Surface losing money? No worries, Nokia's mobile division is too

Money Black Hole Drain

Microsoft has a knack for losing money with its Surface tablet lineup, and it is now poised to do the same with the new phone-making business it just acquired from Finnish maker Nokia. Devices & Services generated a negative operating profit of €326 million in Q1 CY2014 (that equates to a $450 million loss) on sales of a mere €1.929 billion. What is the definition of wanting to lose even more money, on purpose?

The not-so-insignificant-loss has been caused by lower sales of phones and smartphones, the latter of which includes (mostly) Lumia Windows Phones. Nokia has not provided any numbers on the volume of devices it may have sold or shipped during the first quarter of the year, but suffice to say the bar was not high to begin with. In Q1 2013, the Finnish maker sold only 5.6 million Windows Phones, and this business lost a lower €120 million (while also posting €836 million more in sales).

Back to Surface

In an SEC filing, Microsoft has revealed Surface was not profitable in Q1 CY2014. "Surface revenue was $494 million for the three months ended March 31, 2014. [...] Surface cost of revenue was $539 million for the three months ended March 31, 2014, which increased due mainly to a higher number of units sold". The loss is not that big, coming in at $45 million. But, Microsoft suggests the difference could have been even higher had Surface sold better in Q2 2014.

In the second half of 2013, the software giant posted a $0.9 billion charge due to lower-than-expected Surface sales. And, in early 2014, it revealed further losses of $39 million. These are things we have also learned from SEC filings, where Microsoft reveals this kind of information (as opposed to its quarterly earnings reports).

Necessary Evil

Microsoft prides itself on being a devices and services company. To stay on this path, it needs to have its own branded hardware. That does not stop at keyboards, mice, Xbox and Surface. The mobile market nowadays means smartphones and tablets, the former of which see higher volumes and can, therefore, give Microsoft more exposure among consumers.

With the Devices & Services business in its control, Microsoft is now the largest Windows Phone vendor. Previously, Nokia's Lumias made up roughly 90 percent of the Windows Phone market, which is a share the software giant can expect to reach as well.

Turning a profit from tablets and smartphones does not come easy, but, luckily, Microsoft has the money to burn to keep and market its Surface tablets and (future) Windows Phones, while also working to launch new ones. A net income of $5.66 billion in Q1 CY2014 can go a long way towards building a profitable mobile hardware division. The only question is: When we can expect that to actually happen?

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