Analysts Slash Surface Sales Estimates

We've always known that Microsoft's Surface had an uphill fight ahead of it. Launching a new version of Windows based on an entirely different CPU architecture was a dicey move, as was the decision to push Redmond's own vision for the hardware. In some ways, Microsoft's bets have paid off; the $499 Surface tablet looks and feels like a much more expensive device and the Touch Cover works remarkably well.

Other factors, however, are reportedly dragging sales downwards. Last week, DigiTimes reported that Microsoft had slashed its Surface orders to two million, down from 4M for Q4. Other analysts predicted sales in the two million range. Today, brokerage firm Detwiler Fenton broke ranks, claiming that Microsoft's total Surface sales for Q4 are likely to be well under a million units. Detwiler suggests MS has moved between 500-600,000 units.

That number takes a further hit when you consider that the company already announced that it would gift all 90,000+ of its employees with a Surface. Such units count towards the total number of shipments, but they aren't sales, and they actually hurt the company's bottom line.

Regardless of the final number, it's clear that analysts don't expect Surface to deliver anything like the sales Microsoft was reportedly aiming for. The real question is, why?

Visibility, Price, and Economic Uncertainty

The report from Detwiler suggests that Surface sales have suffered due to the product's low visibility. Units have only been available online via or from the handful of Microsoft retail stores. No Best Buy, no Staples, no shelf presence at Wal-mart or Target translates into lower consumer awareness and weaker sales.

Makes sense so far.

The next factor in play is the unit's price. Here, it's hard to argue. It's already clear that traditional Windows users have very different ideas about what it and isn't desirable in a tablet, and Surface's $100 Touch Cover price tag doesn't help clarify the situation at all. The tablet-only version of the device is $499; a Touch Cover puts it at $599. The problem is that you can buy a pretty decent x86 laptop for that price.

According to iSuppli, the low-end Surface costs Microsoft $284 to manufacture, with the Touch Cover coming in at $14-$18. At $399 for tablet and touch cover, Microsoft would have a killer product. At $499 for both, it would still be an arguably better value than the iPad. At $599, it's a much, much harder product to recommend.

The final problem, that Detwiler Fenton doesn't address, is that the current economic climate in the United States is miserable.

Ever since the election, the focus has been on the so-called "fiscal cliff." The term is a misnomer; the budget cuts that kick in when 12:01 AM January 1 rolls around can be nullified by a further act of Congress. There's no army of federal repo men standing by, no physical consequences that can't be undone. Nevertheless, the date has acquired apocalyptic overtones.

After Congress's irresponsible behavior last year with regard to the debt ceiling, investor confidence that the House will reach an agreement with the President before the end of the 112th Congressional Session is low. Economic reports from both sides of the aisle have indicated that the consequences of failure could send the US back into recession.

It is, in short, a really bad time to be launching a new uncertain device backed by a radically new OS at a high-margin price point. As much as I like Surface's physical design, I'd never recommend anyone buy one right now. The chances of a price cut in the next few months are extremely high, and MS needs to demonstrate that the app ecosystem for Windows RT is going to evolve significantly more than what's currently available.