Microsoft lost millions on Surface Sales

Yesterday Microsoft filed its Form 10-K with the Securities and Exchange Commission (SEC) for the end of the 2013 fiscal year.  Page 28 of the SEC filing reveals Microsoft earned $853 million dollars from the Microsoft Surface.  The Surface comprises both the cheaper Surface RT and more expensive Surface Pro.

If you merely give the report a cursory read you might think all is well with Microsoft; however, scrupulous readers will notice a grave incongruity here.  How is it possible that Microsoft earned almost $900 million in revenue when just a few weeks ago, on July 19th, Microsoft’s stock plummeted 12.2% in a single day?

Something isn’t so obvious from the SEC report but if you scrutinize it you’ll discover the $900 million dollar charge for the Surface RT inventory adjustment.  You’ll also see this poignant statement:

Sales and marketing expenses increased $1.0 billion or 34%, reflecting an $898 million increase in advertising costs associated primarily with Windows 8 and Surface.

This is serious stuff and simply corroborates my conviction that Microsoft is poised to fail.  Launching the Windows 8 and Surface products was a prodigious undertaking that has taken a sizable bite out of the proverbial profit pie.

Incidentally, it gets worse.  Microsoft’s cost of revenue soared by 16%. In other words, the costs directly associated with the produces and services Microsoft’s manufactures climbed by $2.7 billion dollars.

This is a major black eye to the corporate giant who, prior to the great Friday fiasco of July 19th, enjoyed a 32% year-to-date gain in earnings. This was a significant misstep for Balmer and his team.

Now to be equitable, you might retort that since this is Microsoft’s first venture into manufacturing it’s own tablets I should give it a break but my rejoinder is simply that Microsoft should stick to what it knows best: Software.

Asking me to forgive Microsoft for manufacturing tablet hardware would be like asking me to forgive Coca Cola for manufacturing watches (if that ever happened).

I think companies should stick to their core competencies and shouldn’t foray into unknown verticals.  Unless Microsoft has a talented team with the requisite experience and a proven track record of success in the hardware space, Microsoft should hone it’s skills with Windows.

Just as Coca Cola should keep making soft drinks, Microsoft should keep making software.

It’s that simple.