Microsoft Sued Over Poor Surface RT Sales

3 minute read
David Roe avatar

Microsoft Surface RT Tablet
One of Microsoft’s shareholders has filed a legal suit against the company, claiming that Microsoft executives misled investors over sales of the Surface RT tablet, which ultimately led the company to take a write-down of US$ 900 million in the last quarter.

Surface RT Suit Filed

The suit was filed in the US District Court off Massachusetts by the San Diego law firm Robbins Geller Rudman & Dowd on behalf of Gail Fialkov and others, and cites former Chief Financial Officer Peter Klein, Corporate Vice President Frank Brod and Executive Vice President of Marketing Tami Reller.

The suit alleges that Microsoft issued false statements about the performance of Surface RT financially and that it already knew by the end of March this year that it wasn’t selling, having taken back a large number of the tablets even at that stage.

The problem, the suit says, is that Microsoft failed to tell investors about this and continued to offer optimistic assessments of the future of Surface RT. The suit says:

What Defendants knew, but failed to disclose to investors ... was that Microsoft’s foray into the tablet market was an unmitigated disaster, which left it with a large accumulation of excess, overvalued Surface RT inventory.

Microsoft, Surface RT and Q4 Figures

The fact that Surface wasn’t doing as well as it might became official in the financial statements of the last quarter. In the financial commentary on the figures, CEO Steve Ballmer said that while its device segment wasn’t doing too well, it was only building up steam in the market. The statement read:

Learning Opportunities

We are working hard to deliver compelling new devices and high value experiences from Microsoft and our partners in the coming months, including new Windows 8.1 tablets and PCs…Our new products and the strategic realignment we announced last week position us well for long-term success, as we focus our energy and resources on creating a family of devices and services for individuals and businesses that empower people around the globe…”

In the same statement Amy Hood, Chief Financial Officer admitted that Microsoft, generally speaking, hadn’t done as well as they hoped across the board and that Microsoft would have to do better.

I want to be clear—we know we need to do better, which is why we instituted the reorganization we did last week," she told analysts on the earning conference call.

Microsoft’s Position?

So Microsoft itself wasn’t shy about announcing that it hadn’t done well in the quarter and while it didn’t specifically mention Surface RT, Ballmer did talk about refocusing its devices strategy. The fact that it did announce a write down of US$ 900 million at the end of Q4 over Surface RT definitely indicated that the tablet was in trouble.

The question is whether it should have done it at the end of Q3 on March 31, three months earlier than it did, or did it only announce the write-down when it became clear that there was a problem? This, in essence, will be what the suit is about.

The suit also cites examples where Microsoft pushed the Surface RT product after March 31 and points to this as an example of how investors were being misled. The question that the courts will have to answer is whether these instances were just marketing, or a deliberate attempt to mislead? At face value, claims that it was a deliberate attempt to mislead seem like a difficult allegation to prove. 

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