Microsoft has already taken a $900 million (€676 million) charge against inventory and pricing adjustments for its Surface tablet, and has now revealed that its revenue so far from the struggling product has been less than that – at $853 million.
Tablets, while appearing to offer the growth potential of a fairly virgin market, have actually proved a minefield for firms that don't get the design and user experience just right. RIM, which recently admitted it would not run BlackBerry 10 on its PlayBook, effectively orphaning the device, bears witness to this, as do Hewlett-Packard (several times over) and Dell.
Even Samsung took a while to get it right, and to come up with something really distinctive in the Note, while Nokia hasn't played at all. Even some tablet makers with fairly popular products, like Barnes & Noble, have foundered on the rocks of a poor business model.
For such a new sector, consolidation has come very quickly, partly because the devices are strictly luxuries, not must-haves like phones, so consumers will wait for the right experience to come along. For many, of course, this has been the iPad, while the Galaxies Tab and Note, the Google Nexus family and the Amazon Kindle Fire are the other success stories, along with a host of low cost, white label products.
It seems that Microsoft is falling on RIM's, rather than Apple's, side of the fence, especially with the ARM-based Windows RT offering that was meant to kickstart a new life for Windows outside of x86. But consumers remain unconvinced, and PC partners like Acer have been angry at the new competition from the OS vendor. Acer has been very negative about Windows RT and this week said it would not produce another tablet for the OS, focusing its efforts on the Intel-powered Windows 8 Pro.
Such decisions, mirrored by others like Samsung and HP, will please Intel, of course, keeping the old Wintel double act alive, but also Google, which sees little threat to Android on the ARM platform.
Although Microsoft has not disclosed sales unit figures for Surface, the revenue level suggests it has sold about 1.7 million units, which is in line with various analyst calculations. The $853 million of revenue equates to less than 5% of the total takings of the Windows division last year, despite the huge marketing budget put behind making the Surface RT a breakthrough launch.
In its SEC filing, Microsoft said Windows sales and marketing expenses rose by $1 billion in its latest fiscal year, up 34%, “reflecting an $898 million increase in advertising costs associated primarily with Windows 8 and Surface” – an advertising outlay that is larger than the sales it sparked.
While the Surface RT is targeted at the premium end of the market, up with the iPad, there is rising growth in low end Android tablets, mainly for emerging markets. However, these low end offerings worry Google, which has always been particularly protective of the Android user experience on the large screen.
Its own Nexus 7 is designed to showcase this UE at its best, and VP of Android product management, Hugo Barra, implies the company had to design Nexus because the wider device ecosystem was failing to step up to the mark. He told The Verge: “I really do think that the Android ecosystem hasn't yet put its best foot forward, when it comes to tablets.”
One tablet, of course, which has combined affordability with a strong business model is the Kindle Fire, which the Nexus 7 largely emulated both in specs and in its reliance on content sales, not device revenues, to drive the business. Amazon sells the Fire almost at cost, because it knows from its Kindle eReader experience that an optimized user experience, tailored to content, ensures that users will buy and consume more media, which in the Amazon model, has to come from the etailer's own stores (Kindle, LoveFilm, AppStore and others. The smooth purchasing process on a touch-enabled tablet even drives increased transactions in its physical shopfronts).
Amazon is now readying its next wave of Kindle and Kindle Fire models for the holiday buying season. According to various leaks, the 7-inch Fire HD will run on a top end Qualcomm Snapdragon 800 chip, trebling performance without a price increase (and further smoothing that experience for watching, listening to, reading and buying content, whether downloaded or in the cloud). There will also be increased RAM and storage options while the larger 8.9-inch tablet will have a 2560x1600 HD display and two cameras.