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If you are following Microsoft for the past few years, you might not be surprised to hear that Microsoft continues to lose money on its Surface tablets. ComputerWorld spoke with an analyst and concluded that Microsoft could have lost over $1.7 billion since its launch. In the last quarter, Surface business posted a revenue of $409 million and the cost of revenue was at $772 million. So, Microsoft lost about $363 million and they even mentioned in the financial reports that current year cost of revenue included Surface inventory adjustments resulting from our transition to newer generation devices and a decision to not ship a new form factor.” In FY2014, Microsoft lost about $676 million and in FY2013, Microsoft lost about $1.049 billion (including $900 million write-off).
But does it matter to Microsoft? ComputerWorld and their analyst claims that Microsoft may stop investing in Surface if this loss continues for few more quarters. But, I think Microsoft has enough balance sheet and cash flow to continue Surface business until it makes profit. Losing billions of dollars in some business units are not new to Microsoft, Xbox and Online Services Division (Bing) are two great examples. Both of them are now a great assets for Microsoft and even generating profits. Microsoft’s loss from Surface business represents just 3% of the company’s FY2014 gross margin.
In the annual letter sent to Microsoft employees, CEO Satya Nadella highlighted that Microsoft’s Windows device OS and first-party hardware will set the bar for productivity experiences like they did with Surface Pro 3. He also hinted that Microsoft will at times create new categories like they did with Surface(productivity tablet) to stimulate more demand for the entire Windows ecosystem.
Our first-party devices will light up digital work and life. Surface Pro 3 is a great example – it is the world’s best productivity tablet. In addition, we will build first-party hardware to stimulate more demand for the entire Windows ecosystem. That means at times we’ll develop new categories like we did with Surface. It also means we will responsibly make the market for Windows Phone, which is our goal with the Nokia devices and services acquisition.
This clearly indicates that Microsoft is willing to experiment with first party hardware and even ready to create new categories like they did with Surface.
What do you think?