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Microsoft takes $900M write-down on Surface, but Office 365 looks strong

Microsoft’s late entry into the post-pc tablet business has whipsawed them hard, with the company taking a $900 million dollar write-down on Surface. And, as I suggested recently (see Microsoft reorganizes and this time it’s for all the marbles and Microsoft will rise from the ashes of Windows and Surface failures), Microsoft spokespersons will continue to toe the company line, saying that Microsoft is committed to Surface and will continue to push hard on it.

You have to realize that this is a miscalculation of how many Surfaces Microsoft thought it could sell, not the cost of making them. It’s astonishing that they could be this far off in their guesswork, but the company Kool-Aid has been the hypothetical attractiveness of “good ole” Windows on a tablet. And they spent years struggling to bring that to market and now have smashed face first into a world firmly dominated by iOS and Android devices.

Xbox hardware revenues were also down, but Windows Phone revenue was up $222 million, although that includes sales of Windows Phone licenses and patent licensing. So that could be mostly a reflection of Android phone sales paying licensing fees.

The bright spot in Microsoft’s number is Office 365, which has risen to a $1.5 billion run rate, and the business division as a whole — including Office applications — rose 14% to $7.21 billion, although that included revenue from a deferred upgrade offer. Server and enterprise tools grew 9%, as well.

So, all proceeding as I outlined in Microsoft will rise from the ashes of Windows and Surface failures. Microsoft is destined to be the new IBM, who walked away from its PC hardware business, and is now shopping its vanity server business around. The future for Microsoft is the enterprise, based on offerings like Office 365, Yammer, Sharepoint, Exchange, Office, and Skype. They have lost the consumer war, but the executives at the top of the company are going to throw billions away before they admit it.