Microsoft loses money on every Surface it sells -- $300 million in total and counting

Microsoft may say that its future lies in devices and services, but at the moment it's losing big in the devices market: $300 million and counting for the Surface in the last nine months. And the more Surfaces it sells, the more money it loses. Is this any way to turn around a company's mobile strategy?

Computerworld's Gregg Keizer reports that according to Microsoft's latest 10-Q filing with the U.S. Securities and Exchange Commission, Microsoft reported $494 million in revenue from the Surface line in the latest quarter, but the cost of revenue was $539 million, which means that it lost $45 million in the quarter from Surface. That's $6 million more in losses than the previous quarter, which ended December 31.

In the last nine months, Microsoft spent $2.1 billion on the Surface, and gained $1.8 billion in revenue, meaning a total loss of $300 million. The biggest loss came in the September 2013 quarter, some $216 million. However, Microsoft continues to lose money with each Surface it sells.

All this brings to mind the old joke about a company that loses money on every unit of a product it sells, and when the CEO is asked how he's going to fix the problem, he responds, "volume."

Without knowing what's behind the high Surface costs, it's hard to know how Microsoft is going to fix the problem. It's not as if the Surface is cheap, with the Surface 2 Pro starting at $899, and the RT-based Surface 2 at $499. The cheapest iPad Air sells for $499, and Apple has certainly made iPads an extremely profitable product line.

The Surface will bring in additional revenue compared to the iPad, because it uses Microsoft services such as Bing, Bing Maps, OneDrive, and email. But I'm not convinced that the additional revenue will make up for the income shortfall.

When it comes to pricing, Microsoft is caught in a quandry. If it raises prices, it could well price the Surface out of the market. Already it's far more expensive than Android tablets, and carries a luxury price tag. Microsoft simply can't afford to raise the price. So it has to find a more efficient way to manufacture and sell them. That's easy to say, and hard to do.

The upcoming Surface Mini might help Microsoft, at least if it carries a mini price tag rather than a maxi one. But either way, until Microsoft figures out how to drop the cost of manufacturing and marketing for the Surface, its mobile strategy most likely won't work.

Copyright © 2014 IDG Communications, Inc.

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