Another day, another lawsuit, this one alleging that Microsoft purposely misled investors over the poor prospects of its Surface RT tablets. Does the class-action lawsuit have validity, or is it just one more instance of lawyers trying to cash in on bad news, a sign of a legal system gone amok?
The suit by the law firm Robbins Geller Rudman & Dowd charges that Microsoft "issued materially false and misleading statements regarding the Company’s financial performance and its tablet computer, the Surface RT." (If you want to read the entire suit, get the PDF here.) Here's how the firm sums up its charges:
Specifically, defendants misrepresented and failed to make public the following adverse facts: (i) that the Company’s Surface RT product was experiencing poor customer demand and lackluster sales; (ii) that the Company’s Surface RT inventory experienced a material decline in value during the quarter ended March 31, 2013; (iii) that the Company’s financial statements for the quarter ended March 31, 2013 were materially false and misleading and violated Generally Accepted Accounting Principles and Microsoft’s publicly disclosed policy of accounting for inventories; (iv) that the Company’s Form 10-Q for its third quarter of 2013 failed to disclose then presently known trends, events or uncertainties associated with the Surface RT product that were reasonably likely to have a material effect on Microsoft's future operating results.
In essence, the suit charges that Microsoft didn't alert potential investors to how badly Surface RT tablets were selling, and that the company's financial statements were false and misleading. Named in the suit were Microsoft as well as CEO Steve Ballmer, former CFO Peter Klein, Corporate Vice President Frank Brod, and Tami Reller, who until the recent Microsoft reorganization was head of business and marketing for the Windows division.
No damages were specified, but you can be sure the lawyers will be asking for plenty. The suit is being filed on behalf of anyone who bought Microsoft stock between between April 18, 2013 and July 18, 2013.
What evidence does the suit cite? As far as I'm concerned, not much. It charges, for example that after the Surface RT's launch:
What the defendants knew, but failed to disclose to investors, however, was that Microsoft's foray into the tablet market was an unmitigated disaster, which left it with a large accumulation of excess, over-valued Surface RT inventory.
The suit also cites Microsoft's attempt to spur market demand for the Surface RT by giving away a free magnetic cover and keyboard, and then slash the price of the tablet by 30%.
To show how much of a disaster the RT had become, the suit quotes numerous articles in the computer press, including this one in Computerworld, as well as articles in PC World, Infoworld, and others. And it cites statements by various Microsoft officials as evidence, including this from Steve Ballmer:
"The bold bets that we made on cloud services are paying off as people increasingly choose Microsoft services including Office 365, Windows Azure, Xbox LIVE, and Skype. While there is still work to do, we are optimistic that the bets we’ve made on Windows devices position us well for the long term."
What does all this add up to? Plenty of nothing. Ballmer's statement that "the bets we’ve made on Windows devices position us well for the long term" is innocuous. Yes, it's certainly optimistic. But if companies can be sued for optimism, there's not a single corporation in the United States that can't be sued. Who starts a business or launches a strategic plan without a normal amount of optimism?
The Surface RT has been a fiasco by any accounting. It's been a failure, as has Windows RT itself. It's not likely that Windows RT and Surface RT will survive in the long term.
But making mistakes in business isn't illegal. Microsoft hasn't done anything illegal here. This suit should be thrown out as soon as possible.