Microsoft Corp. said last week that sales of its Surface media and business tablets grew significantly year-over-year in the third quarter of its fiscal 2014. While this is generally a good for the company, since the growing amount of consumers chose Surface over rivals, this also meant that the company lost more money on its slates.
Surface revenue grew over 50 per cent year-over-year to approximately $494 million, according to Microsoft’s financial results for the quarter, which ended on the 31st of March, 2014. The company did not reveal whether during the quarter it sold mostly new-generation Surface tablets released in 2013 or previous-gen slates launched in 2012. It also did not provide split between sales of Surface for consumers and Surface Pro for professionals.
What is known is that Surface’s cost of revenue was $539 million for the three months ended March 31, 2014, which increased due mainly to a higher number of units sold. In general, this means that the company continues to lose money on its tablets and during the Q3 FY2014 it lost $45 million.
While losses on hardware is not something brand new for Microsoft (it is used for losses being in the video game console business), what is noteworthy is that it could not make money on two generations of Surface that have been on the market for well over a year. It is okay to lose money on game console hardware since they will return in the form of software sales, but for devices like Surface, companies have to earn on hardware. Although hardware is now one of Microsoft’s strategic businesses, the company still cannot make money on it.
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KitGuru Says: Hardware business is different from software business that Microsoft is used to. It is obvious that in the future the Redmond, Washington-based company will learn how to make profit from Surface tablets. But until then it will continue to bleed money at increasing pace now that it has Nokia's smartphones, tablets and feature phones in its product lineup.