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Surface RT is worse than we thought: Why Microsoft took a $900M inventory hit

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I suggested in January that there would be little demand for Surface RT when comparably priced Windows 8 tablets were available. Now there are 900 million reasons to back up that suggestion: In its quarterly earnings report on Thursday, Microsoft included nearly a billion dollar inventory adjustment to its financials due to Surface RT:

“These financial results include a $900 million charge, or a $0.07 per share impact, related to Surface RT inventory adjustments.”

That financial footnote may explain why Microsoft reduced the price of Surface RT devices by $150 recently, dropping the $499 base model down to $349 for the hybrid tablet computer. Even so, an informal poll of our own readers suggests that even at this price, Surface RT isn’t desirable: Of the 298 votes, 63.8 percent of respondents said they still aren’t interested.

Windows 8 Start ScreenIt sounds like Microsoft now has a glut of Surface RT devices in warehouses or in the retail pipeline that simply aren’t selling, even at the reduced price, or it figures it won’t sell most of them.

There’s a very small glimmer of hope though, based on a IHS teardown of the Surface RT product last November. The bill of manufacturing and the cost to build Surface RT with keyboard cover was estimated at $284. It could have even become cheaper to make over time. That means Microsoft may have more room to move on price cuts and consumers could snag a Surface RT at $299 with Microsoft still eking out a small profit.

For many however, even at that price Surface doesn’t become attractive. It does include Microsoft Office software on the desktop but there are still some key apps missing in the new Metro-style interface. And it doesn’t run any old Windows applications, so it’s an all new app ecosystem starting from scratch.

At this point, Surface RT is looking more like the HP(s hpq) TouchPad 2.0: A great product on paper but too many gaps in the implementation.

10 Responses to “Surface RT is worse than we thought: Why Microsoft took a $900M inventory hit”

  1. rannxerox

    For enterprise users, a Surface RT is an fantastic companion device that allows a lot of connectivity and functionality. For the home users though MS really needed to dump a LOT of money to have quality Metro apps created for them. But W8 should have been W8.1 from the beginning.

  2. MikeO3

    No idea why anyone would surprised at another MS$ hardware failure. When will they learn. Their only hardware business unit that appears to have survived is the mouse & keyboard unit and in my opnion are by far inferior to the likes of Logitech. Not even sure if they even make any money so I won’t comment there without facts.

  3. Richard Fieldhouse

    Perhaps the most valuable instruction in my MBA course was… “Ignore sunk cost.” Microsoft should look on numbers like 499, 399, 349, 299, 284… 250, 200… as just fodder for accountants, the question is what price should they set to get the inventory out of the warehouse before it becomes completely worthless?

    There is, though, a point at which it becomes better to write down the whole lot to zero and put a match to the warehouse to avoid reputational damage. I Believe Samsung have been known to do this – and look what happened to them!

  4. stopthis

    Stop this app nonsense, there are more than 100,000 tablet optimized apps in the windows store.
    How many tablet optimized apps are in the play store?
    I bet no more than that, and no running phone app on a large tablet screen does not count because it’s very lousy experience

  5. Hi Kevin, as IDC market statistics notoriously derive their vendor distribution statistics from inventory channels, I’m wondering if you know what percentage IDC claimed Surface RT owned of the tablet market, prior to this $.9B write off. Thanks.

    • John Nemesh

      They don’t break down RT vs. Pro…they just lump both together…in any case, the number is so small that it barely registers on the charts.