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Microsoft's money pit: Surface has lost $1.2B

Gregg Keizer | May 20, 2014
CEO Nadella will unveil new tablets Tuesday, but can he stop the bleeding?

The loss, although not an existential threat — Microsoft recorded $5.7 billion in net income in the March quarter and has $88 billion in its cash and short-term investment horde — puts Tuesday's unveiling in a harsh spotlight. Can Nadella turn tablets around, from money losers to money makers?

Microsoft's tablet strategy has cost the company $300 million in the last nine months, more than $1.2 billion since its debut. Can the new CEO turn that around? (Data: Microsoft, SEC filings.)

Analysts weren't optimistic.

"I expect premium price points," said Patrick Moorhead, principal analyst with Moor Insights & Strategy, in an interview last week.

He explained why by citing rivals' business models. "Both Google and Amazon have models for their tablets where they make it up on the back end," Moorhead said, referring to the advertising and product sales that the two rely on to offset their lower-priced tablets. "But I don't feel like Microsoft has achieved scale in their tablet content to offset [lower prices]."

Higher prices means lower sales volume. And that's a problem. "You have to have scale to buy cheaper components. Microsoft doesn't have the scale to be profitable or to hit interesting price points," Moorhead argued.

In other words, because Microsoft will be forced to stick with premium prices for the Surface, it's unlikely to sell in enough volume to be able to strike bargains with component suppliers. If it was able to make those deals, it could either use the lower costs to turn a profit in the short-term, or more likely, immediately reduce prices, recognizing that would delay profits but expecting the losses to turn into even larger, and more sustainable, gains.

Others also expected the new Surface tablets to retain their high prices. Independent analyst Sameer Singh, for example, pegged the likely price of a "Surface Mini," a 7- or 8-in. tablet, at between $249 and $299. "I don't think Microsoft can afford to compete with low-end Android and 'white box' manufacturers on price," Singh said recently.

Singh's price range was closer to the established first-generation iPad Mini — which lists for $299 — than to the current crop of 7-in. tablets from the likes of Amazon and Samsung, priced at less than $200.

Rumored prices of a new slate of Surface Pro tablets — the models that run legacy Windows applications — also tilt toward the high end. A report Saturday by Windows Phone Central claimed that the next-generation Surface Pros will start at $799 and run up to $1,949.

Those prices are minus the keyboard that Microsoft virtually mandates in its marketing. A Surface keyboard currently runs between $80 and $140.


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