Why Microsoft lost $900 million on the Surface RT

Financial results are in for the fourth quarter, and it looks like Microsoft's Surface RT landed not with a splash, but with an ugly, pronounced thud. The company reports that it wrote down $900 million for an "inventory adjustment" relating to Surface RT units, parts, and accessories, and is currently sitting on a stockpile of six million unsold tablets.

Meanwhile, the Surface RT's only real competition in the $500 range, the full-sized iPad, appears to be growing steadily, although it's impossible to gauge exact figures since Apple groups all its iPads (including the Mini) into one lump figure.

Still, the narrative is clear, and Microsoft's risky bet that consumers would want a tablet with PC trimmings is somehow a bigger failure than anyone reasonably expected.

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What went wrong?

A couple of things. For starters, there's an argument to be made that the Surface RT was simply too expensive from the outset. It was $500 for the baseline model, which was sold without the one element that really differentiated it from the iPad: The keyboard cover, which was an additional $100 to $130. Microsoft recently slashed the price of the Surface RT down to $350, but it grossly overestimated what consumers were willing to pay for a tablet branded with Windows and Office, even if it had the salient selling-point of "more internal memory."

Plus, $350 without a keyboard is still $150 more than much better, more affordable Android tablets like Google's Nexus 7 and Amazon's Kindle Fire, which nail the retail sweet spot at $200.

Microsoft's sales expectations were also way too high from the very beginning. With an initial order of seven million Surface RTs, "Microsoft seemed to have this total self-belief that from nowhere they could sell iPad like numbers," says Matt-Baxter Reynolds at ZDNet. "Right off the bat."

Also: Some users were dismayed that the Surface RT couldn't run traditional Windows software, like the much more expensive, much more powerful Surface Pro. As PC World's Tony Bradley notes, whereas the latter actually "doubles as a tablet," the RT has "more limited application, and is more likely to be used to augment a PC rather than replace it."

With nearly a billion dollars worth of Surface RTs growing dustier and more obsolete by the day, Microsoft has more than earned its lumps in the tablet-based computing arena. The company knows it has to do better in terms of pricing, and figure out how to sell the tablet without its most marketed feature (the keyboard). For the sake of competitive balance, let's hope it learns from its mistakes and fares better in Round Two.