back to article Microsoft: The MORE Surfaces it sells, the MORE money it loses

The more Surfaces slabs Microsoft sells, the more the Redmond giant has to shell out. Microsoft Thursday trumpeted $494m in revenue made from sales of Surface during its third fiscal quarter. But Microsoft also notched up $539m in costs associated with selling Surface, thereby cancelling out any profits and forcing it to post a …

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Before the usual "ipad is better, surface is shi*" debate starts, I should point out that many people *want* a Surface, or indeed a Surface Pro.

Getting hold of them is significantly more difficult - especially if you want them for business and not buying them one at a time from John Lewis etc. I've got customers who want them, and I've had to go to John Lewis more than once to get it because the distributors rarely have stock.

MS could sell a boatload more if they were actually able to get hold of them...

Everyone I know with a Surface (and it is a growing number) likes them - I like my Pro 2, but while I like the lighter/thinner form of the RT, it's not good enough as I want full Windows... either way, no good if you can't get them.

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Distribution via John Lewis is sensible business strategy

If Microsoft restricted sales to people calling in person at their shop on Mars, they would lose much less money.

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MS could sell a boatload more if they were actually able to get hold of them...

This.

To get them into the hands of sales we have gone to JL and used the corp AMEX. Expensive but effective until someone in the US noticed and told us to go back to hookers, Veuve and the Colombians. They have a GL code for that.

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Do you know why nobody has the Surface Pros ready to ship? It isn't because your distributor/vendor can't get them, that's 100% bullshit. It's because MS has no incentive to push the tablets in low quantities precisely because of the reasons outlined in this article. your vendor can get all the Surface tablets of any model they like, but not onesey twosey quantities, they've got to get a bunch or commit to a bunch do it isn't worth it for them either.

The 'economies of scale' thing people talk about, but don't understand, is a harsh mistress. Tiny misses in any link in the product chain result in losses far, far greater than gains from those economies functioning as planned. An abysmally unpopular product with an extremely over the top marketing failure on top, is not a tiny miss...

The Surface Pro is a perfectly fine, if overpriced, product. But even if it were marked down 75% MS would never be able to cover the losses of the other products in the Surface family. Ever. All those things have to move as planned or none of it works. That's why high investment, high retail cost products are such a risky investment. If it works out the payoff is enormous, if not it costs nearly invincible, super powerful, ultra wealthy CEO's their jobs.

People simply don't understand how much money it costs to get their kit to them. When full size desktops were still the thing it costs ~2x the price of the components and the manufacture of the PC. That's improved, marginally, with notebooks and tablets because warehousing density is so much higher, but it still costs the manufacturer more to get your notebook to you than it cost to buy the parts and assemble them. Again, that's perfectly fine, if the product is a success, but it's really, really bad if it isn't. Cost of sales drives more companies to death than market shifts, shitty product or despotic nationalization combined. It's a motherfucker at scale and there's nothing to be done about it.

The smart money would be to pull the product completely from the market. You can't even give them away without losing money at this point, and that's the point. If it costs you more to give something away than to bury them alongside ET then you're screwed. Jettison the product and try again. That's exactly what I expect to happen as soon as the new guy gets sorted and comfy in his new chair.

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But why anybody buy the surface now? If you wait to the end of the year you can buy one of the jugué pile of unsold tablets with a discount of 50% at least, so my advice is wait to the surface price go around 200 usd and then use wisley that money and buy an ipad or at least a good android tablet.

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Devil

Re: Distribution via John Lewis is sensible business strategy

Finally, a good reason to Buy a surface,

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because

>But why anybody buy the surface now?

Yeah until I see it can be rooted and you can put a non irrelevant OS on like Android its nothing but a good door stop.

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Anonymous Coward

Oh, so maybe I should buy one then?

It would hurt Microsoft, but it would hurt me more.

It remains on my Win 8 boycott. Call me when Win 9 is out; assuming it explicitly backs away from the Metro nonsense, then perhaps we could be friends again.

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Er.. actually Don Jefe its true, disties didn't have them.

All the other lines of text you typed (didn't read it all, as you waffle) is largely true. Managing the supply chain is hard, and Apple are experts at it.

I don't even know what MS's problem was, but I was given a very accurate figure from my Surface 2 order in Jan it wouldn't be in the channel till late March.

And late March it came. I had an MS suit in front of me one day, and as I moaned about not getting my shiney toy he knew exactly which disties were getting them, in what numbers and what days.

MS have had a hold up on supply, but its largely as of end of March gone. Surface 2 were harder hit, but they make up 80% of Surface sales. I love mine.

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Bull****

Yeah but I've heard a lot of savvy people argue they they want a surface RT and that surface pro is sh**. Why? Because touch is rubbish on normal windows, RT is lighter and thinner and cheaper with better battery life. In short, RT is a decent tablet, and pro is a Frankenstein monster. Thus MS has succeeded in confusing the market place yet again, and no wonder most people say bugger it, I'll get an ipad at least Apple knows what the f*** they are doing.

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Race to the bottom @Don Jefe

I think the figures prove that the Surface Pro isn't overpriced. You could argue the iPad is over priced, due to the (for the industry) very high profit margins. The problem with the the IT market at the moment is that we have seen such competition to push prices down, that the customer expectations are now unrealistic for a high end product that isn't going to sell in high numbers.

Just look at the people who were saying that the 7" Nexus 7 and Kindle Fire were the right price and Microsoft would have to meet those sub 199€ prices for the Surface (and some even saying the Pro should have been sub iPad prices), even though the BoM costs far exceeded the Nexus or iPad.

The majority of people can't see beyond the form factor - it doesn't have a keyboard and it doesn't have an Apple logo, therefore it has to cust under 200€... Whereas the reality is, if you can't shift 10s of millions of the things, they are going to be much more expensive than an iPad to produce.

I have a Samsung tablet (original ATIV SmartPC 500) and it is a great little tablet, but it was expensive, even with its Atom processor, it was still more expensive than an entry level iPad - but it offered much more than the iPad could for that price. And nearly a year and a half later, it is still a great little tablet and I wouldn't swap it for an iPad, because it does what I want from a tablet and the iPad doesn't.

The market has so concentrated on the bargain basement segment, that it is almost impossible to sell a decent product at realistic prices, if you don't have a half eaten piece of fruit on the cover of the box.

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Re: Bull**** @countach

The Pro is just as touch as the Surface 2, just that it can also run desktop applications if needed.

We have a couple here, connected to dual 24" displays on the desktop, with BT keyboard and mouse. They make great desktop replacements in that scenario, but on the move it is light and easy to use and with touch and the WACOM stylus, it is great for making notes in meetings.

I've used my Samsung ATIV in a similar way, although it only supports one external display, whereas I believe someone demonstrated the Pro with something like 4 external displays at the same time. The ATIV, being Atom based was enough for basic office work (MS Office and our ERP system), but wasn't really man enough for the graphics work that I have to do, so I still use my old desktop for that part of the job.

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Re: Bull****

Windows RT doe not run real Windows programs, so I think you've got that backwards.

In short, Pro is a decent tablet, and RT is a Frankenstein monster.

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Sorry but...

"Before the usual "ipad is better, surface is shi*" debate starts, "

What debate??

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Not sure I'd be impressed as an investor

It's all very well reinforcing and approaching your vision, and executing behind it, and being accountable to customers, investors and "anybody who knows me", but putting the business bullshit aside isn't his job as CEO actually to make money for the owners?

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Re: Not sure I'd be impressed as an investor

No, the CEO's job is to manage the 15,003 wildfires burning in every large company every single day. He's doing the proper thing for any new CEO and establishing the persona that will define him in the future. That's crucial and it's the reason why big investors like to attend quarterlies and annuals in person.

Being a supreme bullshitter is part of the job as is being a supreme bullshit detector. You go to those meetings to judge how much that person is bullshitting. The numbers don't matter for the past (which is what earnings meetings are), the future is what it's about. You've got to judge how confident the CEO is that the strategies he's implementing will be positive for the future. Early meetings, like this, establish a baseline.

Sales is responsible for making the money. They are 100% responsible for every penny of every paycheck for every company employee and every penny investors make on their investment.

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Re: Not sure I'd be impressed as an investor

This makes little sense. Sure, sales is responsible for bringing in the money, but is the sales teams' fault for the debacle that was Surface RT? Was it sales' fault that Apple (and then Google/Samsung) was able to snag most of the phone market even though Microsoft has been in that space for longer than either one? This is a leadership and a market vision issue, and that takes a lot more than press-friendly rhetoric like "establishing the persona".

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@walnut

Yes, the failures of Sales to identify how to move a product then to fail again in identifying how to offload the stalled products in a creative, non loss making way is most fucking certainly on the heads of the senior Sales people; 100%.

I'm curious. Who are you trying to pin those failures on? The CEO doesn't do product sales anymore (they're doing investor PR when they make statements). The COO is concerned with everything but product sales. The CFO's only concern is making sure the financials meet the goals the CEO set out without (getting caught) breaking any laws. The CIO, normally, knows less than nothing about product sales. So who does that leave on the Bridge of a large company to be be concerned with sales? I'm going to give you a hint and tell you it's the Chief Sales Officer or Executive President of Sales that is responsible for sales. It's kind of neat how job titles and responsibilities match up isn't it?

The CEO says 'I want (metric)' then goes off to keep the board (most importantly) and investors somewhat mollified while all the other C' go off and figure out how to satisfy that metric. Occasionally, if the company founder is also the CEO, they'll participate in operations or sales from a 50,000ft altitude, but generally they'll have no idea what the company is doing if it isn't on their dashboard or their daily one page executive briefing every day. They don't know, because it isn't their job to know. Hell, unless you're talking a thimble sized company the CEO can't know. There's too much to do. That's what all those other officers are supposed to do. That's why they have those incredibly descriptive job titles.

Incidentally, firing executives who blame others for their failures is another job the CEO has. That's important for you to remember if you're ever in a position where you're reporting to a CEO. If you're trying to figure out who is responsible for a given thing then that person is in the mirror.

Go look at a market analysts report on any company's earnings call. The first fucking thing they write about is the appearance of the CEO and the mood in the room. Know why? They aren't being creative, that's for damn sure. They put the CEO appearance, manner of speaking and mood of the room first because that's the sole reason the CEO is showing up for the event.

The Senior Executives, the Board and major partners knew the numbers a few days ago and the rest of the world will have access to that data a few hours before the call. The information is irrelevant, it's already happened. The way the CEO looks and handles himself will determine if investors have confidence or if they don't think the CEO's goals for the future are viable. Find another Wall Street financial document that begins with a fashion and social column. I challenge you.

The CEO's sole responsibility is seeing that the Board is satisfied. They do that by making sure investors are satisfied(ish) and they do that by giving the actual company drivers goals that will satisfy the Board and investors. It's everybody but the CEO who is responsible for figuring out how to meet those goals.

Being a CEO is the hardest job in the world, but it's fun too, if you're cut out for it. You should try if sometime.

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So gnomes got their plan wrong:

Step One: Collect underwear.

Step Three: Vision, purpose and execution.

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its just the apps for the ARM, they are just poor, the worst of the itunes and playstore crap.

just RSS mishmash feed programs, and just crap..

where are the wifi scanners, xbmc, plex (free people i just spent 300 on a device that does basic tasks) utorrent remotes, ipcam viewers, lg/samsung tv remote's, eon energy app, bittorrent sync., keepass, squeezer app... just a sample of whats on my android phone.

The design, feel, performance, great!!!!!

I want a pro, but £700, hmmmm

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The ARM stab there is a little misplaced you know. You should have been aiming at the developers of the software, not the processor. But you can't blame software companies for wanting a somewhat stable business.

As it stands right now there isn't a viable industry sector for 'apps', on any platform. Sure, there are big success stories and individual fringe cases, but no real life in the middle. You've got to have that middle or you've got a speciality, not a sector. It's pretty apparent that middle isn't going to be found in the traditional buggy shit with a pretty dress model most all software uses, but hey! Now we know. But again, that's got fuck all to do with processor architecture.

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"that's got fuck all to do with processor architecture."

I don't think he was having a pop at ARM in general, but specifically at the Surface RT. There's plenty of stuff which runs on ARM and there's plenty of stuff which runs on Surface Pro. But there not much (decent) stuff which runs on ARM Surface RT.

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Theres nothing wrong with ARM

its just MS cant get their core office stuff to work on it!

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Joke

Re: Theres nothing wrong with ARM

They should do up 'Office Fingerpaint'! That way people who want an MS tablet to do something productive with aren't left out!

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"If he were to sum up the quarter in two words it would be “execution and transition.”"

Ahhh...that would be 3 words.

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Dan said it was one word so they took the average

http://www.brainyquote.com/quotes/quotes/d/danquayle387146.html

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Re: "If he were to sum up the quarter in two words it would be “execution and transition.”"

hah! - but to sum up in words of just one _sound_ is the best thing to do

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Re: "If he were to sum up the quarter in two words it would be “execution and transition.”"

And isn't a word, like 'it' and 'a'

A to the L to the I to G!

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Re: "If he were to sum up the quarter in two words it would be “execution and transition.”"

The real question is who is going to be executed?

I'm sure we all have our favorites....

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Re: "If he were to sum up the quarter in two words it would be “execution and transition.”"

If 'and' isn't a word, what is it? I'm genuinely curious. I suppose it could be a bunch of variables, but nobody has ever shown me the formula to address them, that's just shoddy workmanship on the parts of so very many editors.

Ooh, ooh! If I take public domain classic literature then remove the 'and' from them can I copyright them as new works? I suppose I could just substitute any other three letter word if it's actually a variable. I could do for classic literature what Ted Turner did for classic film!

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Re: "If he were to sum up the quarter in two words it would be “execution" and "transition.”"

Put the quotes in the right place... The two words are "execution" and "transition".

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Joke

Why bother with new stuff?

As a "dated Microsoftie" (as I sometimes like to call myself, I'm a big fan of Windows 7, Office 2010 & Visual Studio 2012 but not so much of the recent products) I have finally seen the light, now I understand... I guess this is Microsoft's way of saying that the Surface is too good to be true (it costs them money) so it really is something which everyone should be buying into.

Anyway, I'll pass. I just upgraded my Toshiba Satellite laptop (which ran on Windows XP) with FreeBSD 10 (powered by Xfce4, SeaMonkey and LibreOffice) and one thing became obvious right away: although my laptop is quite dated it actually became a whole lot better to work with. Xfce4 is pretty light weight while still providing several options to make your life easier.

And make no mistake here; this isn't because of FreeBSD perse, but more so of Xorg, Xfce4 and the other projects (which will obviously also run just fine on Linux!). It takes getting used to, sure, and it doesn't easily "connect" (yet!) with my Office environment, but it does make one heck of a business laptop.

Best of both worlds: with Xorg and LibreOffice I have my portable business environment, whereas the Unix-like environment underneath makes for one heck of a network station (which you'll need whenever you're troubleshooting network problems at a customers place).

I maybe late to the party, but IMO now really is the best time to start pushing new life into older hardware. Especially with the currently ongoing financial climate.

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Thumb Up

Re: Why bother with new stuff?

Have a thumbs-up from the FreeBSD camp!

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Mushroom

Re: Why bother with new stuff?

>And make no mistake here; this isn't because of FreeBSD perse, but more so of Xorg,

Yep you are lucky FreeBSD even supports your hardware on a laptop (sounds like it being close to decade old might be why). In fact you may well be amazed how much better even your performance will be if you switch to Linux instead. The only use case I have ever been satisfied with *BSD over any amount of time is a m0n0wall or pfsense firewall/router box.

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Trollface

Re: Why bother with new stuff?

And actually Linux is now better on the router/firewall side as well due to last I saw *BSD not having fq_codel yet (security still *BSD strong suit, that along with obscurity). Still I can respect the *BSD folks and their neck beards. Its takes a certain kind of person to put principles before usability, performance, hardware support and platform software availability (sorry last I saw linux binary emulation was single CPU only). BSD folks are kindred spirits of the Amiga folks.

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Re: Why bother with new stuff?

Ok enough being a dick. The BSD folks have given us some good code over the years (OpenSSH, etc) and I certainly like their passion and even ecosystem a lot more than some others. I also believe they will finally clean up OpenSSL as they do security and audits better than anyone. They just often make themselves easy to dislike like the Debian folks on steroids.

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Surface rocks

I have a Surface Pro 2 for work and it rocks. It is an awesome bit of kit.

The problem is the price, I would not buy one for home because they are so crazily expensive. If MS drops the price it would sell many more of them, because the concept is amazing.

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Re: Surface rocks

IMHO if they'd only heeded advice and sold the MkI at cost or less in the first place.

But then again, Ballmer would be still at the wheel.

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Re: Surface rocks

Cutting costs can't work once you've put something into production, you're stuck with the choices you've made, or the economics fail, catastrophically.

The custom tooling and machinery (that's what my company makes) have already been built and (probably) still being paid for when the lines start moving. You've already committed with your manufacturing provider for (x) units and minimum length of timeline. Same with your components, packaging and included accessories vendors. Then you've got the warehouse commits you've made, logistics, reverse logistics, insurance underwriters, regulatory compliance assurance contractors, the list goes on.

All those contracts have early termination clauses, but when you're dealing with the bastards who brought you Windows ME, Vista and 8 and is notoriously aggressive about licensing enforcement and partner abuse you aren't going to get any favors tossed their way just because they've built a looser.

As I noted earlier, margins don't scale like losses at scale. You reduce pricing, say 15%, but your margins go down 25-30% or more and climb as cost of sales skyrocket as sales increase due to lower pricing. Bigger reductions cause the margins to fall even faster. It really sucks, believe me, but big losses are the risks of big business. It's a big vicious circle and once you're in you're in. Hesitation or weakening convictions hurt you even worse so get it right before you start the pick and place machines or you're stuck with a situation like MS is in. It's a tough game.

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Re: Surface rocks

They are a good, clever piece of equipment. I don't have one, but I have a WIn8 smartphone and as I tell everyone, Win8 is very good indeed in small form factor and with touch. It is just terrible as a desktop interface.

Microsoft's big mistake was treating the marketplace like their dirtbox. As far as tablets are concerned, MS were a latecomer to the market and an upstart.

The best thing they could have done was taken a HUGE loss on Surface and cut the price very low and accepted that as the cost of carving out market share against Android and Apple. But they thought they were too good for that.

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@ Flatpackhamster Re: Surface rocks

I concur about the failure to accurately assess the market, their place in it, and the appropriate strategy. As Don noted, once you've made the initial decision, you have to wait out the consequences. If they cut prices now they look indecisive and confused.

All that being said, even if they had accurately assessed those options, I'm not sure it would have worked. MS were too focused on the unified code block and shifting to software rental as a business model to do what they really needed to do: separate the two and compete them independently. In the process they honked off far too many people. If they put a real menu tree option back in Windows 8 and made the operational mode an explicit selection made during initial configuration I'm not sure they could undo the damage their intransigence has already done.

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confused

Sorry - I realise I'm missing something but can someone explain to me (very slowly and patiently) why isn't it a $45 million and $300 million loss rather than $45000 and $300000 loss?

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Re: confused

I'd imagine it's because the financial reports often miss out the last ,000 (and definitely the .00 on the end) when they're dealing with big numbers. So Dr Evil's One Meellion Dollars would show up as a paltry $1,000...

So someone was probably typing in a bit of a hurry. Or C+P went wrong.

To be fair, their loss on the last quarter was proportionally less than the losses in the previous 2, even if it was on lower sales. But with the Christmas period on there, that's to be expected. They might even manage to break even on Surface next year, who knows?

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Anonymous Coward

Re: confused

Cause MAGIC my friend -- seriously, I would like to know the answer to Bill 2's post as well.

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Ah Gavin,

It wouldn't quite be the same Microsoft financial statement without you pissing all over it.

Between you and Neil McAllister you never fail to darken my Internet with your glass-half-full attitude to the biggest software company in the world.

Yes, that's right, they're STILL the biggest software company in the world and in almost every measurable way, they're still in very good financial health.

Sorry about that.

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Anonymous Coward

Re: Ah Gavin,

What part of M.O.N.O.P.O.L.Y. do you not understand?

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Headmaster

Re: Ah Gavin,

None of which changes the facts that they lost money, which is big news in itself, and that the Surface Pro 2 sales are in the toilet and are dragging down Microsoft's profitability. Don't let facts get in the way of your blinding fanrage, though.

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Re: Ah Gavin,

Its funny that people focus on a single product line and say "see, it lost money". People don't do that with other retail outlets where loss-leaders are commonplace.

The thing about the Surface range is that they are the gateway to an ecosystem that Microsoft is attempting to create. They are trying to build a world around their app store, music store and the like. That's where the real money is - software. Just like Google and their Android OS. It gets people to use their app store, it gets people to use their search tools, their email system etc...

My view has always been that Microsoft have been going about their Surface 'world' wrongly. The devices should be cheap. So cheap that its silly not to buy them. There should be very nice incentives for developers to get onto the platform too. That way, Microsoft can make the money where it matters - their core business of software and services.

So! Long may the Surface lose money for Microsoft. And hopefully, long may its app store make it plenty instead.

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Re: Ah Gavin,

M.O.N.O.P.O.L.Y. means nothing to me. Regardless, it's terribly, terribly poor form to have an acronym with an even number of letters other than two.

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Re: Ah Gavin,

So, to recap the article, which you clearly didn't read:

Microsoft lost $45 million due to $300 million in losses from selling Surface. In short, Surface losses ate up all of Microsoft's profits and then some. Do you understand?

"So! Long may the Surface lose money for Microsoft. And hopefully, long may its app store make it plenty instead."

The very existence of Microsoft fanboys is puzzling to me. Why do you care whether Microsoft, the company, is successful? Surely the company should stand or fall on the quality of its products; why do you identify with them to the point that you care about the company as an entity?

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