That Microsoft’s new Chief Executive, Satya Nadella, lives in a corporate bubble is self-evident from
his jargon-filled speeches. However, Nadella is about to learn something that any small business
owner lives with every day and knows in his very bones. That basic but vital business lesson is that
virtually anybody can sell something for less than it costs to produce – although not for long. Some
people manage to sell a product for a price equal to the cost of production, perhaps as a sales hook
– but not for long. Not so many people can sell something at a price greater than the production
costs – which is the only sure way to make a profit. Think about this and then look at the
PowerPoint chart above which shows the costs, revenues and margin of Microsoft’s Surface tablet
with optional keyboard. This data comes from Microsoft’s published reports with further data from
Jackdaw Research. You can clearly see that the costs of sales (revenue) for Microsoft’s Surface
tablet obviously exceed the revenue created, resulting in a negative profit margin i.e. a loss. So far
the Surface tablet has cost Microsoft more than $1.7 billion, and that doesn’t include any
advertising and marketing costs. Satya Nadella, who’s clearly no street trader, calls selling Surface
3 for less than it costs “making a market” in Microsoft parlance. How long the company can
continue to lose money on Surface tablets by making a market must be causing some interesting
discussions in Microsoft’s boardroom.
You may or may not have noticed that Microsoft is in the middle of a costly global advertising
campaign to convince as many people as possible to buy a Surface 3, the company’s third attempt
at making a tablet. The Surface 3 is now available in 28 countries and Microsoft is spending a huge,
yet undisclosed, amount of money to promote it. The advertising message for which that Microsoft
is paying so much to get you to remember is that the Surface 3 is “the tablet that can replace your
laptop.” If you haven't seen it yet, you can click here to watch the 30 second commercial. Yet for all
its efforts, Microsoft's advertising will almost certainly fail to make the Surface 3 a popular device.
How can I be so sure? Well, it’s an old adman’s truism that no amount of money spent on
promotion can sell a poor product. I'm not saying that Microsoft's Surface 3 computer is really
bad, it’s just not that good, and it’s horribly expensive in a market where the trend is for people to
seek lower prices. The kind of folk who are prepared to pay more for their computing hardware
are already locked-in to buying Apple devices and the rest are starting to buy Goggle Chromebooks
in ever increasing numbers, which is really bad news for Microsoft.
Sometime before the launch of the first version of the Surface, when the price hadn't been made
public, I wrote about how the Surface would probably be too expensive to compete with Android
devices. I also wrote a later article about Microsoft having to write down $900 million in 2013 when
they had so many unsold Surface computers in their possession. In that article I pointed out that,
starting in the late nineties, Microsoft made several attempts at producing a tablet computer, and
the company had started using the term “tablet pc” back in 2001. It used to be said in the trade
that Microsoft would often make three attempts at a product before they would start to get it right.
In today’s fast moving world of electronics it seems that for Microsoft three attempts are no longer
sufficient to guarantee success, especially in the Surface 3's case when they appear to be claiming
something that is just not possible.
Let me explain: Microsoft's own Surface 3 advertising defines their problem with the message that
a tablet computer can replace a laptop computer – in the future maybe, but today it can’t. For
many tasks a tablet computer isn't a replacement for a laptop because tablets use a touch interface
and the majority of business orientated software is designed for the precision only obtained when
using a mouse and keyboard. This particularly applies to Microsoft's own Office software and their
other business software products. If you want to write a lengthy report that includes manipulating
graphic images, you’ll find relying on a touch interface tedious, if not downright difficult. Many of
the other hundreds of non-Microsoft software programs which contribute to the strength of the
Windows environment do not work very well with touch. Touch screens simply don’t provide
enough sensitivity, or sometimes the problems come from these screens being too sensitive. Next
time you use a tablet, notice how many mistakes happen and the number of applications you didn't
intend to open which get opened. When I use my Nexus 7 tablet and scroll upwards near the
bottom of the screen I frequently, and annoyingly, open Google Now, instead of being able to
continue to read more of the newspaper article I’m concentrating on.
The recent catalogue of mistakes made by Microsoft is far too extensive for me to detail in this
article, and I'm sure some of them will be used as negative case studies in business schools for
years to come. But I’ll just mention one of the main causes of the present situation: an
extraordinary state of affairs where Microsoft is having to spend loads of money on advertising in
order to support a seemingly impossible proposition, and to lose money on every single sale it
makes. By far the biggest mistake in the whole Surface débâcle was when Steven Synofsky, the
executive in charge of Windows at the time, decided that the future development of Windows
would take a diverse path from that chosen by Microsoft's major competitors Apple and Google.
Apple currently has two different operating systems: one which uses touch as the primary interface
(iPhone and iPad), and another one for laptops (Macbook Pro and Macbook Air) which uses a
mouse and keyboard as an interface. Google is similar in that Android is a touch interface for
smart-phones and tablets, and Chrome is centred round a mouse and keyboard input.
Making major changes in developing operating system software takes a minimum of two years to
bring to market, so when Steven Synofsky decided that Windows 8 would be an all-in-one interface
that united touch and mouse and keyboard, it was a bold move but he got it wrong. Laptop
manufacturers were sceptical about his approach, nevertheless they managed to produce touch-
enabled laptops. But the result has been declining laptop sales with many corporate customers
preferring to load up Windows 7 instead of the new all-in-one interface of Windows 8. In fact one
study found that more than half of Windows 8 users treated the interface just like Windows 7.
Windows 8, and its rushed update Windows 8.1, have not proved popular. To show Windows 8 and
8.1 in the best possible light, Microsoft produced the Surface 1, quickly followed by the Surface 2
and now the Surface 3. It has been an expensive exercise. Indeed, it is rumoured that Microsoft is
currently spending more on advertising the Surface than the revenue being created by sales.
To try and correct some of the problems that Windows 8 and Windows 8.1 created, the forthcoming
Windows 9 is being made easier to use with just a mouse and keyboard. One result is that rumours
say that the “Charms Bar,” a slide-in menu from the right, in Windows 8 is likely to be dropped.
Indeed, many of the cheaper laptops being produced for this Xmas, like the Asus X205, use a low
cost “Bing” version of Windows and don’t even possess a touch screen. This economic version of
Windows is aimed to counter the growing use of Google's free cloud operating system Chrome, and
the increasing sales of Chromebooks that I mentioned earlier. These new products will help
Microsoft Windows compete better with Google.
To understand what led Steven Synofsky to produce the financially disastrous all-in-one interface
for Windows 8 and 8.1 it helps to know a little history. Synofsky has always placed a greater
importance on software that stands out by being different, than by being usable. He was the man
in charge of Microsoft Office when the infamous Ribbon interface was introduced. A pull-down
menu bar that lists all the options available is more efficient and easier to use than a large context-
sensitive ribbon bar where options appear and disappear. There is always a learning and
remembering cost when menu choices suddenly vanish. The only way to find something that isn't
visible is to remember where it hides, and that takes time and an effort that shouldn't be required.
The Microsoft Office Ribbon was introduced in 2007 and people are still writing about the added
complications that it introduced, you can read an example here.
If Synofsky had understood more about usability, and had he also bothered to use an Apple or
Google touch interface product for any reasonable length of time, he would have realised that
people use them in a quite different way to a laptop. When people find something is too difficult to
use, they simply don't use it. Tablets and smartphones are adjunct devices to the more complex
operations carried out on desktop or laptop computers. If Synofsky had grasped this he might
have kept the touch interface for tablets separate from the mouse and keyboard input in Windows
8. The staggering amount of money and loss of market position this mistake cost Microsoft, as well
as computer hardware manufacturers, has yet to be calculated – the sums run into billions of
dollars. This includes lost sales from Windows 8 and 8.1 as well as the costs for developing Surface
1, 2, & 3 which alone amounts to over $1.7 billion so far, and that figure doesn't include the
extravagant global advertising campaign running at the moment. That mistake eventually cost
Synofsky his job - at the end of 2012 he was smartly ejected from Microsoft. Today he publishes a
blog called “Learning by Shipping” which is about pushing products out early to find out what
actually works. Yet the gigantic costs of developing operating software make it far too important to
“learn by shipping”. The better strategy is to be like a tailor about to cut a piece of cloth – think a
great deal about what you are doing before making a cut. Software operating systems underpin all
the functions available on a computer and, like a tailor ruining a piece of cloth, an error in its
development can be economically disastrous. It is only because Microsoft has vast cash reserves
and other revenue streams that it can survive Synofsky's big mistake, a smaller, less financially
sound company would have been wiped out. At some point Microsoft's new chief executive, Satya
Nadella will have to decide whether there will be a Microsoft Surface 4, 5 & 6 or whether the
economic loss is too great, even for such a rich company. Whatever Nadella decides, the mouse
and the keyboard will be around for a long while yet, although the thinking at Microsoft seems to
be that everything in computing is converging around mobility and the mouse will be replaced by a
stylus pen. Hence the Microsoft Surface 3 has a pen holder obtrusively sticking out of the side of
the optional keyboard in what looks very much like an afterthought. It’s a great pity that more
forethought wasn’t given to the whole Windows 8 and Surface concept.
...with analysis & insight...