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Microsoft is actually losing money on its Surface tablets

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April 26, 2014

Microsoft posted its third quarter earnings results this week and the software giant is actually losing money on its Surface tablets that it sells to consumers.

So, the more tablets that it sells, the more the company is losing money. Microsoft Thursday declared $494 million in revenue made from the sale of its Surface tablets during the 3rd quarter.

However, Microsoft spent upwards of $539 million in direct costs associated with selling the Surface, thereby losing $45 million in the process.

The corporation reported $1.8 billion in Surface revenue for the nine-month period with costs outweighing revenue by $2.1 billion. That meant a $300 million loss for the period. Microsoft broke out the numbers in its 10-Q form filed with the SEC.

On the revenue/cost matter for the tablet device, Microsoft attributed growing revenue and increased costs to more sales of the Surface.

The overall increase in the cost of revenue was “due mainly to a higher number of units sold,” Microsoft said in its filing.

The message is clear-- nearly 1 1/2 year into the sale of the Surface, the more Windows 8 tablets Microsoft sells, the more it loses money of the device.

The company is quiet about saying how many Surfaces it has sold so it hasn’t given any unit shipments. That’s in stark contrast to the sales of its Xbox, a cash cow for Redmond.

Microsoft says it sold two million Xbox consoles for the third quarter, and 10.6 million for the nine-month period.

The financial details emerged after Microsoft's new CEO Satya Nadella was wooing Wall Street during the company’s earnings call, assuring them that a new era has begun, now that Steve Ballmer is no longer CEO.

It was Nadella’s first quarterly conference call running the company, of which, until late last year, he had been a group president in the server and tools unit.

If we were to sum up the quarter in two words, it would be “execution and transition.” According to Nadella, “we are well on our way” to achieving his vision of going into a “mobile-first, cloud-first world.”

“With every device launch and service launch we keep coming back and reinforcing that vision, because at the end of the day, it’s the purpose with which we approached the vision and the execution behind it which is what really counts,” Nadella said during call.

After several years of complacency, absenteeism and poorly thought-through ideas, investors were anxious to know whether he has any big strategic reviews planned for the software behemoth.

“One of the things that I feel as the leadership team we have really picked up the pace on is asking the hard questions-– what is the believability of any of our plans and pushing ourselves to the limit. Because to me, I want to be accountable to you all-- to our customers, to our partners, and as a team by executing on our plans very well,” he said.

In other mobile news

Legislators in the State of California rejected a proposed new bill requiring smartphone makers to include antitheft software on the devices sold in the state. Their reason-- it would simply be bad for business.

After a long debate on the Senate floor, California state legislators narrowly rejected a bill today that would have required antitheft software to come preloaded and automatically enabled on all smartphones sold in California.

The proposed new law, spearheaded by California State Senator Mark Leno and San Francisco District Attorney George Gascon, would have mandated so-called 'kill-switch' technology, requiring all smartphone makers like Apple and Samsung to include software that lets users wipe clean, or remove all their data from the device remotely.

That basically renders the phone completely inoperable if stolen or lost. But the issue, Leno and other government officials say, is an epidemic. About 32.4 percent of all robberies in the U.S. involves the theft of a mobile device, according to the Federal Communications Commission.

On Gascon's own home turf of San Francisco, for example, more than half of thefts involve phones or tablets. And across the bay in the city of Oakland, that number jumps to more than 75 percent.

Consumer Reports has said that about 1.6 million Americans were the victims of smartphone theft in 2012 alone, and the trend is rapidly increasing.

Failing to reach a minimum of 21 votes in favor, the final tally was 19 yes's to 17 no's, with one senator abstaining. The bill could be brought up again before the end of May, however.

Leno had no comment in the moments immediately after the bill failed, but his office subsequently quoted him as saying, "This technology already exists, and until it is pre-enabled on every new phone purchased, consumers will continue to be the innocent victims of thieves who bank on the fact that these devices can be resold at a profit on the black market."

Also in a statement, Gascon blamed the priorities of the opposition. "With their no vote, 17 members of the Senate chose to protect billion-dollar industry profits over the safety of the constituents they were elected to serve. And Apple could be mentioned since its international headquarters are based in Cupertino."

The vote is only the latest in a nascent national push by other state law enforcement agencies, with New York Attorney General Eric Schneidermann -- who has worked closely with Gascon in the past -- leading the charge in New York.

The two launched the "Secure Our Smartphones," or SoS, initiative in New York last June, with the goal of bringing kill switches to phones.

Members of the campaign include more than a hundred politicians, law enforcement officials, and consumer advocates, like New York City Mayor Bill de Blasio and Oakland Mayor Jean Quan.

Overall, there has been a push back from the wireless carrier industry, which argues that mandating kill-switch technology leaves consumers vulnerable to hackers who could maliciously wipe away a phone's data.

But government officials have said the wireless industry's resistance has to do with money, specifically losing business from insurance partners and others.

But last week, the CTIA, a trade organization that represents the mobile telecom industry, softened its stance by announcing a pledge that ensures a "baseline antitheft tool" will come preloaded or be available for download on devices made and sold by participating handset makers and wireless carriers, including Apple, Samsung, Google (which makes the widely used Android mobile operating system), AT&T, Verizon, Sprint, and T-Mobile.

While government officials applauded the move, their biggest issue is that the antitheft measures remain opt-in. Because they're not automatically turned on, consumers may forget to activate them, which defeats the purpose of having the software there as a deterrent for criminals.

"The debate is now between opt-in and opt-out," Leno said, presenting the bill. The proposed legislation was amended for Thursday's vote, only applying to smartphones and to those manufactured after July 1, 2015.

The bill originally encompassed more mobile devices, including tablets, and called for the software to be applied to phones sold after January 1st of 2015.

The rethoric from those opposing the bill was that having a requirement for phones sold only in California would hurt business. Senators also argued that over-mandating would drive away the companies that have been such a boost to the state's economy. "If people want to hijack your car because it's expensive, do you want a 'kill switch' on your car?" said Senator Jean Fuller on the floor.

Another concern was that the kill switch wouldn't be as much of a deterrent as its supporters think, as criminals would still try to get their hands on devices for the value of its hardware.

"We need to make the sale of parts illegal," Fuller said after the vote. The San Francisco District Attorney's office denied that the sale of hardware was the issue.

"The parts market is extremely niche, and that's not what's driving the epidemic," said Max Szabo, legislative affairs and policy manager for the DA's office.

For Gascon, who was not at the vote but worked closely with Leno, the effort began in late 2012, when he reached out to AT&T. That led to a powwow between his office, the CTIA, and the four national carriers-- AT&T, Verizon, T-Mobile and Sprint.

The meeting eventually led Gascon to reach out directly to phone manufacturers instead, because the CTIA said those companies would ultimately make the call on the technology.

First on Gascon's list was Apple. As San Francisco's DA, he had been appointed to serve that region. And, after all, Apple is a local company based in California, about 40 miles outside of San Francisco.

"Apple was really my primary focus early on," he said. Leno also said that criminals dub smartphone theft "Apple picking."

Gascon wrote two letters to Apple CEO Tim Cook, and though he still has not discussed a kill switch with Cook directly, he's met with the company's general counsel, Bruce Sewell.

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Apple, and its chief rival Samsung -- the Korean handset maker and No. 1 smartphone seller in the world -- have since introduced new antitheft measures on their devices.

When Apple released an overhauled version of its mobile operating system in September, the company added an antitheft feature to its Find My iPhone app -- which uses GPS tracking to locate a lost or stolen phone -- called "activation lock."

The feature makes it more difficult for someone to use a stolen phone by requiring a user's Apple ID and password before they can turn off Find My iPhone's tracking, sign out of Apple's iCloud online storage service, and reactivate a locked phone.

And when Samsung released its Galaxy S5 smartphone earlier this month, it included its own antitheft feature called "reactivation lock," which prevents a locked phone from being made operable again, even through a factory reset.

In other mobile news

According to The Wall Street Journal, the Federal Communication Commission's newly drafted proposal for updated net neutrality rules will allow internet service providers to charge companies for preferential treatment, effectively undermining the whole concept of net neutrality in the first place. The new rules would allow ISPs to invoice companies for special treatment so long as they offer that treatment to all interested parties on "commercially reasonable" terms, with the FCC deciding whether the terms are reasonable on a case-by-case basis.

Additionally, if the new rules are to take effect, providers will reportedly not be able to block individual websites, however.

The aim of net neutrality rules is to prevent service providers from discriminating between different content, allowing all types of data and all companies' data to be treated equally.

While it appears that the outright blocking of individual services won't be allowed, the Journal reports that some forms of discrimination will be allowed, though that will apparently not include slowing down websites.

In response, FCC chairman Tom Wheeler issued a statement that reports of net neutrality's demise are "flat out wrong." Nonetheless, allowing some websites to pay for preferential treatment would inherently favor larger, more successful companies.

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Source: Microsoft.

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