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Alexis Kleinman   |   July 26, 2013   11:29 AM ET

Microsoft boss Steve Ballmer is finally admitting what everyone has been thinking: Microsoft made a huge mistake with the Surface RT tablet.

Last week, the company disclosed that it lost over $900 million on the low-selling tablet computer, and during an internal Microsoft event this week, Ballmer put the disaster into simple, understated terms, The Verge and Neowin separately reported.

"We built a few more devices than we could sell," Ballmer reportedly said.

Despite some good reviews, Microsoft had an extraordinarily difficult time getting the Surface off of shelves, and an overwhelming number of Surface RT tablets have been left unsold. If you break down the $900 million Microsoft lost on the Surface RT, it comes out to about 6 million unsold devices.

Still, Microsoft is working on the next generation of the tablet, and internal response to the new device has been positive at Microsoft, Neowin reports.

It's not just the Surface that has been letting the company down; Microsoft is not selling enough Windows products in general. But Microsoft does have one bright spot: Windows Phone 8 is beating BlackBerry for the coveted No. 3 spot in the smartphone market.

Dino Grandoni   |   July 19, 2013    3:44 PM ET

In some unknown warehouse presumably sits a pile of millions of beautiful, unused Surface RTs, the tablet computer that was supposed to resurrect Microsoft. Late Thursday, the company revealed for the first time that it has failed to entice many people to buy the product, and the software maker made an unexpected, $900 million writeoff on its unsold Surface inventory. The losses don't end there: On Friday morning, Microsoft shed $30 billion in value after its stock tumbled 10 percent.

According to one calculation, that loss translates to nearly 6 million sleek and rather stunning machines that consumers have decided they don't care to own. No matter how the math works out -- the company would not provide exact sales numbers -- that heap of Surfaces just burned a nearly $1 billion hole in Microsoft's pocket.

The irony of the Surface debacle is that Microsoft actually managed to design a product that many reviewers admired, but it failed anyway -- underscoring the degree to which this once-dominant technology company appears to be past its moment. Good, bad or mediocre, the Surface was apparently doomed on arrival because that arrival was way too late, with the market already claimed by Apple’s wildly popular iPad.

How did such a powerful company manage to engineer such a colossal loser?

A number of factors conspired -- each the result of a miscalculation from the company executives, which probably explains why CEO Steve Ballmer reshuffled leadership in Redmond and put one person, Julie Larson-Green, in charge of all hardware. Let's break down a few numbers on why this tablet bombed so badly:

  • 30 months, or the amount of time between the release of Apple's first iPad and that of the Microsoft Surface. That, apparently, was all the time Apple needed to extend its walled-off ecosystem of apps and music to tablets. Had Microsoft foreseen that the world was ready to use slabs of glass as computers -- and having made an ahead-of-its-time tablet in the early 2000s, it should have -- it could have beat Apple to the punch.
  • $100, or the difference between the cheapest full-sized iPad and the cheapest Surface RT (with cover) when it first arrived. Say you're the sort of luddite who hadn't gotten around to buying an iPad, and had to choose between it and the Surface. Advantage still goes to Apple if you own an iPhone with a bevy of purchased apps or own an iTunes account full of purchased songs. Microsoft could have still swayed that customer with a lower price point -- but decided that its tablet should be significantly more expensive. It took until this month for Microsoft to finally lower prices and undercut the iPad.
  • 20 stores, or the number of physical retail locations Microsoft had open when it first announced the Surface. Taking a major cue from Apple, Microsoft now has a retail strategy of opening Microsoft-branded stores. Initially, the stores were going to be the only physical place where you could buy a Microsoft-branded tablet. But Business Insider counted only 20 Microsoft stores after the Surface was first announced. Even though the tablet could be ordered online, people often want to feel and test out something in real life before putting down hundreds of dollars to buy it.

Leaks suggest that Microsoft is expected to sell its second line of Surfaces within the year. Microsoft is one of the few companies rich enough to blow nearly a billion dollars selling a product and continue full-steam doing the same thing -- which, it should be noted, is some people's definition of insanity. Get ready to watch, GIF-like, Microsoft stumble again.

Or maybe not. As Yahoo News' Jason Gilbert points out, there was considerable excitement for the Surface when it was previewed at a hush-hush media event last year. When it finally went on sale, there were swarms at Microsoft Stores -- as if it was made by Apple! Reviews were mixed, but certainly not bad enough to scare away diehard Microsoft fans.

Even if sales didn't meet that stir, the hype showed a pent-up desire for a tablet that doesn't run on software made by Apple or Google. Microsoft is hoping the same thing is true of smartphones, and is having more success is that category. Windows Phones have edged out BlackBerry as the No. 3 operating system.

Bill Rigby   |   July 18, 2013    6:11 PM ET

(Reuters) - Microsoft Corp on Thursday reported lower-than-expected quarterly earnings as slow personal computer sales ate into its Windows business and the company took an unexpected $900 million charge for its inventory of unsold Surface tablets, sending its shares down 5 percent after hours.

The massive charge underlines the struggles of the world's largest software company, which last week announced a deep reorganization to transform itself into a "devices and services" leader, but is struggling to make mobile devices as attractive as those by Apple Inc or Google Inc.

"That's the biggest miss we've ever seen from Microsoft, the biggest that I could remember," said Brendan Barnicle, an analyst at Pacific Crest Securities. "It looks like everything was weak and that's what we need an explanation on."

Microsoft shares fell 5 percent in after-hours trading, tumbling from 5-year highs. Before the close, the shares were up 32 percent this year, beating a 19 percent rise in the Standard & Poor's 500 index.

Microsoft said the $900 million charge was related to its Surface RT tablet, the version of its tablet running on ARM Holdings-designed chips. The Surface was meant to challenge Apple's iPad when it was launched alongside Windows 8 in October, but has not sold well.

Earlier this week, Microsoft said it was drastically cutting prices and expanding distribution of the model to entice buyers, reducing the value of Surface devices in its inventory.

"We do know we have to do better, particular in mobile devices," Amy Hood, Microsoft's new chief financial officer, said in a telephone interview. "That's a big reason we made the strategic organizational changes last week."

Microsoft's biggest shake-up in five years, unveiled by Chief Executive Steve Ballmer last week, creates a single devices unit for the first time at the company, suggesting that it will double down on its so-far unsuccessful move into hardware.

Redmond, Washington-based Microsoft reported fiscal fourth-quarter profit of 59 cents per share, compared with a 6 cents per share loss in the year-ago quarter when it wrote off the cost of a failed acquisition.

Wall Street had expected earnings of 75 cents per share, on average, according to Thomson Reuters I/B/E/S.

Revenue rose 10 percent to $19.9 billion, helped by sales of Microsoft's Office suite of applications, but fell short of analysts' average estimate of $20.7 billion.

The sales of Windows rose slightly, but only because of the inclusion of some deferred revenue, weighed down by an estimated 11 percent dip in PC sales in the quarter.

(Additional reporting by Liana Baker in New York; Editing by Richard Chang)

By RYAN NAKASHIMA   |   July 18, 2013    5:20 PM ET

LOS ANGELES (AP) — Less than a year after Microsoft entered the tablet computer market with the Surface, the cracks are starting to show.

The software giant on Thursday booked a large write-off to its Surface RT business after it slashed prices on the tablets to stimulate demand this week. Its quarterly earnings results also showed that Windows 8, an operating system designed to bridge the divide between PCs and tablets, has been so poorly received that it contributed to a revenue drop in its operating system software unit.

The missteps in both strategic product lines disappointed Wall Street and shares plunged nearly 7 percent to $33.10 in after-hours trading Thursday.

The write-down for expected losses on the Surface RT tablet amounted to $900 million. Even without it, Microsoft's results would have fallen short of expectations.

The results came a week after the company announced a major reorganization to help it transform into a "devices and services" company that is less reliant on providing software for personal computers. The earnings miss raised new questions as to whether the transition will succeed.

"It doesn't inspire a lot of confidence," said Nomura Securities analyst Rick Sherlund. "You're in the hardware business now, and pretty shortly after entering it you have a pretty big write down. That's embarrassing."

Both Windows 8 and the Surface tablet represent Microsoft's big bets on the tablet computer market as PC sales continue to decline. Research firms IDC and Gartner said last week that global PC shipments fell 11 percent in the April-June quarter. It was the fifth consecutive quarterly decrease.

Acknowledging the company's difficulties with the change, Microsoft Chief Financial Officer Amy Hood told investors on a conference call that "this journey will take time."

"We know we have to do better," she said. "We are confident we are moving in the right direction."

Microsoft cut the price of Surface RT from $499 to $349 on Sunday, a move designed to spur sales amid sluggish demand.

Microsoft began selling Surface tablets in October. The company shipped about a million tablets in the first three months of 2013, according to research firm IDC. That includes about 260,000 of the slimmed-down RT version and 750,000 of the Pro version of Surface, which is compatible with older Windows programs.

The shipments gave Microsoft a meager 2 percent share of the tablet market. Apple Inc. remained the leader with 39.1 percent and was followed by Samsung Electronics Co., AsusTek Computer Inc., Amazon.com Inc. and Acer Inc.

Microsoft also saw revenue from its flagship Windows operating system decline 6 percent in the recent quarter after excluding the late recognition of revenue from last year, when it offered discounted upgrades to users of older versions of Windows.

Consumers haven't responded well to Microsoft's latest operating system, Windows 8, and the results reflect the poor reception. IDC has said the new operating system is contributing to the longest slump in the history of personal computer sales. Gartner disagrees that Windows 8 is to blame.

Brendan Barnicle, an analyst with Pacific Crest Securities, said the entire PC market is undergoing a massive shift, especially as device makers increasingly develop their own operating systems, like Apple Inc. and Google Inc. do for their tablets and personal computers.

"Microsoft can't charge $100 per device for Windows the way they could 20 years ago," Barnicle said.

In a sign that Microsoft is adjusting, the company said it expects to derive 65 percent of Windows revenue from third party computer manufacturers in the July-September quarter, down from 75 percent a year ago, prior to the Surface launch. More Windows revenue is coming from its own Surface line.

Revenue and profitability improved in Microsoft's other lines of business, including enterprise software, servers and tools, the Xbox video game division and the Bing search unit, but those results also fell short of analysts' forecasts.

Net income in the April-June quarter came to $4.97 billion, or 59 cents per share, reversing a loss of $492 million a year ago when it wrote down almost the entire value of its 2007 purchase of online ad service aQuantive.

Excluding the negative 7-cents-per-share Surface charge, earnings were 66 cents per share, short of the 75 cents per share expected by analysts polled by FactSet.

Revenue grew 10 percent to $19.90 billion, also below the $20.72 million expected.

Dino Grandoni   |   May 23, 2013    1:55 PM ET

Microsoft's newest ad pits an up-and-coming gadget against an established foe. There's a white background, snarky "dialogue" and a comparison of two products, one doing things the other can't. If this doesn't sound very familiar, it should.

The company's latest spot, an ad for Windows 8 tablets, uses a Siri voice to hawk features the virtual assistant supposedly envies in her tablet-cousin. Placed side by side, the robotic monotone "Siri" says, "I'm sorry, I can only do one thing at a time," referring to the Windows 8 ability to have two apps open at once on a screen. She adds, "And I guess PowerPoint isn't one of those things," referring to the lack of Microsoft Office apps on iOS.

Setting aside the dubious claim that people are clamoring for PowerPoint on tablet, the ad is strange for a few reasons. By having Siri narrate, Microsoft decided to highlight Apple's voice-command assistant. While Siri may not be universally popular, the product outshines the Microsoft-made equivalent, which just transcribes speech instead of following orders. The ad compares prices, too: $699 for a high-end 64GB iPad vs. a $499 Asus VivoTab Smart with the same amount of memory. Don't worry that the Microsoft Surface RT -- Microsoft's homemade and highly-touted answer to the iPad -- retails at the exact same price as the high-end iPad when the keyboard touch cover is included.

Recently, Microsoft's ad department has been in attack mode. It took aim at Google with a recent "Scroogled" campaign, which tried to convince privacy-conscious consumers that Redmond does less data-collected than Mountain View. Microsoft is in the same position in which Apple found itself a decade ago when it ran its now-famous "Mac vs. PC" commercials: Macs then were simply an also-ran to PCs running Windows, and the company was trying to grab market share with an edgy new ad.

Today, though Windows' share of the market is still bigger than Apple's, its share of PC profits is not.

Microsoft realizes it must acknowledge certain things in its ads. In this case, that the iPad is the dominant tablet. But there are better ways for Microsoft to tap into its potentially resurfacing coolness. Remember the Microsoft ad last November that gently mocked Internet Explorer haters? That was the right way for the company to reestablish that it might just be somewhat stylish again. Copycat ads, most likely, aren't going to help much.

  |   April 11, 2013    9:12 AM ET


(Reuters) - Microsoft Corp is developing a new lineup of Surface tablets, including a 7-inch version expected to go into mass production later this year, the Wall Street Journal reported, citing people familiar with the company's plans.

Microsoft executives felt they needed to keep pace with the growing popularity of smaller tablets like Google Inc's 7-inch Nexus and the 7.9-inch iPad Mini introduced by Apple Inc last October, one person told the paper. (http://link.reuters.com/wem37t)

Microsoft declined to comment to the Wall Street Journal. The company could not immediately be reached for comment by Reuters outside of regular U.S. business hours.

(Reporting by Sakthi Prasad in Bangalore; Editing by Daniel Magnowski)

Undercover Shopper: Apple vs. Microsoft Store

John Pavley   |   March 31, 2013    9:01 PM ET

During the work week I'm a Blogger-CTO for a mighty Internet disrupter. But on the weekends I'm just an ordinary joe. I trade in my starched button-down shirt and high-tech urban warrior shoes for a well-worn polo shirt and beat up old sneakers. I become a hapless shopper, out for the afternoon with my family looking for bargains and decent food at the food court at the mall.

That transformation makes me a perfect undercover shopper. As I travel from store to store I look like an easy mark, ready for a clever sales clerk to pounce and part me and my credit card-powered money. But I try to be a crafty shopper: I try not to buy on impulse and I try to research everything that I do buy. And I always remember that stuff bought on credit automatically costs 15 percent to 30 percent more.

At one of the local major malls we are blessed with both an Apple Store and a Microsoft Store. I was excited to shop them side-by-side in my own undercover shopper exercise. Long ago and far away in the mists of time I used to buy computers at computer stores: an IBM PC/AT clone and a Macintosh 512KE. Those places were independently owned resellers located in strip malls and populated by middle-aged sales people who were certified and really knew their stuff. In Princeton the best computer store was Clancy-Paul. As a college kid in the late 1980s I would hangout with their techs and absorb as much IBM and Apple hardware lore as I could.

Ready to step into the modern incarnation of the computer retail shop I decided my first stop should be the Microsoft Store. Outside the store an Xbox and Kinect was setup and a crowd of kids were holding an ernest dance-off. They were seriously competing and seriously good. This Olympian competition looked promising for venerable Microsoft.

Inside the Microsoft Store it was a different story. There seemed to be more staff than customers. I was pounced on three times before I got to the table with the Surface Pros. A very eager sales dude talked me though using Microsoft's new swanky tablet and explained its nifty features and how I could get back to a Windows 7 like desktop at the touch of a button. He seemed to have answers for my every question: How is the Pro different from the RT? Can I run my Windows 7 software on the Pro? Why does it have a pen, a touch screen, and a keyboard? (He didn't have a good answer for that last one). The deeper I went below the surface of the Surface Pro the more agitated that sales dude became. Eventually he walked away as I discovered the device needed its wireless Internet connection reset, the Microsoft App store was nearly impossible to navigate, it was hard to find the app I downloaded, and the freshly downloaded app didn't run right off the bat.

I felt bad for the Microsoft Store. The devices and accessories looked sharp and smart. But they were heavy to hold and didn't work as advertised. I would have liked to buy a Surface Pro but I think I'll wait for Pro 2 and Windows 9. Microsoft is the king of "good enough" (except for Xbox) and a Windows-based product requires a healthy third party system support ecosystem to get it to work for consumers. Alas, Clancy-Paul went out of business in the 1990s.

I probably don't have to say much about the Apple Store: The staff never approached me; It was packed and noisy with the energy of a dance floor but with adults and not kids (I think it actually smelled); The Apple products were everywhere and I could explore them in peace; The accessories on the shelves in the back were really interesting: Nike FuelBands, Beats headphones, Jambox wireless speakers. The Apple sales staff were mostly talking to each other and seemed to be engaged in deep philosophical locutions.

So why is Microsoft failing at selling pricey devices directly to consumers while Apple is clearly still succeeding? For the same reasons that JC Penney is failing at replicating the Apple Store experience. We also visited "Pennies" at the same mall and like the Apple Store it was a bright, savvy, consumer-oriented experience. They even had iPads out where I could browse Levi jeans without touching them. JC Penney hired the guy who invented the Apple Store concept a couple of years ago (not Steve Jobs, Ron Johnson) with the idea of radically updating the JC Penney's look and feel. But like the Microsoft Store Ron Johnson's user experience is sterile and museum-like. You can't apply Apple like a magic formula to a failing business model and expect consumers to come running back.

My wife and I call JC Penney "Pennies." As Pennies shoppers for 30 years we expect well-made clothing and housewares for a value price and, of course, great coupons. My wife used her coupons to get $40 worth of clothing for $7 that day. That felt really good, like a personal victory, a unique experience that keeps us coming back. Ron should embrace the "Pennies" and not try to turn it into an Apple-ish fantasyland.

Microsoft should do the same thing and focus on its core consumers: Kids. Bring the Xbox dance revolution inside the store. Xbox's are awesome and Microsoft is starting to recognize that awesomeness. Microsoft needs to pivot hard into the Xbox and build up its ecosystem with ruthless focus that turns those dancing kids outside the store to lifelong Microsoft users. I can see that some folks at Microsoft get it but their efforts are drowned out by the need to keep Windows relevant and Apple contained. Spend 5 minutes outside the Microsoft Store and you will see -- Not one of those kids gives a hoot about Windows or Apple. They came to dance.

Don't Do Safe -- Why Innovation Isn't Always Disruptive

John Sculley   |   March 13, 2013   11:17 AM ET

Everywhere I go someone is on a Samsung or Apple mobile device. A few years ago, I first started seeing people on planes working on their iPad; today I see iPads at every meeting I go to. More and more, I see Samsung Galaxy S3s. But in spite of all their advertising (Microsoft actually spends as much on advertising as Apple) I have yet to see anyone on a plane trip or at a meeting using a Microsoft Surface? I've seen a lot of Surface advertising and I've had a hands-on try of a Surface several times at one of the many Surface demo booths.

In the past, Microsoft has been a superb fast-follower. Bill Gates invented the concept of shrinkwrap software apps back in the 1970s, but I can't think of a significant user-centered concept where Microsoft has been the originator of an idea. Yet Microsoft is one of the world's greatest companies; it hires some of the most talented people; and it has created huge wealth for its stockholders over four decades. So why haven't they been a fast-follower in mobile?

Don't Do Safe

Google and Samsung have been the successful fast-followers in mobile; much as Microsoft and Intel were the very successful fast-followers with easy-to-use PCs 23 years ago. The formula of a fast-follower is to copy, improve and expand. It's shouldn't be to protect your cash cow. Yet that's exactly what Microsoft has done. While Google and Samsung moved immediately to capitalize on Apple's mobile innovations, Microsoft was slow to react and when it did Microsoft was conflicted with a desire to protect and justify the relevance of their Windows/Office cash cow in the new era of mobility.

In so doing Microsoft may have ended up creating a contrived product for a non-existent market.

Real disruptive innovation happens on the bleeding edge of opportunity. It's always about high risk, so undivided focus is key.

It's easy to assess why a very disruptive innovation was successful looking back. It begins with solving a really big problem before it becomes obvious to others -- think iPad.

Analysts were very skeptical when rumors were first heard about Apple developing a tablet; was Steve Jobs creating a cool, but contrived product for a non-existent market?

But looking back it's clear that a light weight, high-resolution display tablet solved a real problem -- mobile viewing of Internet broadband media on a screen bigger than a smartphone but with all the cool smartphone apps.

Microsoft waited too long to respond to Apple; it was so concerned about protecting its Windows/Office franchise that it compromised with a facelift on an old product concept, Windows PC, to make it look like an exciting new product.

Microsoft Surface tried to convince prospective users that putting a tablet touch screen on a PC would make a cool hybrid. What Microsoft created was wheels on a boat.

They did it because they could, not because it solved a big user problem in a good way.

As a mobile Internet viewer, Surface is too big compared to increasingly lighter weight tablets from competitors. Suggesting a PC is cool, just when PCs were becoming irrelevant commodities was not a believable brand marketing story.

The real test for a new product innovation should be, would you recommend this product or service to a friend?

So far, no one has recommended I get a Microsoft Surface.

Gerry Shih   |   February 21, 2013    8:55 AM ET


By Gerry Shih

SAN FRANCISCO (Reuters) - Microsoft Corp is cooler than you might think.

A Reuters/Ipsos poll found that just under half of 853 respondents between the age of 18 and 29 thought Microsoft is cooler now than it was a year or two ago.

The software maker, often derided in Silicon Valley for failing to dream up products that captivate a new generation of social media and mobile savvy consumers, managed to pip Facebook Inc in the survey - only 42 percent of young adults thought the world's largest social network is cooler now than in the past. Twitter scored 47 percent, below Microsoft's 50 percent.

Part of Microsoft's lift appears to stem from a well-coordinated marketing blitz around its all-new Surface tablets, which have revamped the familiar Windows interace with a tile-based, mobile app-friendly look and feel. Its Xbox gaming console and "Kinect" accessory, which can respond to gestures and voice commands, has in the past year also burnished its image around younger consumers.

Josh Johnson, a 24-year-old media arts student at the University of South Carolina and self-professed gaming aficionado, said he has been impressed with Microsoft's consumer-oriented push with Windows 8.

"It's more customizable, and not as rigid as an Apple phone, where you have to buy all the products from Apple," Johnson said. "If you want a ringtone, you don't have to pay iTunes."

He added: "I know Apple is the cool, hip brand right now, but if Microsoft keeps coming out with new tech I'm sure it'll be back soon."

Apple Inc, despite falling out of favor with many Wall Street investors, still scored well in the Reuters/Ipsos poll, the first in a series that aims to measure brand perception and usage over time for major consumer tech brands.

About 60 percent of 18- to 29-year-old respondents still thought Apple was cooler now than in the past. But Google Inc's Android brand did even better, with a full 70 percent giving it the thumbs up.

Although "coolness" remains, at best, an amorphous concept, consumer perceptions are pivotal in determining the longevity of products, particularly in the fast-moving consumer electronics industry.

Microsoft dominates the personal computing industry and is still far larger than most other tech corporations on the planet. But it has seldom won plaudits for cutting-edge consumer technology and its share price has plateaued for a decade under CEO Steve Ballmer's watch.

Apart from Xbox and Kinect, Microsoft's past is littered with failed attempts to conquer the consumer gadget marketplace, from clunky early tablets and wrist-watch computers to the Zune music player and Kin phone.

Gartner estimates that Microsoft sold fewer than 900,000 Surface tablets in the fourth quarter, a fraction of the 23 million iPads sold by Apple. Windows phones now account for 3 percent of the global smartphone market, Gartner says, far behind Google's Android with 70 percent and Apple with 21 percent.

The survey "definitely shows that Microsoft's efforts are paying off, but we'll have to see how cool translates into customers," said Gartner analyst Michael Gartenberg. "It's also hard to compare ‘cool' factor as a quantitative measure against Apple, a company, and Android, a platform."

SOCIAL MEDIA

The poll of about 4,800 people produced fewer surprises in other areas.

In social media, 90 percent of 18- to 29-yearolds said they log in to Facebook, including 54 percent who use it "continuously throughout the day." Nearly 30 percent of respondents in their 50s, and 18 percent of those over 60, also say they use it nonstop.

Facebook's usage figures dwarf those of Twitter and Tumblr, as well as new kid on the block Pinterest, the visual "pinboard" sensation. Despite its influence in media discourse, 50 percent of young adults say they do not use Twitter. By comparison, 58 percent said they do not use Pinterest and 68 percent said they do not use Tumblr.

Harley Pruitt, an 18-year-old high school student in Newnan, Georgia, said Facebook remains the only social network she logs onto because it's the easiest way to contact friends from many years ago, while other social networks feel less accessible.

"Myspace is long gone and Twitter is confusing as all get-out," Pruitt said. "I'm a creature of habit, so I can't predict that Facebook will fade off."

The poll, which will be repeated in coming months, included responses from 4,798 people surveyed between February 5 and February 19. The data is collected online from a pool of pre-screened candidates.

The accuracy of the poll is measured using a survey technique called a "credibility interval" and is precise to within 1.6 percentage points. Among the young adult aged 18 to 29 subset, the credibility interval was 3.8 percent.

(Additional reporting by Bill Rigby in Seattle and Maurice Tamman in New York; Writing by Gerry Shih; Editing by Edwin Chan and Leslie Gevirtz)

Bill Rigby   |   February 6, 2013    9:06 AM ET


By Bill Rigby

SEATTLE (Reuters) - U.S. tech writers have given Microsoft Corp's new Surface tablet-laptop hybrid largely negative reviews, casting a shadow over the software group's hopes to take a bite out of sales of Apple Inc's iPad and MacBook Air.

The latest Surface runs on an Intel Corp chip and features the full Windows 8 Pro operating system, which Microsoft hopes will make the device attractive to people who want to produce as well as consume material.

It also hopes to appeal to businesses who want to give employees lightweight, mobile machines that fit easily into their technology and security infrastructure.

The "Surface with Windows 8 Pro", as it is officially called, is available from Saturday. Windows co-chief Tami Reller said earlier this week it is a key part of revving up interest in Windows 8, launched last October but which has not gripped consumers' imaginations.

The Surface Pro is thicker, heavier and several hundred dollars more expensive than the first Surface RT, which runs on an ARM Holdings Plc-designed chip and is not compatible with old Microsoft programs.

Available in 64 and 128 gigabyte versions, both with wifi-only connectivity, the Surface Pro starts at $899, excluding a $120-plus keyboard. That is $200 more expensive than a comparable iPad and closer in price to the 64 GB MacBook Air laptop at $999.

Microsoft has said the device is the first to bring a full operating system to the tablet format without compromising quality. But reviewers found the device uncomfortably stranded between a tablet and a PC, with many compromises.

"It ran all the software I threw at it - both the new type and the old desktop type - speedily and well," wrote Walt Mossberg on the All Things D tech blog.

"But the Pro has some significant downsides, especially as a tablet ... It's too hefty and costly and power-hungry to best the leading tablet, Apple's full-size iPad. It is also too difficult to use in your lap. It's something of a tweener - a compromised tablet and a compromised laptop."

Mossberg said the Surface lasted less than four hours on his standard battery test, half the performance of an iPad. He also expressed concerns about the usable memory on the 64 GB version.

NOT AS GOOD

"The Pro is definitely snappier and more ‘performant' (to use a bit of Microspeak)," wrote Mary Jo Foley on the ZDNet tech blog.

However, she added: "I keep scratching my head over who Microsoft expects to buy the Surface Pro. It's not as good of a tablet, in terms of weight/battery life, as the Surface RT is. But it's also not as good of a Windows 8 PC as other OEM-produced devices, coming in at lower price points with better battery life and other specs."

Steve Kovach, writing for Business Insider, praised the specifications on the new Surface, but not the experience as a whole.

"The Surface Pro has some impressive hardware specs for such a unique form factor. It can go toe-to-toe with any other thin and light laptop," he wrote.

"(But) you can't rest the Surface Pro comfortably on your lap without it flopping around. You can't adjust the angle of the screen when it's propped on a table with the built-in kickstand," Kovach added.

"You need to spend at least another $100 to get the full laptop-like experience with one of the special keyboard covers. At 10 inches, the screen feels a bit small for traditional desktop computing.

"The cheapest model only has 23 GB of free storage, so you'll have to buy a separate memory card because you'll definitely need more than that."

David Pierce, writing on The Verge tech news site, singled out the high quality of the screen, quick startup time, the USB port on the charging hub and pressure-sensitive stylus.

But he criticized the lack of Microsoft's Office suite of applications - which have to be purchased separately - and its general awkwardness.

"Even a well-executed Surface still doesn't work for me, and I'd bet it doesn't work for most other people either," Pierce wrote.

"It's really tough to use on anything but a desk, and the wide, 16:9 aspect ratio pretty severely limits its usefulness as a tablet anyway," Pierce added.

"It's too big, too fat, and too reliant on its power cable to be a competitive tablet, and it's too immutable to do everything a laptop needs to do. In its quest to be both, the Surface is really neither."

(Editing by David Holmes)

By MICHAEL LIEDTKE   |   January 24, 2013    6:15 PM ET

SAN FRANCISCO (AP) — Microsoft's latest quarterly earnings slipped, even as the world's largest software maker showed modest progress adapting to a shift away from the personal computers that have been its financial foundation for decades.

The results announced Thursday are the first to include Windows 8. The program is a dramatic overhaul of the Microsoft Corp. operating system that powers most PCs. Windows 8 came out Oct. 26 with slightly more than two months left in Microsoft's fiscal second quarter.

Microsoft is counting on Windows 8 to help the company extend its franchise into tablet computers while still reaping revenue from a new breed of PCs. The redesigned software displays applications in a mosaic of interactive tiles instead of a staid menu. It can be controlled by touching on a display screen, as well as the traditional method of using a keyboard and a mouse.

Although sales of Windows 8 haven't been as impressive as investors hoped, revenue in Microsoft's Windows division climbed 24 percent from the previous year. That includes sales that had to be deferred from earlier quarters because the purchases were made before Windows 8's release.

When Windows 8 finally hit the market, Microsoft also unveiled its own tablet computer, Surface, as a showcase for the operating system. Microsoft didn't disclose Thursday how many Surface devices were sold in the October-December period.

"I don't think they want to provide that because it won't be impressive," technology analyst Patrick Moorhead said.

Analysts have estimated Microsoft sold 750,000 to 1 million of the Surface units during the quarter, far below the nearly 23 million iPads that Apple said it shipped during the same period.

Microsoft booked its Surface sales in the Window division, accounting for some of the gains from the previous year. The Redmond, Wash., company is trying to get the Surface into more hands by releasing the device in 14 more countries and coming out with a more sophisticated version that can handle all Microsoft programs. The new model, called Surface Pro, will debut Feb. 9. The one already out runs a streamlined version of Windows 8 called RT.

Analysts say it's still far too early to reach any definitive conclusions about Windows 8 prospects because it will take time for people to get used to the new system. What's more, the companies that buy most Windows machines typically wait a year or two before changing to a new version of the operating system to ensure all the bugs are worked out.

"I kind of like the Windows segment," BGC Financial analyst Colin Gillis said, adding that the 24 percent growth was "a little stronger than expected."

But another Microsoft division that includes another big moneymaker — the company's Office suite of software — didn't fare also well. Revenue in the Office division declined 10 percent, a shortfall that may have spooked some investors. Analyst Josh Olson of Edward Jones said he believes many of Microsoft's corporate customers may have held off on buying Office because a new version of that program is scheduled to come out early this year. Microsoft ended December with $788 million in deferred Office revenue. Most, if not all, that money is expected to be booked before the end of Microsoft's fiscal year in June.

Microsoft earned $6.4 billion, or 76 cents per share, during the final three months of 2012. That was down 4 percent from $6.6 billion, or 78 cents per share, a year earlier.

The company's total revenue rose 3 percent from the previous year to $21.5 billion.

The earnings were a penny above the average estimate of analysts surveyed by FactSet, while the total revenue fell below analysts' projections by about $100 million.

Microsoft's stock shed 44 cents, or 1.6 percent, to $27.19 in Thursday's extended trading, after the release of results. The stock has remained stuck below its price before Windows 8 and Surface came out, signaling that investors aren't pleased with the products' performance so far.

"This is going to be a 'show-me' year for Microsoft, and there was nothing to really shout about in this quarter," Olson said. "So what we are seeing is sort of a shrug from investors."

Microsoft is still trying to working with device makers to come up with the proper mix of machines at different prices to appeal to consumers and corporate customers, said Peter Klein, the company's chief financial officer.

"This is a big, ambitious reimagining of Windows and this quarter was the first step in that process," Klein told analysts in a Thursday conference call.

Besides debuting Windows and Surface during the most recent quarter, Microsoft also released a new version of its operating system for smartphones.

If Microsoft's revamped software for tablets and smartphones catches on, it would help the company overcome a downturn in PC sales, which has reduced licensing revenue during the past year. Worldwide PC shipments fell 3.5 percent last year, marking the industry's first annual decline since 2001, according to the research firm Gartner Inc.

Despite Microsoft's high hopes and an elaborate marketing campaign, Windows 8 appears to have gotten off to a tepid start. Technology reviews have panned the software as too confusing and cumbersome to navigate, and none of the hundreds of devices running on Windows 8 emerged as a breakout hit during the holiday season.

A big chunk of Microsoft's Windows revenue in the holiday-season quarter came from sales that were made before the new operating system's release. Excluding revenue that had been deferred from previous quarter, Windows revenue increased 11 percent from the same period in 2011.

Reiterating information released earlier this month, Microsoft said it has licensed more than 60 million copies of Windows 8. That puts the redesigned system on the same early sales trajectory as its predecessor, Windows 7, after it came out in 2009. It's unclear how many of the devices that have licensed Windows 8 are still sitting on store shelves.

___

AP Technology Writer Barbara Ortutay in New York contributed to this story.

  |   January 23, 2013    8:50 AM ET

REDMOND, Washington (AP) — Microsoft says that the pro version of its Surface tablet will be available to purchase Feb. 9 in the U.S. and Canada.

Unlike the previous version that launched in October, the "Surface Windows 8 Pro" will use the full version of Windows 8, which is compatible with programs that run on earlier versions of Windows.

The tablet will be priced starting at $899 for the model with 64 gigabytes of memory.

The price includes the Surface Pen, which allows users to write or draw on the device.

It does not include the Touch Cover keyboard, which sells separately for $120, or the Type Cover, which has depressible keys, for $130.

Microsoft hasn't released sales figures for the earlier version of Surface, which runs on Windows RT, a slimmed down version of the operating system.

RT only runs apps bought on the Windows store and a modified version of Office that Microsoft included with the device. The pro version of Surface does not come with Office installed.

Bill Rigby   |   January 22, 2013    8:28 AM ET


By Bill Rigby

SEATTLE (Reuters) - Microsoft Corp Chief Executive Steve Ballmer is not the right leader for the world's largest software company but holds his grip on it by systematically forcing out any rising manager who challenges his authority, claims a former senior executive who has written a book about his time at the company.

"For Microsoft to really get back in the game seriously, you need a big change in management," said Joachim Kempin, who worked at Microsoft between 1983 and 2002, overseeing the sales of Windows software to computer makers for part of that time. "As much as I respect Steve Ballmer, he may be part of that in the end."

As a senior vice president in charge of a crucial part of the company's business with direct access to co-founder Bill Gates, Kempin is the most senior former Microsoft executive to write a book critical of the company, which is famous for the loyalty of its ex-employees.

His criticism echoes that of investor David Einhorn of Greenlight Capital, who called for Ballmer to step down in 2011.

Kempin left Microsoft under a cloud in 2002 as some of the aggressive contracts he crafted with PC makers were seen as fodder for the U.S. government's antitrust prosecution of the company, which started in 1998 and was largely resolved by 2002.

His book, titled 'Resolve and Fortitude: Microsoft's "secret power broker" breaks his silence', is scheduled to be published on Tuesday. He talked with Reuters by phone on Monday.

DEFEND THE THRONE

Kempin charges Ballmer with purposefully ousting any executives with potential to wrest him from the CEO seat, which he has occupied since 2000.

He said he saw the process first with Richard Belluzzo, a former Hewlett-Packard executive credited with launching the Xbox game console who rose to chief operating officer at Microsoft but left after only 14 months in the post, in the same year Kempin left.

"He (Belluzzo) had no room to breathe on the top. When you work that directly with Ballmer and Ballmer believes 'maybe this guy could someday take over from me', my God, you will have less air to breathe, that's what it comes down to."

Microsoft representatives declined comment. Attempts to reach Belluzzo were not successful.

Several leading executives, touted by outsiders at one time or another as potential successors to Ballmer, have left the company in the last few years, most recently Windows unit chief Steven Sinofsky, who departed in November.

Before Sinofsky, Windows and online head Kevin Johnson went to run Juniper Networks Inc, Office chief Stephen Elop went to lead phone maker Nokia Oyj, while Ray Ozzie, the software guru Gates designated as Microsoft's big-picture thinker, left to start his own project.

"Ozzie is a great software guy, he knew what he was doing. But when you see Steve (Ballmer) and him on stage where he (Ozzie) opposed Steve, it was Steve's way or the highway," said Kempin.

Kempin said he spoke to Ballmer around two years ago and expressed his concerns about his management style and direction of the company, but has seen no changes since. He said he sent Ballmer and Gates copies of his new book but has yet to get a reply.

"Steve is a very good business guy, but make him a chief operating officer, not a CEO, and your business is going to go gangbusters," said Kempin. "I respect that guy (Ballmer), but there are some limitations in what he can and can't do and maybe he hasn't realized them himself."

MISSED OPPORTUNITIES

In his book, Kempin writes about how Microsoft foresaw the major moves in technology in the last decade, but bungled its entry into tablets, phones and social media, ceding leadership in the technology world to Apple Inc and others.

"They missed all the opportunities they were talking about when I was still in the company. Tablets, phones...we had a tablet going, we had tablet software when Windows XP came out, it was never followed up properly," said Kempin.

He also claims the decline of PCs is partly due to Microsoft's mismanagement of hardware makers, an area that Kempin oversaw at Microsoft.

"Just think about the insult of Microsoft coming out with a tablet themselves, trying to mimic Apple, and now they are going to come out with a notebook on top of it," said Kempin, referring to Microsoft's Surface RT tablet and soon-to-be-released Surface running Windows Pro.

Several PC makers went public with their unease about Microsoft's decision to make its own computers last year.

Kempin reserves his most pointed criticism for Ballmer.

"Is he a great CEO? I don't think so. Microsoft's board is a lame duck board, has been forever. They hire people to help them administer the company, but not to lead the company. That's the problem," said Kempin.

"They need somebody maybe 35-40 years old, a younger person who understands the Facebook Inc generation and this mobile community. They don't need this guy on stage with this fierce, aggressive look, announcing the next version of Windows and thinking he can score with that."

(Reporting By Bill Rigby; Editing by Matt Driskill)

  |   January 17, 2013    9:13 AM ET

Personal computer makers, trying to beat back a tablet mania that's eating into their sales, are making what may be a last-ditch attempt to sway customers by mimicking the competition.

Many of the laptops to be unveiled around the world in coming months will be hybrids or "convertibles" - morphing easily between portable tablets and full-powered laptops with a keyboard, industry analysts say.

The wave of hybrids comes as Intel Corp and Microsoft Corp, long the twin leaders of the PC industry, prepare to report results this week and next. Wall Street is predicting flat to sluggish quarterly revenue growth for both, underscoring the plight of an industry that has struggled to innovate.

In 2013, some are hoping that will change.

With the release of Microsoft's touch-centric, re-imagined Windows 8 platform in October and more power-efficient chips from Intel, PC makers are trying to spark growth by focusing on creating slim laptops with touchscreens that convert to tablets and vice versa.

Microsoft, expanding beyond its traditional business of selling software, is expected this month to roll out a "Surface Pro" tablet compatible with legacy PC software developed over decades.

That's a major selling point for corporate customers like German business software maker SAP, which plans to buy Surface Pros for employees that want it, said SAP Chief Information Officer Oliver Bussmann.

"The hybrid model is very compelling for a lot of users," Bussmann told Reuters last week. "The iPad is not replacing the laptop. It's hard to create content. That's the niche that Microsoft is going after. The Surface can fill that gap."

Apple's iPad began chipping away at demand for laptops in 2010, an assault that accelerated with the launch of Amazon.com Inc's Kindle Fire and other Google Android devices like Samsung Electronics' Note.

With sales of PCs falling last year for the first time since 2001, this year may usher in a renaissance in design and innovation from manufacturers who previously focused on reducing costs instead of adding new features to entice consumers.

"People used to be able to just show up at the party and do well just because the market was going up," Lisa Su, a senior vice president at Advanced Micro Devices, which competes against Intel. "It's harder now. You can't just show up at the party. You have to innovate and have something special."

At last week's Consumer Electronics Show in Las Vegas, devices on display from Intel and others underscored the PC industry's plan to bet more on convertible laptops.

Lenovo's North America President Gerry Smith told Reuters last week that over the holidays he sold out of the company's "Yoga", a laptop with a screen that flips back behind its keyboard, and the "ThinkPad Twist", another lightweight laptop with a swiveling screen.

Intel itself showed off a hybrid prototype laptop dubbed "North Cape", housed in a thin tablet screen that attaches magnetically to a low-profile keyboard. And Asus showed a hefty 18-inch, all-in-one Windows 8 PC that converts to a tablet running Google's Android operating system.

Lenovo and Asus, which have both won positive reviews for their devices in recent months, increased their PC shipments by 14 percent and 17 percent respectively last year, according to Gartner.

"The number of unique systems that our partners have developed for Windows has almost doubled since launch. That gives an indication of how much innovation is going into the PC market," Tami Reller, chief financial officer of Microsoft's Windows unit, told Reuters.

FINGER-POINTING

To be sure, hybrids with detachable or twistable screens do not yet account for a significant proportion of global PC sales, and consumers still need to be sold on their benefits.

Previous attempts by PC makers to reinvigorate the market have had limited success. Pushed by Intel, manufacturers launched a series of slimmed down laptops early last year with features popular on tablets, like solid-state memory.

They were too expensive, often at more than $1,000 apiece, and failed to arrest the PC decline.

Microsoft's Windows 8 launch in October brought touchscreen features but failed to spark a resurgence in PC sales many manufacturers had hoped for. A round of finger-pointing ensued, with PC and chip executives blaming a shortage of touchscreen components and others saying it was the manufacturers that sharply underestimated consumer demand for touch devices.

Regardless, the entire PC ecosystem is onboard for 2013. Almost half of the Windows laptops rolled out this year may have touch screens. Of those, most will be in convertible form, according to IDC analyst David Daoud.

Further blurring the distinction between kinds of devices, about a quarter of upcoming Windows 8 gadgets will be tablets that can easily act as laptops with the help of keyboard accessories, he added.

But buyers may have to wait until the second half of the year to see many of them.

"The most likely scenario today is for the industry to have these products ready for the back-to-school season," Daoud said.

(Reporting and writing by Noel Randewich; Additional reporting by Poornima Gupta and Bill Rigby in Seattle; Editing by Tim Dobbyn)

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