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Microsoft’s Surface Tablet Is Said to Fall Short of Predictions

Microsoft Corp. (MSFT) has sold about 1.5 million Surface devices, people with knowledge of the company’s sales said, a slow start in its bid to crack the fast-growing tablet market to make up for slumping personal-computer demand.

A customer inspects a Microsoft Corp. Surface tablet inside the company's store in New York. Microsoft’s Surface RT, its first-ever computer hardware product, went on sale Oct. 26. The more expensive Surface Pro, which is built on an Intel Corp. computer chip and can run older PC software, arrived last month. Photographer: Ramin Talaie/Bloomberg
Microsoft has sold little more than a million of the Surface RT version and about 400,000 Surface Pros since their debuts, according to three people, who asked not to be named because sales haven’t yet been made public. The company had ordered about 3 million Surface RTs, they said. Brent Thill, an analyst at UBS AG, had initially projected that Microsoft would sell 2 million Surface RT devices in the December quarter alone.
The poor reception for Surface, unveiled last year, adds to challenges facing Microsoft’s Windows unit, which brings in a quarter of the company’s revenue. The devices are Microsoft’s first direct attempt to grab a slice of the surging market for tablets, seeking to take on Google Inc. and Apple Inc. and prove that Windows has a place in a world of touch screens and smartphone applications. That hasn’t happened so far, said Alex Gauna, an analyst at JMP Securities LLC in San Francisco.
“It’s pretty clear that things were bad entering the year, and at least for the moment they’re getting worse,” Gauna said. “The path to a successful Surface, in the same way that they were successful with Xbox, is not very clear to me right now.”
Catherine Brooker, a spokeswoman for Microsoft, declined to comment on Surface sales.
Surface Orders
By contrast, Apple Inc. sold 22.9 million iPads in the quarter that ended in December. Worldwide tablet shipments reached 128.3 million units in 2012, according to IDC. Apple’s iPad accounted for 51 percent of the market.
Microsoft’s Surface RT, its first-ever computer hardware product, went on sale Oct. 26. The more expensive Surface Pro, which is built on an Intel Corp. computer chip and can run older PC software, arrived last month.
While Microsoft’s newest version of its operating system, Windows 8, runs on PCs and tablets from other computer makers, the company decided to gamble on tablets itself, trying to emulate Apple’s and Google’s strategy of delivering their own flagship devices.
For Microsoft, the stakes are high. PC shipments dropped last year for the first time in a decade, and analysts predict that they will fall again in 2013. Chipmaker Texas Instruments Inc. said last week that the computer market was weaker than the company had expected in January and chip orders related to notebooks have been sluggish. Hewlett-Packard Co., the world’s largest PC maker, last month said the market deteriorated more than anticipated in its quarter that ended in January, and the company expects the decline to accelerate in the current period.
‘Receding Tide’
Notebook shipments may fall by as much as 18 percent in the first quarter from the previous three months, compared with a median first-quarter decline of 9 percent for the past five years, according to research from BMO Capital Markets.
“The tide continues to go out on PC sales as consumers and emerging market users prefer tablets and smartphones to Windows based PCs,” Rick Sherlund, an analyst at Nomura Holdings Inc., wrote in a report this week. “Windows 8 has failed to ebb the receding tide.”
Microsoft’s Surface is the company’s attempt to showcase the interactive and mobile capabilities of Windows 8. The devices, which function like tablets with a full touch screen, can also be attached to covers that double as keyboards, giving them the ability to be used like laptops.
Yet Surface has failed to connect with consumers. Windows 8 is “awkward” and hasn’t successfully combined the ease of use of a tablet with the capabilities of a PC, Nomura’s Sherlund wrote. Consumers see no need to pay extra for it when cheaper tablets with free software will meet their needs, he said.
Fewer Apps
Surface’s appeal has also been hampered by a lack of applications. Microsoft declined to say how many are available for Surface RT, though its apps marketplace has lacked some high-profile offerings, such as a Facebook Inc. (FB) app. Twitter Inc.’s app for Surface was released just this week. MetroStore Scanner, a website that does its own calculation of how many apps are in the Windows store, estimates there are more than 47,000 as of yesterday. There are more than 300,000 apps for iPad.
In addition, Microsoft opted to initially sell Surface RT only at its own stores, which numbered just over 60, then expanded to other retailers. That limited availability may also have left the tablet out of the running for some buyers.
Sales Estimates
Brendan Barnicle, an analyst at Pacific Crest Securities, reduced revenue estimates for Microsoft’s current quarter, citing weak Surface demand. He projects the company will sell 600,000 tablets in the period, down from an earlier prediction of 1.4 million.
Elsewhere, the tablet market is booming. Shipments may jump 49 percent in 2013 to 190.9 million, IDC estimates, with unit sales expected to top 350 million by the end of 2017. This year, the devices are expected to outsell notebook computers for the first time, according to Williams Financial.
Microsoft is taking steps to turn around the tepid demand. The software maker is trying to rejigger its marketing for Surface RT, said two of the people familiar with the company. Microsoft executives have said internally that they failed to persuade some customers to choose Surface over Apple’s iPad or Samsung Electronics Co. (005930)’s tablets, which run on Google’s Android software, one of the people said.
Tablet Partners
Windows tablets from other computer makers have met with a similar reaction. Microsoft had worked with partners to release four Windows RT tablets. Demand for these products has been so light that Samsung, maker of one of the tablets, decided in January not to introduce it in the U.S. Samsung has also stopped selling the device in Europe, Lee Young Hee, executive vice president of Samsung’s mobile business, said in an interview in Seoul.
PC sales may get a lift in the second half, with new Intel chips and more availability of touch screens making them cheaper and more capable and helping them compete better against tablets, Sherlund and Gauna said.
Still, there’s less optimism about Surface. Pacific Crest’s Barnicle cut his sales estimate for the tablet to 5 million units from 7 million for fiscal 2014, which starts July 1. Sherlund cut his estimate for the total market for PCs and Windows-based tablets this year to a decline of 1 percent from growth of 5 percent.


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