Why Microsoft’s ‘Big’ Write-offs is Not Big News

Usually I talk about technology, but today we’re going to talk tech with a healthy dollop of finance. What are we talking about? Microsoft’s $900M write down and subsequent stock swan dive due to the Surface business and the discounting of the current RT line. That’s a lot of stuff, but it’s all interconnected.

If you read what the blogs and the speculators are saying, many are screaming, “the sky is falling” on Microsoft’s tablet foray. The chunk of change they’re taking a hit on could certainly be construed as such, but if we take the long view of how Microsoft operates, as well as some historical points, the picture becomes a lot different.

First off, it should be noted that just because the company is writing off project losses does not mean that they are cancelling anything. Want a case in point? Xbox. Today, it’s a juggernaut of profitability for Microsoft and arguably the king of the console space. It wasn’t like that in the beginning.

Back in 2001 Xbox was considered the folly that would end the careers of many at Microsoft. They laughed at the company taking on such leaders as Nintendo and Sony. In 2007 alone, it wrote down $1billion in charges from the Xbox live project. Guess what? It’s still in operation and even more present now than ever as we use what they’ve learnt to watch Netflix and more.

Then you can take the current write down of $900M and factor that into the gross income of the company for last year, $56.22B. That’s 7 tenths of a percent of the money they made – not just gross sales! For most of us, that’s like the effect of the cost of a night at the pub this month.

Why the giant swing in stock price? You see, traders nowadays are more concerned with quarterly profit rather than long-term investment, which is why JCPenney couldn’t do all the things it would like to do, and perhaps needs to do. So in the jittery and forgetful world of trading, a quarterly drop like this could certainly be construed as the sky is falling.

As a result of disappointing sales, Microsoft has dropped the price of the Surface RT by up to $150. Is it enough though?
As a result of disappointing sales, Microsoft has dropped the price of the Surface RT by up to $150. Will it be enough though?

Conversely, if you were an investor looking at longer horizons than a quarter or even a year, you could also see that the management is in-place to see through massive projects like this and more often than not (yes, there was Zune) bring out profitability in the next few years. Gates and Ballmer have presided over a number of projects of this scope and have had the fortitude to stick it out as long as it has to be. Since these two are also some of the largest holders of MS stock, they really don’t have that much pressure to do otherwise, especially when it seems that the future of the company is in portable media devices.

That leaves the Surface RT price drop to consider. The Surface RT has been in the market for nearly a year. Sure, it could have sold better, but a price drop to the level they’ve given doesn’t necessarily indicated they’re closing the division. The drop to $299 would have had to be done in light of it’s competition, regardless of the write off.

The new price puts the Surface RT in competitive position with some of the other RT offerings by other manufacturers, like Dell. By having a lot of back-stock and taking the loss right now allows MS to also play with the prices a bit to find that sweet spot – something that financial models and focus groups really can’t predict adequately. Having been following the tablet market for a while, I would bet that the optimal price may actually lower than $299; a price a shade over $200 would be ideal for the device. A gradual drop in prices across the next few months into December will bring them to that point, and be warned, there will be many more hecklers on the way, because Microsoft is an easy target.

Taking into account that things generally get refreshed yearly and that this was the first trip to the rodeo, I am sure that Microsoft is feverishly working on the second round of RT tablets and incorporating the lessons they’ve learnt, making this write down something that nobody should get excited about – unless you’d like to own some Microsoft stock, because now is a good time to buy!

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