Channelnomics

Channel ‘Disarray’ Hurts Microsoft Surface Sales

Microsoft Corp.’s grand plan to return to glory and recapture the initiative from Apple and Google has stalled. Analysts are openly saying that Windows 8 sales are sluggish, and Surface tablet – the first Microsoft foray into hardware – isn’t selling well enough to make a dent in iPad and Android sales. Worse, the number of new third-party Windows 8 tablets and PCs are less than expected.

What’s going on? Microsoft’s strategy is a mess. Analysts describe the tablet strategy as being in “disarray.” And behind the scenes, Microsoft is scrambling to course correct the flagships of its 2012 launch cycle before they bring down other products, such as Windows Server 2012 and Office 2013.

All summer, Microsoft executives crowed that 2012 would be the year of the company’s greatest product refresh ever. Nearly every major product was getting a new look, updates and functionality. And, moreover, core products such as Windows were finally being fitted for tablets and the mobility era. On paper, Microsoft looked as though it was ready to re-engage rivals, particularly Apple.

Six weeks into the Windows 8 era, though, and things are now looking so good.

Microsoft says Windows 8 is selling at a faster clip than Windows 7 did three years ago. More than 40 million units of the new operating system shipped in the first four weeks of general availability. Surface, too, Microsoft describes as selling “well,” with the initial online inventory selling out within days of preorders opening.

These numbers should be good, but analysts have pounced on them. The underlying problem, they say, is Microsoft’s failure to effectively engage its multiple channels.

Microsoft won’t officially release Surface sales numbers. Analysts and longtime Microsoft observers say that’s a sure sign that it’s got something to hide. The current estimate is Microsoft will sell 500,000 to 600,000 Surface tablets in the fourth quarter. At an average of $500 a piece, Microsoft could generate $300 million in topline revenue; which isn’t so bad. But considering Apple will ship 26 million iPad 3s and Minis in holiday season, Microsoft isn’t even scratching the surface.

And what about the Windows 8 numbers? Microsoft isn’t categorizing the 40 million units shipped. Analysts are a looking for where these licenses went, with some suspecting that a fair number of them are sitting in unsold PCs sitting in the OEM channel and a fair number are low-price upgrades. Microsoft irked many channel partners by pursuing inexpensive online downloads direct to users. The intent is to get as many licenses installed to prevent users from switching platforms. The analysts charge: Microsoft is stuffing the channel to make Windows 8 look good.

If Microsoft is suffering a poor launch cycle, it will come down to a channel problem.

The first sign that Microsoft wasn’t ready for its launch cycle came at its Worldwide Partner Conference in July. There, Microsoft coyly avoided talk about if and when Surface would find its way into the channel. The strategy was to launch Surface as a direct sale through Microsoft’s Web site and through retail stores.

The limited sales outlets is what’s holding back an otherwise promising product, analysts say. By keeping Surface out of the hands of retailers, online distributors and B2B solution providers, Microsoft is truncating its market reach and potential sales.

Part of the reason Microsoft may have held Surface out of its various third-party channels is because it didn’t have a distribution strategy. Channelnomics is told the major distributors repeatedly approached Microsoft about how to handle Surface logistics. They were rebuffed, as Microsoft management claimed it wasn’t ready to talk about it and were still trying to figure out a channel strategy.

What about all those notebook, tablets and ultrabooks that were supposed to hit the market this year? At the Intel Solutions Summit earlier this year, the chipmaker said more than 75 ultrabook models and dozens of tablets would hit the market by the holidays. Truth is a number of ultrabooks are circulating, but few are running Windows 8. And many OEMs have held off launching Windows RT tablets; Hewlett-Packard, Microsoft’s largest hardware partner, opted to produce no RT tablets and its Windows 8 model won’t hit the market until 2013.

Microsoft can’t take all the blame for the lack of Windows tablets or ultrabooks. Intel’s had problems with its power management software of its Clover Tail chipset. This has delayed several tablet models from reaching market in time for the holidays.

And let’s not count Microsoft out too early. Microsoft has surprised the market before by posting surprisingly positive numbers in the face of poor forecasts. The likelihood of that happening, though, is low given that OEMs are trying to work down an inventory of Windows 7 PCs, while Apple and Google tablet products continue to sell exceedingly well.

Microsoft’s best competitive and growth weapon remains its sprawling channel. If Microsoft just engaged its channel more effectively, provided it the opportunity to sell and support more products, and got manufacturers engaged, it could reignite momentum of Windows 8 and Surface. What’s holding Microsoft back is a complete mystery.

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