Below the Surface are Microsoft’s tablet troubles

Microsoft has sold about 1.5 million Surface devices, people with knowledge of the company’s sales said, a slow start in its bid to crack the fast-growing tablet market to make up for slumping personal-computer demand.

Microsoft has sold a little more than a million of the Surface RT version and about 400,000 Surface Pros since their debuts, according to three people, who asked not to be named because sales haven’t yet been made public. The company had ordered about 3 million Surface RTs, they said. Brent Thill, an analyst at UBS, had initially projected that Microsoft would sell 2 million Surface RT devices in the December quarter alone.

The poor reception for Surface, unveiled last year, adds to challenges facing Microsoft’s Windows unit, which brings in a quarter of the company’s revenue. The devices are Microsoft’s first direct attempt to grab a slice of the surging market for tablets, seeking to take on Google and Apple and prove that Windows has a place in a world of touch screens and smartphone applications. That hasn’t happened so far, said Alex Gauna, an analyst at JMP Securities LLC in San Francisco.

“It’s pretty clear that things were bad entering the year, and at least for the moment they’re getting worse,” Gauna said. “The path to a successful Surface, in the same way that they were successful with Xbox, is not very clear to me right now.”

By contrast, Apple sold 22.9 million iPads in the quarter that ended in December. Worldwide tablet shipments reached 128.3 million units in 2012, according to IDC. Apple’s iPad accounted for 51 percent of the market.

Microsoft’s Surface RT, its first-ever computer hardware product, went on sale Oct. 26. The more expensive Surface Pro, which is built on an Intel computer chip and can run older PC software, arrived last month.

While Microsoft’s newest version of its operating system, Windows 8, runs on PCs and tablets from other computer makers, the company decided to gamble on tablets itself, trying to emulate Apple’s and Google’s strategy of delivering their own flagship devices.

For Microsoft, the stakes are high. PC shipments dropped last year for the first time in a decade, and analysts predict that they will fall again in 2013. Chipmaker Texas Instruments said last week that the computer market was weaker than the company had expected in January and chip orders related to notebooks have been sluggish. Hewlett-Packard, the world’s largest PC maker, last month said the market deteriorated more than anticipated in its quarter that ended in January, and the company expects the decline to accelerate in the current period.

Notebook shipments may fall by as much as 18 percent in the first quarter from the previous three months, compared with a median first-quarter decline of 9 percent for the past five years, according to research from BMO Capital Markets.

“The tide continues to go out on PC sales as consumers and emerging market users prefer tablets and smartphones to Windows based PCs,” Rick Sherlund, an analyst at Nomura Holdings, wrote in a report this week.

Microsoft’s Surface is the company’s attempt to showcase the interactive and mobile capabilities of Windows 8. Yet Surface has failed to connect with consumers. Windows 8 is “awkward” and hasn’t successfully combined the ease of use of a tablet with the capabilities of a PC, Nomura’s Sherlund wrote. Consumers see no need to pay extra for it when cheaper tablets with free software will meet their needs, he said.

Bloomberg