Microsoft Craters on the Surface

Microsoft's recent wave of promotions and deep discounts for its

Surface RT tablet, the company's first big push into hardware, led to

speculation that it was close to releasing a new version. Turns out

the reason was even simpler: Nobody's buying the thing.



In its exceptionally bleak earnings report yesterday, Microsoft took a

stunning $900 million writedown on inventory for the Surface RT, which

launched in October, starting at $500 ($600 for double the storage

capacity). On Sunday, the company knocked $150 off both models; Mark

Hachman's back-of-the-envelope math ballparks the unsold inventory at

6 million tablets, compared with maybe 1.8 million sold. This is after

a June promotion that offered the device to schools and universities

for as much as 60 percent off.



That doesn't bode well for future iterations of the Surface, or for

Microsoft's plans to move further into the hardware market. Chief

Executive Officer Steve Ballmer's prepared earnings statement made

reference to new Windows 8.1 tablets and PCs among the "compelling new

devices" Microsoft has planned. While the Surface has scored some

decent reviews and the price cut can't hurt, it's unclear how the

company plans to compel people.



For now, Microsoft is still relying heavily on its PC software and

enterprise businesses. They helped push the company's revenue up 10

percent to $19.9 billion, though it fell well short of analyst

estimates. On last night's earnings call, CFO Amy Hood was asked when

she expects Microsoft's tablets to compensate for the contracting

consumer PC market. Points for honesty: "It will take a long time for

that to happen," she said.