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Microsoft Corporation: After Disappointing Surface RT Sales, What's Next?

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The company takes a hit and a price cut on the lower-range tablet.

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The urgent need for Microsoft (NASDAQ:MSFT) to continue developing tablet devices is growing, thanks in part to the relentless decline in the demand for PCs. Yet when Microsoft reported a nearly $1 billion write-down on the Surface RT, it gave investors pause. The inventory write-down for the tablet is staggering, but not surprising. Should investors give up on Microsoft's tablet strategy?

Background

The RT, built with the Windows 8 user interface in mind, was introduced when Apple (NASDAQ:AAPL) dominated tablet market share. By the end of last quarter, Microsoft faced a $900 million write-down. Heavy advertising efforts had failed to improve RT sales. Now, to make matters worse, Google (NASDAQ:GOOG) has refreshed its Nexus 7 tablet. At a marginally higher price, the new Nexus 7 is thinner, has a higher resolution, and runs on a Snapdragon S4 Pro processor.

In response to weak demand, Microsoft has reduced the price of the RT by $150 to $349. Retail distribution grew last quarter, and the tablet is now available in 10,000 locations and in 29 markets.


Price data sourced from Zacks Investment Research

Why Surface RT Failed

The RT failed with consumers because the product was neither here nor there: App selection was limited; the device was underpowered (compared to the Surface Pro); and most importantly, the RT did not run applications made for PCs. Although the Pro costs more, Microsoft might want to consider winding down the RT line and focusing solely on the Pro.

The Big Picture

Microsoft is still an attractive company. Nearly every Microsoft division grew last quarter, with Windows RT being the only real sore spot for the company. And despite the loss, Microsoft is getting some increasing support from its competitors. For example, Apple said in June that it would make Microsoft's Bing search its default over Google search.

Conclusion

Even though sales for the Surface tablet are weak, it continues to be of core strategic importance for Microsoft and its positioning in PCs and devices. The company might rethink the RT version, eventually retiring the line to focus on Surface Pro. Ideally, Microsoft could reduce its market budget while allocating funds toward developing a lighter, less expensive fully functional device. That might make the tablet lineup more attractive for users and could lead to greater interest in Windows 8.1.

Editor's note: This article was written by Chris Lau, a Kapitall contributor.

Kapitall's lists break complex concepts down to their basics, offering education and investing ideas to novices that double as a refresher course for more seasoned investors. Inspired by video game design, Kapitall's revolutionary brokerage platform combines a graphical user interface with tools that make it easy to build portfolios, share ideas and execute trades.

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