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Microsoft Still Losing Millions on Surface

Brian Hall, general manager of sales and marketing for Surface

It sounds impressive: Microsoft in its latest quarter doubled sales of Surface — the tablet it hoped would compete with the iPad — and brought in twice as much revenue from the product as it did in the previous three-month period.

But the Redmond, Wash.-based company still managed to lose millions on its tablets.

In its earnings report, Microsoft said it sold $893 million worth of Surface tablets in the three months that ended Dec. 31, up from $400 million in the previous quarter. That was more than the $853 million in Surface sales for Microsoft’s entire fiscal 2013, which ended in June. But the company’s “cost of revenue” — what it cost to sell the tablets — was a whopping $932 million in the latest period.

Microsoft just couldn’t spark sales of the original Surface RT, the supposed “iPad Killer,” after it launched in 2012. The software giant was way too late to the tablet game, Surface wasn’t available at many stores, and with a starting price of $500, the product failed to gain traction. The company reported a $900 million charge last summer to reflect a $150 price cut on unsold Surface inventory, and has since slashed the price even more to make room for the second generation of Surface, which went on sale last fall.

(Microsoft seemed to learn from its Surface RT mistake and didn’t ship enough of its second-generation Surface devices to keep stores stocked during the holiday shopping season.)

Over the past few months, Microsoft has been selling what was once a $500 tablet for as little as little as $199, less than the cost of its parts.

A “considerable amount” of Microsoft’s Surface sales in its latest quarter could have been driven by the discontinued, heavily discounted tablets, Tim Coulling, a senior analyst at Canalys, a technology market research firm, said after Microsoft’s earnings call with analysts and investors. “A significant portion of what was sold was sold at a loss.”

Consumers seemed to respond to the price cut, at least: According to InfoScout, an analytics company, the Surface RT priced at $199 was the top-selling product at Best Buy on BlackFriday. The Surface, as it’s now called, is still being sold in Microsoft’s online store with a starting price of $299. Microsoft didn’t break down sales by Surface type, but in prepared remarks, Amy Hood, Microsoft’s CFO, said the company “saw improved sales of Surface RT” in the latest quarter.

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