For Microsoft, tablet business is a losing proposition

Some 18 months after Microsoft launched its first Surface tablet, the software giant continues to lose money on every one it sells.

The company broke out the bad news for its tablet business in a regulatory filing last week following its fiscal third quarter earnings report. In its most recent quarter, the company’s Surface tablets cost it $45 million more to produce than they generated in revenue.

In its fiscal third quarter, which ended March 31, Microsoft sold $494 million worth of Surface devices. But those same devices cost the company $539 million to produce and distribute.

That gave the product line a gross profit margin — which is the difference between the sales generated by a product and the amount they cost to make as a portion of the sales — of -9.1 percent.

But that was actually an improvement of sorts. For the first nine months of Microsoft’s fiscal year, the company sold $1.8 billion worth of Surface tablets. Those devices cost the company $2.1 billion to produce, giving it a gross profit on the product line of -16.7 percent.

Note that those figures only include the direct costs of making and selling Surface tablets. They don’t including operating expenses, such as the administrative or research-and-development costs.

Microsoft doesn’t break out those expenses for the Surface line in particular, but its entire “devices and consumer” operating segment, which includes sales of the Xbox and the licensing of Windows, incurred $2.3 billion in operating costs last quarter. Suffice it to say that as a stand-alone business, Surface would be losing money hand over fist.

H/T to Computerworld.

Photo courtesy of Microsoft.

 

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  • sam liu

    With Google selling off the Motorola basic handset business and retaining the important devisions and patents, I scarcely see Microsoft as nimble!

  • jim-346431

    The surface is so very NOT sexy like the iPad. I love windows (especially the compatibility). I NEED the Office suite. Apple excels (no pun intended) in the entertainment areas but lags in productivity. But in reality, MS has become stagnant when it comes to the Office suite. It is still a pain to merge Excel tables into Word without spending a long time formatting them to fit neatly. Once Apple makes a serious effort to break into productivity (iWork needs improvements), MS will really find a significant loss of business. The ONLY reason I looked at purchasing the tablet was the need for Office. But then decided the laptop I already had was more comfortable.

  • The author is very wrong. This is a platform war and Microsoft cannot lose it on the tablet front. Losing $45M for Microsoft is like nothing. When Amazon launched Kindle and Google launched Nexus 7, they have both used the same strategy.

    What the author failed to realize is that Microsoft also makes a lot of money on cloud services, and that part is growing at about 100% YoY. Moreover, Microsoft’s Surface tablet has a much higher gross margin than Android based tablets. As the volume picks up, it can be a very profitable business. The trend is clearly in favor of Microsoft.

  • Lizzie Saito

    I think the Microsoft tablet still has an edge in the market. I guess what MS should do is come up with an innovative product that they can call an industry first. Look what SensyTouch did, they became the industry leader for multi-touch solutions (came up with a tablet as big as a coffee table).

 
 
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