Microsoft has driven off the cliff into the death spiral and rather than change direction they are trying to speed up their ‘momentum’. Endless reorgs, paid analyst reports, and flat-out lying to anyone who will listen won’t help, they can not succeed from their current position.
Last fall SemiAccurate was one of the few voices criticizing Windows 8, WART, and Surface. The mainstream press seemed too welded to the MS advertising revenue stream to dare even hint that the emperor has no clothes, but anyone even looking at the facts had to admit the trio was doomed. In light of the utter meltdown of Surface that the company announced yesterday, let’s do a little recap before we point out why this $900 million loss is a minor bump in their death spiral.
First Microsoft surprised their entire partner ecosystem with the announcement of Surface, most ‘valued partners’ found out that their main OS supplier was now their biggest competitor through the press. To no one’s surprise they all dumped Microsoft as we exclusively pointed out last year. Just kidding, the mass OEM exodus took some by surprise but they are all in leadership positions at Microsoft. How they didn’t foresee that one is either incompetence or stunning mismanagement.
Rather than fire those responsible they picked a scapegoat and executed him for no real reason other than to shield the incompetent. Most onlookers doubted what we said about the severity of the break, it alone is fatal to Microsoft. Let us reiterate, you are underestimating it. Rather than back pedal, Microsoft announced the impending glory of their new devices and services strategy leaving ‘valued partners’ no doubt that if they don’t flee now they are dead. Every ‘valued partner’ sells lots of Android tablets now, the last Dell PC a friend purchased came with a WART tablet at what appears to be less than hardware costs. How many OEMs put anything more than meager efforts behind selling WART/Win8 tablets? Think they are getting enough volume in return to pay for the case tooling?
The biggest problem for Microsoft is their Surface simply can not compete against Android. This is not a qualified statement, it is a simple analysis based on the costs of the devices. As we said in the previous link, a WART tablet needs significantly more CPU, storage, and battery to provide the same experience as an Android device. More than half the storage on a 32GB Surface is taken by the preloaded software and the rest is filled almost instantly by the Windows software bloat, service packs, and drivers. Most Android devices are swimming in extra storage with 8GB.
Microsoft is at such a massive hardware cost disadvantage that it is borderline crazy for any OEM, Microsoft included, to greenlight a Windows 8/WART tablet at this point. To make matters worse, Microsoft is force-bundling Office on to WART devices to ‘entice’ tablet users to switch. We probably don’t need to point out how successful this strategy was, but more on that later. The main point is that the cost of a WART license is in the $90 range and by doing so the forgo a potential Office sale later too. Of longer term import is that Microsoft is pointing out to its entire user base how much they don’t need Office on a tablet, and that will bite them in a few years too.
If an OEM wants to make a WART tablet they have a BoM that is $90 more than Android or iOS to start. A good rule of thumb is that you double the BoM cost to figure out retail costs, you can buy a very good Android tablet for less than 2x $90. There is no way that Windows 8 or WART tablets can succeed, period. Actually there is one way they can fail less spectacularly though, if you don’t have to pay the $90 OS tax you will only be at a severe disadvantage vs the competition, not an impossible situation. MS doesn’t pay the $90, OEMs have to. See the problem? Did we mention that Lenovo just dropped the Yoga 11?
Then there is the software side of things or lack thereof. Microsoft is in the app death spiral. No one is willing to code for their platform for several reasons, the utter lack of market share being a key one. If there is no one to sell apps to, why make them? Microsoft’s app store is a vast wasteland of knockoffs and things that you would not want even if they were free. Most apps you would want are simply not there nor will they be, and most software houses are not showing any interest in porting.
When SemiAccurate was at GDC last spring we asked almost every dev we talked to about WART and Windows Phone development. The answers were all the same, those with apps indicated that they were handsomely paid to make them by Microsoft, those who weren’t were unified in their derision of the platform. It is pay to play for Microsoft at this point and given the lack of apps that matter, even though they are paying large sums to many, the rest of the community isn’t playing ball.
That said there are some games and apps here and there, but there is a big dark secret to them. Some of the apps that are there were funded, a handful were not, but any free commercial apps are ad supported like they are on other platforms. Like Google, Microsoft sells these ads and makes money by doing so. Early Windows 8/WART/Windows Phone devs reported robust ad money so all is good, right?
On April 1st, no joke, that came to a screeching halt. From 100% fill rates and a meager living to low single digits in a day, what could have happened? The dark secret was those 90%++ of the ad slots that are now empty were being purchased by Microsoft for internal use, mostly Bing ads. They agreed to purchase any unfilled slots for a period of time, and that period ended on March 31, 2013. Ad revenue has gone from barely tolerable to essentially zero, what was not worth making an app for voluntarily is now a dead zone with no chance of recovery.
If you make an app for Windows 8 at this point and you depend on ad revenue, you will not make money. This has zero chance of changing unless Microsoft literally starts buying their own ad slots, and that is simply unsustainable. Even then it isn’t worth writing an app for, if Microsoft changes their mind, you are dead. Would you base your business model on Microsoft’s whims? Would you invest in a company that did? Zune anyone?
If you charge for your app there is no market. If you want to write for Window Phone 8/WART you give up compatibility with Windows 7 and all prior Windows versions. WART/managed code will not run on these platforms period. Do you aim for the <10 million Win8 devices or literally billions of desktops and laptops. Don’t forget Microsoft takes a 30% cut if you go the app route, not to mention all the qualification hurdles you need to go through to get approved for their store. Making software that is compatible with the new way is market death too, you cut out more than 95% of your potential market, have more hurdles in making your product, and lose about 1/3 the little revenue that is there off the top.
So no chance of any third-party making dollar one on the hardware, OEMs are running for the hills, and software is a dead zone that is only getting worse. Sales of Surface are laughable at ~1.5 million units in the first six months or so including the launch and Christmas holiday season. Sales have been nowhere near as brisk since, Microsoft can’t give surface away mainly because it is a horrible device. It is slow, has no software, is counter-intuitive, and generally is a miserable experience for the buyer. True some people like it but they are few and far between.
Windows 8 the elder was supposed to ride the synergies of WART, and the other way around, to tablet and phone victory. At least that was the cunning plan from Ballmer et al, something that even the most jaded observer was dubious of. Even bundling office with each tablet for ‘free’ didn’t help, Windows 8 is just awful. It tanked sales by 15% in the first full quarter after launch, and the most recent quarter have shown about another 10% drop. As SemiAccurate pointed out, the Microsoft spin is at best dishonest, none of their competitors seemed to have the same macroeconomic problems during the same time period. Windows 8 is market death, just more so in some segments than others.
That brings us to the latest admission, something the SEC seems singularly capable of making Microsoft do. When not forced to tell the truth the official picture is quite rosy, when they are under scrutiny things are not so upbeat. Yesterday they took a $900 million charge, yes almost a billion dollars, for Surface.
If you run the numbers you can come to two conclusions, neither are good just varying levels of awful. If the recent $150 per unit price drop is the reason for this write down, that would be 6 million units collecting dust on the MS books. If they just wrote them off entirely that is about 1-1.5 million units that won’t be sold depending on the Surface/Surface Pro mix. In any case this is a big problem for Redmond. If you recall the smallest of these numbers is the six month, including launch hype and Christmas, sales figure. The larger of the two is an ~2 year inventory if sales go at the initial ‘high’ rate.
What is the shelf life of obsolete computers? When is Surface 2 due? Understand the price cut now? This is flat-out desperation on Microsoft’s part not that it will help. Why? Because to use the vernacular, Windows 8 sucks and now everyone knows it. There are no apps, what little developer support there was has dried up, Microsoft has to pay for every app that shows up, then subsidize its support through ads, and the entire OEM ecosystem has gone from partner to enemy. Surface 2 with more speed and a bit less cost won’t change a thing here.
Could it get any worse for Microsoft? Surprisingly no but that isn’t to say it will get better, the company is at the nadir of everything. They have no friends, they have no partners, and no one will go out on a limb to help them. Even when paid many refuse, the major web services are simply absent as far as apps go, not something that can be cured with a bit of cash. Their position simply can’t get any more dire than it is now, and that is a profound statement. Even well paid analysts don’t try and float excuses like the impending 7″ form factor will turn every thing around, Excel on a 7″ multi-touch screen is what you have been waiting for, right? Trade in your iDevices ASAP, how can you lose?
For Microsoft to change their path the company needed to take quick decisive action. They needed to show partners that they would not unfairly compete with them, and they failed. They needed to show end users that the next version would make things better, the ‘Start’ menu in 8.1 simply throws the things users object to most back in their face. They needed to soothe app devs and entice them back but instead they stonewalled on revenue and made app approval needlessly harder.
All of these fairly basic fixes needed to happen months ago in order for those needing the results to see the changes in a timely manner. Microsoft did none of this and quite bluntly went farther in the wrong direction in every case. Instead of fixes we got a reorg that consolidated power in the hands of the most incompetent of them all Steve Ballmer. If he was fired months ago there was a small chance Microsoft would survive, today he has more control than before. Microsoft has failed.S|A
Have you signed up for our newsletter yet?
Did you know that you can access all our past subscription-only articles with a simple Student Membership for 100 USD per year? If you want in-depth analysis and exclusive exclusives, we don’t make the news, we just report it so there is no guarantee when exclusives are added to the Professional level but that’s where you’ll find the deep dive analysis.
Latest posts by Charlie Demerjian (see all)
- SemiAccurate was right about Apple’s foundry plans - Apr 17, 2014
- Global Foundries and Samsung sync up 14nm processes - Apr 17, 2014
- Analysis: How many units is Baytrail shipping and why? - Apr 17, 2014
- Intel finally kicks Microsoft to the curb shattering Wintel - Apr 16, 2014
- Broadcom’s latest 802.11ac announcement one ups the competition - Apr 16, 2014