Channel Watch

Microsoft's Surface Drama Continues with Shareholder Lawsuit

The RT version of Microsoft's tablet device has faced an uphill battle almost from the start. And now, it's drawn the ire of investors.

The Microsoft Surface RT is now officially doing so badly in the market that it's drawn a shareholder lawsuit.

Microsoft started a feeding frenzy with the July 18 acknowledgment that it would take a $900 million charge related to a write-down in the value of its Surface RT inventory. Press estimates that day based on the size of the write-down suggested the inventory of unsold Surface RT devices could be as high as 6 million -- about triple or more the number of devices that are estimated to have been sold.

The market responded to the news by wiping out about $34 billion of Microsoft's market value.

Later in the month, Microsoft confirmed the market's understanding of the basic storyline with the admission that it has pulled in about $853 million in revenues from total sales of both the Surface RT and the Surface Pro since the devices launched on Oct. 26, 2012, and Feb. 9, 2013, respectively.

On behalf of shareholder Gail Fialkov, law firm Robbins Geller Rudman & Dowd LLP filed suit, accusing Microsoft and its top executives of "materially false and misleading conduct" in disclosing Surface RT sales information to investors.

Scanning through the Microsoft executive quotes the attorneys present as false and misleading claims in the 30-page lawsuit, they all looked like standard operating procedure for Microsoft investor calls. The executives provide hard data on success; they offer unimportant metrics (such as country launch counts) on failures that are still considered strategic; and they say nothing about failures that aren't strategic.

The most serious allegation is Microsoft failed to disclose the inventory problem once its scope should have been clear to executives, which the lawsuit claims was the quarter ending March 31.

By delaying the day of reckoning, the class-action lawsuit claims that Microsoft misled anyone who bought the common stock between April 18 and July 18.

"Defendants led the market to believe that Microsoft's launch of Surface RT had been executed in a measured and conservative fashion so that it could observe and understand its progress and outcome. What Defendants knew, but failed to disclose to investors, however, was that Microsoft's foray into the tablet market was an unmitigated disaster," the lawsuit states.

Whatever the outcome in court, Microsoft is reportedly at work on another Surface device and steadily expanding sales of the devices to the channel.

Microsoft has always been playing a long game on the Surface, tablets in general, Windows 8 and Windows Phone. The big miss with the Surface RT just suggests Microsoft's moves in that game start later, come slower and enjoy less luck than even Microsoft expects when the company is trying to be measured and conservative.

What's your take? Let me know in the comments below or at [email protected].

More Analysis by Scott Bekker:

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.

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