Microsoft struggles on a slippery Surface

The failure of Microsoft's Surface tablet may not spell doom for the computer giant but it is teetering on the edge, writes Alistair Fairweather. (AFP)

The failure of Microsoft's Surface tablet may not spell doom for the computer giant but it is teetering on the edge, writes Alistair Fairweather. (AFP)

If you launched a brand new product just before Christmas and then sold around 700 000 units, you'd be pretty pleased. But if your company was Microsoft, and the product was the Surface tablet, those numbers would look a bit pitiful.

But wait a minute: 700 000 units at $500 each means Microsoft earned at least $350-million in just three months from a brand new product. How can that be considered pitiful? These numbers are in comparison to its main competitors – Apple and Samsung – which sold 22.9-million and 7.9-million units of their own tablets respectively.

This was Microsoft's first quarter in the game.
These things take time, right? Not for Apple, which sold 3.2-million iPads in the same quarter they were launched. The iPad also debuted in the second quarter of the year, not a traditional gift-giving season. Apple was also creating an entirely new market for a device that many analysts scornfully dismissed as "pointless" and "a fad".

What's really embarrassing is that Barnes & Noble, a bookseller, managed to sell more tablets in the period than Microsoft – and you can bet that Barnes & Noble didn't spend nearly as much money on marketing as the software giant did.

But the most worrying thing for Microsoft isn't the Surface's sales numbers themselves, but what they mean for its flagship operating system – Windows 8.

The Surface and Windows 8 were developed as a matched pair: Microsoft's first foray into touchscreen devices mated with its first "touch-optimised" operating system. If one of the pair struggles, the other is doomed.

Some Microsoft fans are pinning their hopes on the new more powerful range of Surface tablets – the Surface Pro – which will launch later in February.

The Pro tablets have more powerful chips and will thus showcase Windows 8 to its full effect – or so the theory goes. But if Microsoft is already struggling to sell the $500 version of the Surface, how will it sell a souped-up version for $900? And Microsoft is getting little help from its traditional market in personal computers.

Sales of laptop and desktop computers for the fourth quarter of 2012 were down 11% compared to 2011. In the past a new version of Windows has spurred people into buying new computers but that did not materialise this time.

It's true these disappointing numbers haven't had any discernable effect on Microsoft's earnings. The company still raked in $21.4-billion in revenue and $7.7-billion in profit for the quarter. It proudly announced that over 60-million licenses of Windows 8 had already been sold, lifting the profits of its Windows division by nearly a half a billion dollars compared to the previous year. It's also true that the company is sitting on $68-billion in cash and is no stranger to coming from behind.

When Microsoft first launched its Office suite in 1989, it was widely derided as inferior to competitors like Wordperfect and Lotus. Two decades later it dominates the office automation market and accounts for close to 50% of the company's profits.

Microsoft used the same tactics with its servers and tools division – now a hugely profitable part of its business – and with its entertainment division that produces the popular XBox consoles.

Microsoft, in short, is known for playing the long game. But there's a critical difference this time around.

In the past Microsoft entered every new market on the front foot with nothing to lose. When it broke into office automation, its operating system business was still booming. When it entered the server and gaming console markets, both operating systems and office automation were still minting cash. This time around those markets are completely mature – so mature in fact that you might say they're in decline.

This time its competitors, like Apple and Samsung, are on the front foot and it is scrambling to keep up. And this time its clever business tactics – bundling, making deals with device manufacturers, winning over developers – have either been deftly copied or made irrelevant.

Some of the more excitable prophets of doom seized on last quarter's performance as proof of the inevitability of Microsoft's decline. I think it's premature to announce the untimely death of one of the world's most powerful companies. But I also think the prophets have a point. Microsoft is teetering on the edge – regardless of what its financial reports might say.

Alistair Fairweather

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