Microsoft's Real Problem Lies Beneath the Surface

Last week Microsoft dropped a bomb on investors. The company announced $0.59 EPS, quarterly revenue that increased by 10% from last year to $19.8 billion, and revenue for fiscal 2013 was up 6% from the year before... and also announced a $900 million "inventory adjustment" for Surface RTs. Ouch.

But the real issue isn't that Microsoft made too many RTs and can't sell them -- it's the fact that the company didn't have the insight to see that consumers wouldn't want it in the first place.

Microsoft Surface RT. Source: Microsoft.

The company's inventory adjustment basically means that Microsoft miscalculated demand for the Surface RT, and now many of the devices are sitting in inventory stockpiles, the total amount being as high as 6 million units by some estimates.

Give 'em what they wantthe first time
This isn't the first time over the past few months that Microsoft realized it misjudged what consumers want. After strong user demand, the company released the Windows 8.1 Preview upgrade last month that brought the Start button back to its OS and an easier way to access the desktop. Around the same time, Microsoft completely back-pedaled on game-sharing restrictions and always-on Internet requirements for its upcoming Xbox One after the gaming community lashed out against the company.

Microsoft cut the Surface RT price last week by $150 because consumers don't want a $500 Surface RT -- and Microsoft can't even be sure they want one for $350.

How can a tech company survive on making products that people don't want? The obvious answer is that it can't. At some point Microsoft needs to stop thinking it knows what users want and actually create a tablet device that they do want. A quick glimpse at the iPad or Samsung's Android tablets would be a good place to start.

But looking to the competition for inspiration seems to be difficult for Microsoft. I think the company is taking an old-guard approach and believes that it should be the No. 1 mobile software OS because it held that top spot in the desktop business for decades.

Microsoft needs to shed a bit of its overconfidence if it wants to move ahead with its products. Investors may be able to stomach the $900 million inventory adjustment, but I can't imagine that it hasn't made them at least a little uneasy. Microsoft has failed to take the simple and straightforward mobile OS approach that Apple and Google have, and the company's paying for it. Instead of thinking of itself as a tech dominator, maybe Microsoft should consider itself the underdog fighting for mobile relevancy. At least then the company would have the right perspective.

While Microsoft's tablets are having a rocky start, it doesn't mean the company is out of the competition just yet. But four other tech companies will duke it out for the top spot -- so Microsoft needs to kick its tactics into high gear. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free tech report. Click here now to get free access.

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Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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