I hope Microsoft is committed to its Surface products for the long haul, because it appears to have a lot of ground to make up — not just in market share and sales, but in profit. Based on Microsoft’s financial filings, Computerworld’s Greg Keizer estimates Microsoft has lost $1.7 billion on Surface so far.
Keizer’s figures come from Microsoft’s July 22 8-K and last week’s 10-K report filed with the S.E.C. He looked into them because while Microsoft has previously reported revenues for Surface, it didn’t provide the cost of those revenues, meaning we don’t know have much money Microsoft invested in its Surface products to actually create sales revenue.
“According to the 8-K statement filed with the U.S. Securities and Exchange Commission (SEC) on July 22, the Surface posted revenue of $409 million for the quarter that ended June 30. But unlike the two quarters prior, Microsoft did not reveal the cost of revenue associated with the Surface for the period.”
Keizer’s calculation is that the cost of those revenues topped $772 million while an analyst at Jackdaw research pegged the figure at a slightly lower $733 million cost to Microsoft.
What’s in those figures? Aside from actual production costs for the Surface devices themselves, the reported shelving of a Surface Mini product enters into the equation because the small slate was held back just prior to launch; it’s conceivable, if not likely, that some inventory was produced even though the device was never made available for purchase.
As bad as the numbers may sound, this fiscal year is actually an improvement over the prior one, which saw Microsoft write down $900 million in Surface inventory. Total cost of Surface revenue in Microsoft’s 2013 fiscal year topped $1.902 billion, says Kaiser, compared to $853 million in revenues. That works out to an estimated loss of $1.049 billion in FY 2013, compared to $676 million the company lost on Surface this fiscal year.
Microsoft has the money to lose on products and has done so in the short term already: The Xbox division lost an estimated $4 billion through 2005, only to turn things around three years later and start making money for the company. Unfortunately, the laptop and tablet markets aren’t quite the same as the gaming console markets, where money can be made up through attach rates of $60 game titles.
I don’t think Microsoft will give up on Surface any more than it did with the Xbox; the company wants to be part of the discussion whenever you talk about computing, be it on a laptop, desktop, tablet or a phone. There’s a new sheriff in town, though, and it will be interesting to see if Microsoft CEO Satya Nadella stays the course — the way I suspect Steve Ballmer would have.