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Microsoft remains shackled to strategy after $900M 'absolute abomination' of a blunder

Gregg Keizer | July 22, 2013
Redmond can't afford to dump ARM just because it screwed up on Surface RT, analysts assert.

Microsoft's massive $900 million Surface RT gaffe may have been, as one analyst put it, "an absolute abomination" in operations, but the company will not — cannot — give up on the ARM-based platform, experts contended today.

"They haven't given up, not yet," said Frank Gillett, an analyst with Forrester Research. "Maybe in a year or two if, in fact, they're still struggling, but this is a determined company with a lot of cash and a large market presence."

Yesterday, Microsoft took a $900 million charge against earnings to account for a drop in the value of its remaining Surface RT inventory. As explained by Amy Hood, the company's new CFO, in a call with Wall Street Thursday, the charge accounts for a 25% to 30% discounting of the tablet as well as a write-off of an unspecified quantity of components and accessories, likely including some already-purchased parts that have not yet been used to assemble more devices.

But the company, which has repeatedly confirmed that it will remain in the hardware business, gave no hint that it would either dump the Surface RT specifically or scale back its plans to become a devices-and-services vendor.

Analysts don't see any other move for the Redmond, Wash. giant, whose decades-old core business — selling operating systems and applications for personal computers — is slowly draining away as consumers reject PCs in favor of tablets and smartphones, markets where Microsoft continues to struggle to reach double-digit shares.

"It really doesn't matter if they wrote down $100 million or $900 million, they still need ARM as a hedge against Intel, a guarantee that they can go to lower price points," said Patrick Moorhead, principal analyst at Moor Insights & Strategy.

Microsoft invested in Windows RT, the scaled-back cousin to Windows 8, because it needed an operating system that would run on devices powered by ARM-licensed processors. Most tablets, including Apple's iPad and the vast bulk of those based on Android, run an ARM processor.

And it will continue to support Windows RT, and roll out its own "hero" devices based on that OS, to keep Intel's feet to the fire, Moorhead argued.

"Microsoft thinks that if they don't hold something over Intel's head, they won't see solutions in the future as competitive as Bay Trail which, at least on paper, looks very competitive for holiday 2013 Windows 8-based tablet," Moorhead wrote in a blog post today (subscription required).

The firm also needs to stay in the ARM game for other reasons, Moorhead continued, including the lower prices of ARM processors and the eventual merging of the Windows Phone and Windows code.

"They see ARM-based SoCs [systems on a chip) from someone like Rockchip or Huawei providing that cost reduction necessary to enable them to charge more for software or lower the product street price," Moorhead said.


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