Microsoft Corporation (MSFT)’s Real Problem Lies Beneath the Surface

Last week Microsoft Corporation (NASDAQ:MSFT) 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 Corporation (NASDAQ:MSFT) 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 Corporation (NASDAQ:MSFT) 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 want the first time
This isn’t the first time over the past few months that Microsoft Corporation (NASDAQ:MSFT) 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 Corporation (NASDAQ:MSFT) 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 Corporation (NASDAQ:MSFT) 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.