Retail Folly: Why Microsoft Surface Losses Will Result In A New Channel Strategy


The BYOD (bring your own device) to work phenomenon has caused a lot of irrational behavior in the channel. The biggest and most costly mistake with Microsoft leading the charge is to step up consumer sales, marketing and product efforts at the expense of the commercial or business-to-business (B2B) channels.

What vendors should be doing is some good old-fashioned return on investment (ROI) comparisons on both their consumer sales channels and their commercial sales channels. Highly profitable commercial channels have through the years funded many foolhardy retail channel efforts. But with the BYOD phenomenon, the short shrift being given commercial channels has hit a historic high.

The madness that is Microsoft regarding consumer vs. commercial channels was front and center during the holiday season blitz around Surface. We called Microsoft's decision to refuse to let solution providers carry Surface the worst channel decision of 2012. And now the Surface sales numbers along with retail traffic spot checks are coming to light that show just how damaging that decision has been to Microsoft.

[Related: The CRN Test Center's Smartphone And Tablet Comparisons]

Microsoft has spent by some accounts as much as $1.5 billion marketing Surface and Windows 8, including hundreds of millions of dollars building brick-and-mortar stores. Several Wall Street analysts have pointed to the lack of distribution as a saleskiller even with the big retail buildout. Investment firm UBS recently reported that Microsoft sold only 1 million units of Surface RT in the fourth quarter, down from an initial UBS forecast of 2 million units. During the same period, Apple is expected to sell an estimated 26 million units.

CRN conducted an informal survey two weeks before Christmas, comparing retail traffic at the Microsoft store with the Apple store over a period of several hours. The Apple store had some 100 customers, many who made purchases, compared with 21 customers for Microsoft, with what looked like few purchases during that time period. If you want a good laugh, check out the video report, "Apple Vs. Microsoft: A Retail Store Comparison" on CRN's YouTube channel. Take the retail traffic numbers, the consumer marketing dollars Microsoft has spent on Windows 8 and Surface, and then tally the ROI. Microsoft's losses in its retail operations are almost unimaginable.

Let's be generous and say Microsoft's total consumer investment around Surface RT is $1 billion. Now let's call the average Surface RT purchase as $600. So Microsoft generates $600 million in sales. Bottom line: Microsoft's losses around Surface are astronomical. My bet is Microsoft will be forced to reveal just how poorly Surface has fared in the wake of a foolhardy direct sales strategy.

With retail losses mounting, look for Microsoft to realize it made a big mistake and do an about-face with the distribution strategy for Surface Pro, which is set to ship at the end of January. Partners will get their chance to sell Microsoft Surface, but only after Microsoft has been bloodied and beaten in the retail channel. Then, Microsoft will finally come to the conclusion that the only way to succeed with Surface is to leverage its tried-and-true commercial sales channel.

BackTalk: Steve Burke writes a monthly opinion column on CRN.com. You can reach him via email at steve.burke@ubm.com.