop computers.

But there’s mounting evidence that it’s not just the Surface RT that’s not doing well — it’s the Windows RT operating system. It looks like Lenovo, for instance, also pulled the plug on its Windows RT device this week.

On the other hand, Microsoft’s eggs aren’t all in that basket. The company also introduced the new Office 365 subscription service and Office 2013 this year, and says strength of its enterprise services is helping offset challenges in the PC space.

It’s probably a bit early to write off Microsoft. The Surface RT, on the other hand, might be on or near its deathbed.

Meanwhile, Google also reported its quarterly earnings today. The company also missed analyst estimates, in its case due to a decline in cost-per-click for Google ads. Consumers are increasingly using mobile devices to access the internet, but mobile ads are still a fledgling industry.

  • 1stkorean

    You think we will see a $99.00 Surface RT any time soon?

    • Cal Rankin

      If they end up at $99, there will be proof that this the HP TouchPad all over again, and I will make sure to buy this in a heartbeat.

      • www

        I bought 11 tpads on the fire sale ..sold em all and kept 1 for myself,,i love it…

      • Cal Rankin

        I never said anyone didn’t love the HP TouchPad, I just said it didn’t sell, and at the same price as an iPad 2 (at least at the time) it certainly wasn’t priced to sell. I do love webOS, and I wish HP would have tried again as an open-sourced OS, especially since 2013 seems to be the year of open-sourced mobile OSes

  • Michael Thompson

    Think of it as evolution in action.

  • fukrappers

    well da gee, I guess we should raise the prices,,,oh no maybe lower them,,doahhhhhh I don’t what to do….

  • George

    I wonder how many billions of dollars MS is going to blow on trying to dominate in mobile before it accepts an also-ran role. Unfortunately, it hasn’t seemed to quite “get it”, even losing ground to later entrants that came up with the right recipe.

    It’s been in phones for a very long time, and was even a contender when it had Windows Mobile, with a low double digit market share, a multiple of it’s current market share with Windows Phone. It also has been around forever with tablets/slates, seeding the market segment with Windows XP Tablet PC Edition.

    • Tsais

      People are suspicious of Microsoft, because for the better part of a decade, they didn’t spend a dime on fixing widely reported issues with Windows Mobile / Windows CE.

      They thought they had the market sewn up at ~36% market share and hung their customers out to dry.

      If that was one of Ballmer’s executive decisions, or if it was related to the usual infighting and middle management derailing each other for personal gain, we might never know.

      • fukrappers

        what are you a walking opinion machine..

    • John Morris

      Windows sucks as badly as Windows CE/Mobile/Phone/RT. The difference was they were in the right place at the right time and utterly ruthless in establishing a monopoly. Had that not happened we would be living in a much better world where competition and innovation kept happening in the PC space. Instead we all had to suffer two decades of stagnation and figure out a way to innovate somewhere other than the PC.

      Even today it is all but impossible to buy a PC or laptop without it being preinstalled with Windows. Even if you manage to buy one, more often than not you still paid Microsoft. Dell’s ‘N’ series costs as much or more than the same hardware with Windows. In other words Dell still pays the per cpu license (that Microsoft has signed countless Consent Decrees swearing to stop) and doesn’t put a Windows certificate on the side if the customer wants to believe they aren’t paying the ‘Microsoft Tax.’

      • http://www.altfuels.org altfuels

        Well, I’m no particular fan of Windows or Microsoft but, in fairness, are you sure about the reason you give for the lack of a discount on Microsoft-free computers? I thought that it was generally attributed to the fact that such machines, besides not having Microsoft software on them, also don’t have third-party “crapware” on them. Thus the computer manufacturer can’t use the revenue paid to them by those third parties to hold down the price of the hardware. A fairer comparison would be between the price of an open-source-powered machine and that of an equivalent machine purchased through Microsoft’s “Signature” program with “junkware” (even Microsoft uses uncomplimentary terms to describe it!) omitted.

      • John Morris

        We hear that myth all the time to explain away Microsoft’ continuing illegal bundling but math laughs at it.

        Go look at Microsoft’s revenue numbers, especially for the operating systems division. That money is almost entirely generated from large OEM contracts since the number of PCs sold by local chop shops paying the full ~80/copy gets lost in the rounding. Do you really believe Symantec & Adobe along with some really small fry are ponying up that sort of cash? Really? Those companies who typically bundle don’t have the combined net income to write that check.

        Now consider that large OEMs like Dell freely admit that it only takes about two support calls to turn a sale into a losing deal. Shipping a blank hard drive and a FreeDOS cd in the box eliminates over half the support since software related problems are typically at least half of all support calls.

      • http://www.altfuels.org altfuels

        I’m not sure the numbers to which you refer are (directly) relevant to the question. In order for the crapware-revenue explanation for the lack of a price difference not to be a “myth,” Symantec, Adobe, et al., don’t have to come up with a quantity of baksheesh comparable to Microsoft’s total Windows revenue; rather, they just have to be spending an amount comparable to that revenue times the fraction of computers sold without Windows. I don’t know how small a fraction that is, of course; a direct comparison, which lets us bypass this unknown fraction, would be to look at the cost to the manufacturer of an “ordinary” Windows-plus-crapware computer for that one Windows license vs. the revenue to the manufacturer from crapware vendors for that one computer. That is, could the reduced cost from omitting the former make up for the loss of revenue from the latter, one machine at a time? Again, I don’t have that comparison in hand, but that’s a sanity check that would need to be passed or failed to determine if “math laughs at” the crapware-revenue explanation.

        And as to whether open-source software increases or decreases support costs (for a mass-market vendor, i.e., not System76 or ZaReason), I seem to recall that in the early days of netbooks, when they were mostly Linux-powered, there were a lot of returns due to non-techies buying these computers only to find out they couldn’t run the (Windows) software they were used to…

      • CyberGusa

        It’s a combination of factors, the most predominant of which is the sheer numbers of Windows systems sold means OEMS can more easily keep unit costs lower.

        Versus Linux systems that cater to the Linux user base, which accounts for only around 5% of the total market and thus means far fewer units sold and thus much higher unit costs for the OEM.

        Though, sometimes that can be mostly avoided by using the same model system for both OS… But you are correct about how many OEMs use crapware to offset licensing costs.

        While MS provides free tech support for mainstream support, but the OEMs would have to support the version of Linux they install on the system themselves…

        Red Hat being one of the few exceptions but they charge for support anyway…

        While the version of Linux installed on a OEM system is typically a custom version and thus community and the usual distro support is not always applicable.

        Especially, if the OEM had to certify their drivers with the specific version and thus may not be able to easily change to a newer version, etc. without adding cost of re-certifying the drivers, etc.

        So basically, there are many reasons why Linux has been held back and while MS does have some blame, there are many other factors that have that also factor…

        Linux is a good OS but it’s not perfect, X,Org tends to break easily, industry lacks driver support and the lack of Open Source drivers makes it difficult to compensate, general appeal is more to power users than lay people, despite growing interesting in gaming there’s still largely little support for Linux as a gaming platform and like OSX it could take years for the gaming library to catch up with Windows, along with the business model for Linux not really attracting developers of high end programs and thus limiting appeal to professionals who need to work, and even more reasons than I can list off the top of my head…

        It’s easy to blame MS for all of it but there’s plenty of blame to go around and unfortunately, while it’s improving, it won’t significantly change for quite awhile yet…

      • Arrdee

        If you think 5% of desktops sold run Linux you’re smoking something strong there, but perhaps you are including servers.

      • CyberGusa

        I didn’t say sold, but about 5% is the market share of consumer users for Desktop Linux.

        Most of them install it themselves but that represent the market that those companies selling pre-installed Linux cater to and doesn’t change the point that it’s very small and thus a big reason why costs are so different…

  • Jason Mann

    Perhaps they will realize no one is buying them due to the fact that there is little to no software available for it. If they mark them all down to $99 (ala HP Touchpad) the Dev community will have it running Android in no time. Then there will be plenty of software that will run on it.

    • Ian Tester

      Microsoft have locked down all of the Win RT hardware, so getting any sort of Linux on there would be extremely difficult.

      • John Morris

        Apparently it seems to also be preventing Windows software too. Nobody wants the ‘metro’ stuff and the locks prevent hackers from opening up the windows side almost as much as it is stopping the linux hackers from ripping and replacing.

        Shorter version: DRM is a losing game for everyone on every side of the value chain, it just isn’t as obvious for some.

      • CyberGusa

        Users on XDA Developers Forum figured out how to jailbreak RT awhile ago but it’s still not easy porting apps…

        Though, it’s mainly the Surface RT that’s really locked down as it uses a private key for the Secure Boot and thus no 3rd party key will work with it but the other OEMs are free to use public keys.

        So, ARM just needs 64bit because the Linux boot loader that works with UEFI only works in 64bit systems… Meaning, if RT is still around by the end of next year, when we’ll see 64bit ARM SoCs come to market, then we may see Linux booted on those systems…

  • Tsais

    Micro$oft killed Windows RT when they pulled the promised Windows Software support, which they did as a favor to Intel.

    When I first heard about that last summer, I already said that M$ is going to sit on these till they’re blue in the face. Microsoft has completely lost the understanding of how to make things tasty to potential customers.

    Lets hope RT stays dead and doesn’t turn into a flesh eating zombie…

    • Michael Thompson

      Microsoft has become more about making products that needs are built around than making products that are built to suit needs.