Microsoft CEO Satya Nadella in Seattle last week. (GeekWire photo)

Microsoft’s accumulated losses on its Surface tablets have reached $1.7 billion, according to an estimate this week by reporter Gregg Keizer of Computerworld, based on an analysis of Microsoft’s financial notes in its latest Form 10-K filing with the SEC.

surfacepro3-600x337With cash and short-term investments of more than $85 billion, the company can certainly absorb the loss, but it’s still weighing on the bottom line at a time when Microsoft needs to show steady earnings growth. Investors are accustomed to big profit margins from Windows, Office and other traditional Microsoft products.

Microsoft shareholders have seen this story before, as Microsoft spent billions to build the Xbox business. But this is a new era, with a new leader in Microsoft CEO Satya Nadella, who has already provided a sense for his pragmatism with the decision to cancel Microsoft’s Surface Mini tablet.

Here’s what Nadella said about hardware on Microsoft’s most recent conference call.

At times, we will develop new categories like we did with Surface and we will responsibly make the market for Windows phone. However, we are not in the hardware for hardware sake, and the first party device portfolio will be aligned to our strategic direction as the productivity and platform company.

As I said before, going forward all the devices will be created with an explicit purpose to light up our digital work and life experiences. Good examples of this today are what we are doing with Surface Pro 3 for note taking and PPI for meetings. You can expect to see this type of innovation in our hardware including phones.

In a post on GigaOm, Kevin C. Tofel cites Keizer’s research and asking similar questions, pointing out that the Surface differs from the Xbox in at least one key way. “Unfortunately,” he writes, “the laptop and tablet markets aren’t quite the same as the gaming console markets, where money can be made up through attach rates of $60 game titles.”

Tom Warren of The Verge also offers his take on Keizer’s calculations, noting that Nadella killed off Nokia’s feature phones, but has been expanding Surface Pro 3 internationally. He writes, “If the Surface Pro 3 isn’t successful in turning Microsoft’s Surface losses around, then it makes its existence a lot harder to justify, especially when Microsoft is no longer a ‘devices and services’ company.”

At the very least, Nadella is making it clear that Microsoft’s hardware approach will be much more surgical and strategic under his leadership, vs. scattershot and broad.

Read the full Computerworld analysis here, with all the details on the numbers.

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  • Phil Winkel

    the majority of the losses on surface were presumably from the first generation. I think it was like 800 or 900 million they wrote off on 1st gen surface. The first generation surface was garbage, especially the non-“pro” one that was running Windows RT. Windows RT sucked; you can go read about that disaster elsewhere. Microsoft has since killed off Windows RT. So their initial dive into the Surface hardware was a big failure and very costly.

    The surface pro 2 was a big improvement, but still needed some refinement. The Surface Pro 3 is a very solid piece of hardware. The Surface Pro 3 is probably doing fairly well. It’s unlikely they will to kill off the surface after investing so much money into it, and especially right now just after they have come so far towards perfecting the hardware.

    Some of the surface stuff is still kinda funny, like selling the touch cover as a separate accessory when it should just come with the surface. Overall though the Surface Pro 3 is a nice piece of hardware.

    • GG002

      To be clear: Windows RT and Surface RT were somewhat odd of products. The problem still wasn’t so much whether or not they sucked. It was the confusion and poor marketing.
      I, as an owner (since Surface RT came out), still enjoy the tablet and use it on my many travels for writing long articles and projects with ease, as well as for blogging, consumption and occasional games. All the games (and other apps) in the Store work for my tablet, and there is plenty for me.
      Even with the limited functionality of RT, my laptop still almost always stays at home, simply because I have the full Office suite on the tablet, plus a full browser as well as good side-by-side multitasking.

      • as04

        I completely agree, it was really a result of poor marketing and wrong expectations. People bought a Surface RT and expected the same functionality of a full-fledged Windows laptop, which I blame on marketing. Customers don’t have the same misconception when buying an iPad. They don’t expect to run OSX apps on there. Even though Surface had more functionality than the iPad in a lot of areas, it got dinged by customers because people had different expectations of the product.

      • Phil Winkel

        windows RT did suck, I guess it’s a subjective word, but there were literally no windows store apps when it came out (there probably still aren’t), and even worse like you said people had no idea what they were getting themselves into with windows RT due to the marketing and confusion. Some people are OK with it, surely the “it does what I need it to do” crowd can make due with it and and justify the purchase in their minds. Overall it sucked and it was a bad product with horrible marketing. Your tablet is running on an operating system that’s pretty much dead in the water.

        • GG002

          At the time of launch, not many apps were there, but there ARE now a lot of apps. Maybe you’ve missed it, but Windows 8/.1 runs all the same apps, so it makes literally is no difference to me if RT dies, because I’m going to get the Pro 3 next, which will act exactly the same way as my RT in terms of apps, and also have traditional programs.

          I’m just not afraid of jumping into the newest stuff, regardless of its success rate or popularity. I’m just a geek who likes to try out new things and find the bugs and faults, and see the progress of a product first-hand. It’s not a matter of justifying a purchase, it’s curiosity. That it happened to be good enough to leave laptop at home was not intended. So you may want to quit patronising me and people who like to endeavour into new places. If I were to patronise you, I would say you are closed-minded and scared of change.

          • Stratjacked

            I’m a .NET developer, I make a living using microsoft tools and tech. I had a surface pro 3 for a while, returned it for nonrelated issues (digitizer and pen kinda sucks, compared to wacom).

            I’m not hating on microsoft. Not hating on jumping into the newest stuff or being an early adopter. I jumped on windows phone 7 right away, I developed several apps for it before jumping ship with the whole windows phone 7 / 7.5 / 8 debacle.

            All I’m saying is windows RT sucked. This is just me expressing my opinion. You might love it, that’s great.

            I have windows 8.1 at work and at home on several computers. I don’t use the Microsoft Store, or Windows Store, or whatever it’s called, whatsoever. I browse through there once in a while but it still just feels weird. I’d rather download the desktop version of evernote than get the funky windows 8 thing. I’d rather go to than use the janky windows 8 facebook app. This is pretty much how it goes for every single app I’ve tried; the desktop version and/or web version is better than the neglected windows 8 version. There’s not enough support there yet. Which is again, my opinion.

            btw, regarding surface pro 3, you may want to just wait until Q1 ~ Q2 2015 for the 4th generation of surface pro because they will likely have the new broadwell processors. Broadwell’s integrated graphics are worth waiting for.

  • Patrick Husting

    You have to spend money to make money.

  • Jonathan George Anaya

    MS is holding onto a DYING price structure:
    In this Brave New World, Consumers can access Tablets and Phones for pennies on the dollar. Google, ASUS and Lenovo have made $149 tablets possible.

    Price Surface at the MARKET RATE (and not the artificial Apple Levels) and you’d get a successful product.

    • GG002

      Yes, but those are also pretty useless for anything but consumption. The problem isn’t the product OR the price. The problem is people underestimate the power of the SP3. It’s in a similar package to other tablets, but perform like a full blown computer. Biased media contributes to this false comparison too (hey, Microsoft), neglecting what the other tablets cannot do.

  • Granpa0

    Getting rid of the confusing debacle that is the RT line is smart. From here on out, Microsoft needs to go Intel. They can offer a cheaper version with the Intel Atom processors, and the more powerful full-blown i5, and i7 pro line and be successful. The type cover needs to be included into the pro line, period. A few refinements here and there, and better marketing strategy and they’ve got a hit.

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