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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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