Surface Warfare: What Microsoft's Steve Ballmer Can't Get Right

Microsoft's tablet entry, the Surface, was always a bit of a long shot: late to market, derivative and not particularly noteworthy except as evidence that the company still has a pulse, recognizing market demand when it sees it (even when competitors have already pointed the way with a blazing neon trail).

But then the company did a curious thing: instead of marketing this for what it was, the not-quite-iPad-but- good-enough entry from a company no longer known for innovation but recognized as an old familiar (and comforting) face by many global consumers, Microsoft decided to charge a premium. Not more than the iPad, but definitely not a discount.

The result, all too predictably, was that the company was forced to take a $900 million charge for unsold inventory. And one suspects that the public number was managed, via accounting sleight of hand, so it wouldnt top the embarrassing $1 billion level.

The issue is instructive not because anyone outside of Redmond, Washington particularly cares about the Surface, but because the way this was handled reflects a larger truth about Microsoft's ongoing approach to development. Engineering driven, redolent of 'we know what's good for you,' and based on an insider's view that resources invested must be recovered as quickly as possible. As opposed to, how do we sell tons of the damned thing and maybe even earn back some of that lost consumer mojo we once owned?JL

John Dvorak comments in PC:

Steve Ballmer has a problem and he's had it since the OS/2 days: he doesn't get pricing or marketing. He always wants to charge too much based on some idealistic cost of development model.

The basic philosophy is if it cost a lot of money to develop, it should be priced high. If Detroit used this model, the Chevy Volt will cost over a $1 million.

And so it goes with the inevitable discount on the warehouse full of unsold Surface tablets. The real bummer in the group is the controversial Surface with Windows RT%displayPrice% at %seller%, which is an incompatible faux Windows 8 tablet that actually showcased how far Microsoft could develop for a new chip. It was something of a crowning achievement for the software development folks. They should have gotten some award, but instead they all got screwed by the simple fact that Microsoft thinks so highly of itself in a market dominated by Apple that it could not price the product competitively.

Who in his right mind would spend $500 on a Windows RT tablet when you can buy an iPad for about the same price? Does Microsoft think consumers are insane? I've been around a dinner table full of people when someone asked which tablet to buy and everyone said "iPad." And that included me!

So Microsoft takes a $900 million write-down and decides to put the Surface on sale for $350. This will attract nobody. The sweet spot for these devices was established when HP sold out an entire inventory of TouchPads in August 2011. The 16GB tablet sold out at $99 and this is despite the fact that the white elephant was abandoned by HP.

You'd think Microsoft would have noticed this phenomenon and reacted accordingly. If Microsoft had put 32 to 64GB of memory in these Windows RT tablets and blew out the six million units rotting in the warehouse at $150 each, it would have reaped $900 million in sales. That sum would have negated the $900 million write-down and—boom!—Microsoft is now gold. The stock would have continued to skyrocket. But no.

I can assure you if HP can sell an orphaned product at $99 and $150, then Microsoft could move these Surface units like crazy with similar pricing. But instead of thinking this way and blowing a hole in the iPad market, the company sells the Windows RT for $500. This is not only arrogant but just plain dumb.

Microsoft used to be known as a competitor that would do anything to win but Ballmer cannot bring himself to apply an aggressive scorched earth policy to gain market share. It has enough money in the coffers to run out cheap $100 tablets for decades but apparently Ballmer would rather take a huge write-down that could have easily been prevented. He has his principles, I guess.

When it announces more bad news in the future, we will all be left wondering why the company wouldn't bite the bullet.