Microsoft's Surface turns first profit in 2 years

But gross margins -- between 9% and 13% -- aren't sufficient to sustain a profitable business

After two years and nearly $2 billion in losses, Microsoft's Surface turned a profit in the September quarter, the company said Thursday.

For the three months ending Sept. 30, Microsoft recorded $908 million in revenue for the Surface tablet line, an increase of 127% over the same quarter in 2013. The nearly one billion in revenue was a one-quarter record for the Surface, and beat the combined revenue of the previous two quarters.

Using information in Microsoft's filing with the U.S. Securities and Exchange Commission (SEC), as well as data from earlier quarters, Computerworld calculated the quarter's cost of that revenue at $786 million, leaving a gross margin of $122 million. Cost of revenue is the cost to make and sell a product, but excludes expenses such as advertising and R&D.

Microsoft said that the Surface line posted a positive gross margin -- implying that outside estimates of prior losses were correct -- but did not disclose a dollar figure.

According to Computerworld's estimate, the margin was small, about 13.4%. That's more than the average for a Windows personal computer, but less than half or a third of the margins on tablets like Apple's iPad.

It was even smaller by the figuring of Jan Dawson, principal analyst at Jackdaw Research, who has also used Microsoft's SEC filings to estimate the Surface's cost of revenue. He pegged the September quarter's cost of revenue at $825 million, the gross margin at $83 million, and the margin rate at just 9.1%.

"That's a gross margin ... which is not earth-shattering and in fact about half the gross margin of the phone business at Microsoft. But it's progress," Dawson wrote on his blog, where he published his analysis of Surface's financial performance.

Indeed.
Since its October 2012 introduction, Surface has been a money pit for Microsoft, in the hole to the tune of $1.73 billion through its first seven quarters. With the September quarter in the black, those overall losses have been reduced to about $1.6 billion.

Over the last four quarters, Surface also remained in the red, with losses of $325 million on revenue of $2.7 billion. Put another way, for each dollar Microsoft earned on Surface sales, it lost about 12 cents.

But were the brighter figures for the September quarter an accurate picture of what Microsoft really spent on the Surface? No, said Dawson and others.

"There's a long way to go to get to the kind of gross margins that would lead to true profitability once marketing and other costs are factored in," Dawson said.

Ben Thompson, the independent analyst behind Stratechery.com, agreed in his subscription-only Daily Update of Friday. "What is all but certain, though, is that this segment, once you include advertising and channel, was still quite unprofitable, and likely unprofitable by a lot," Thompson wrote of Microsoft's Computing and Gaming Hardware division, which generates the bulk of it revenue from Surface and Xbox sales.

Microsoft's advertising campaign for the Surface has been substantial, with widespread television spots, and its marketing spending has also been brisk, including a reported $400 million deal with the National Football League (NFL) that put Surface tablets on the sidelines.

Microsoft called out the Surface Pro 3, which went on sale in June -- making the September quarter the first complete quarter that booked Surface Pro 3 revenue -- in its earnings call with Wall Street for sparking the surge.

"Unit sales are pacing at twice the rate of what we saw with [Surface] Pro 2," said CFO Amy Hood, referring to the now-discontinued model launched in the fall of 2013.

"The release of Surface Pro 3 in June 2014 contributed to a 126% increase [in revenue], reflecting higher premium mix of devices sold," Microsoft said in the 10-Q filed with the SEC.

Thompson seized on the latter's "higher premium mix" to make the case for why Surface revenue jumped. He pointed out that the high prices of the Surface Pro 3 -- between $799 and $1,949 -- generated the increase, while the revenue in the comparative quarter of 2013 was fueled by large numbers of Surface RT tablets that Microsoft sold at fire sale prices to unload an overstock. Last year, Microsoft cut the price of the Surface RT to $349 for consumers and to as low as $199 for educational institutions, representing 30% and 60% discounts, respectively, from the original list price of $499.

Both Thompson and Dawson noted that Microsoft did not reveal Surface unit sales, making it impossible to determine which models have sold best or tell if volume was up, flat or down.

"We don't know the number of units sold or average selling price for the Surface, but considering that the Surface Pro 3 starts at more than double the price of last [year's third quarter] Surface RT, it's likely that Microsoft actually sold fewer Surfaces this quarter than they did a year ago," said Thompson.

"How many Surface devices did Microsoft sell in the quarter? Well, they won't say, but given the new version starts at $800, it's entirely possible that the company sold a million or fewer Surface tablets in total, and likely well under a million Surface Pro 3s in their first full quarter on sale," added Dawson.

As a comparison -- although Microsoft denies that the Surface Pro 3 is a tablet, preferring to dub it a notebook replacement instead -- Apple sold 12.3 million iPads in the same quarter, producing $5.3 billion in revenue.

Microsoft must do better if Surface is to be a viable business rather than a vanity project. "The gross margin has to keep moving up at this point," Dawson said in an email reply to questions. "It's at a point in its history when it has to get beyond the early losses to a sustainable business."

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11 ways to re-energize your IT career

Mid-career blues, begone. Here are 11 actionable items tech pros can tackle to keep moving on up in IT.

Stuck in the middle -- and blue?
Eric Reed knows a thing or two about mid-career pitfalls. He's seen some mid-level IT managers get too enamored with technology for its own sake, rather than viewing it as a way to advance business goals. Other would-be leaders didn't know how to communicate or collaborate with non-IT colleagues and were sidelined as techies rather than ID'd as future business leaders.

Reed is grateful he was able to overcome those challenges in his own career and sustain his momentum -- he's now CTO at GE Capital. With that goal in mind, Computerworld asked Reed and other seasoned IT pros for advice on how to keep your tech career from getting bogged down. Read on for their tips.

Develop a road map
It's smart to know not just where you want to land but how best to get there. Piera Palazzolo, senior vice president at Dale Carnegie Training, which specializes in business-oriented improvement, recommends starting with self-reflection. Map out the exact positions you'd like to hold and the ultimate title you'd like to achieve. "Then set a course for yourself and find out what you need to learn," Palazzolo says. Talk to your supervisor and other higher-ups in the company to determine how they can help you and whether your company's plans for you mesh with your own.

Gain new perspective
Managers often pay lip service to the concept of "walking the shop floor," but James Stanger, senior director of product development at CompTIA, an IT trade association, suggests going beyond the typical pat-on-the-back mentality. Instead, get to know how your direct reports, your colleagues and your customers view the world.

"In middle management, due to the demands of the job and just trying to get it done, people get these blinders on, and they don't think about how others think," Stanger says. Try asking: What do you think about this problem? What's your perspective? Can you explain your need here?

"Take those blinders off and you'll find yourself much more nimble in your thinking," Stanger says, which in turn will make you a better problem-solver -- a valued leadership quality.

Find leadership opportunities
To continue honing your leadership skills, look for opportunities that will get you noticed -- especially ones outside of your department. "Volunteer for a cross-functional task force that exposes you to senior leaders. Get out of your silo, and get more people in your organization to know who you are," says Carly Goldsmith, a career coach specializing in guiding mid-career professionals. She suggests seeking out projects and committees that will help you grow your skills.

One of her clients took Goldsmith's advice, joining a project that required her to have more interactions and strategic conversations with senior leaders. The move paid off: She was offered a promotion shortly after the project wrapped up

Be a perfectionist
Sure, no one's perfect, but if you're gunning for more responsibilities, you have to make sure you're doing your current job as close to perfect as possible.

Sean Andersen, director of interactive services at Six Flags Entertainment Corp., works with IT managers across the company's 18 theme parks. He says he notices the ones who "keep their house in order" -- consistently fulfilling all of their assigned duties, including routine and mundane tasks that often get overlooked. Andersen taps those individuals for special projects because they're most likely to be able to handle additional responsibilities.

Case in point: When the company launched a pilot program with the new Chromebox two years ago, he went to the manager who had everything else already under control.

Learn constantly, and share what you discover
To protect yourself from becoming technically obsolete as you move up in management and away from the tech trenches, you need to be constantly building and refreshing a well-rounded set of skills. "The idea is to be constantly learning," CompTIA's Stanger says. Take more classes, get another certification, earn an advanced degree, he says.

If you're like most workers, your current job requirements already fill your work week, which means you'll have to dig hard to find more hours for learning something new. Andersen, the Six Flags executive, says he carves out time -- usually late at night -- to read up on and test out new technologies. And he says he likewise has doled out plum assignments to direct reports who show similar initiative.

Compensate for your blind spots
Reed, the CTO at GE Capital, admits that in the past he often didn't think about the impact his decisions had on other people. "I'd sign onto an objective and put together a plan, but I was not thinking about the ramifications on the team," he says. He didn't realize the problem until someone on his team called him out on it.

Reed says his headlong decision-making style didn't kill his career, but it had done some damage with his business partners. Now that he's became aware of his blind spot, he works to keep it front of mind as he makes commitments that affect his team.

Bernadette Rasmussen, divisional senior vice president of information management and CTO of Health Care Service Corp. (HCSC), agrees with Reed's approach. "Listen to your team members, listen to your peers and listen to your business leaders," she advises.

Know how your business makes money…
It's not enough to have generic business acumen. That's required for most technologists these days.

To gain a leadership position, you have to know how your organization operates and, more importantly, how it makes money. "Some people get into middle management and they don't understand that. They don't understand that we're not here to implement neat technology. We're here to help the business make money," Reed says.

He recommends spending more time meeting with business colleagues to develop that insight and then using it to make smarter decisions within IT. Understanding which technologies have the biggest impact on the company's bottom line will help you prioritize projects and deliver the big bang that draws attention, Reed says.

… then use that knowledge to drive business results
As an IT middle manager, you most certainly need to know technology and must consistently deliver on your technology projects. As an aspiring C-level leader, your priority should be making sure those projects deliver a tangible benefit to the company. In other words, show your ROI.

"You must change your perspective from mastering technology to helping your organization drive results," says HCSC's Rasmussen. "Help connect the dots, drive change with perspective beyond your own and add your unique value," she advises.

Be the expert that people seek out
You need to be more than an expert to attain a corner office -- you need to be the expert.

Theresa Caragol learned that lesson during her upward climb. "You have to be the best and have the deepest expertise so someone says, 'If I want to understand this, I have to go talk to this person.' And if you're the expert in more than one technology, that's even better," she says.

Caragol, now global vice president for channels and partners at Extreme Networks Inc., positioned herself as an expert in software-defined networking at a previous employer. Her mentors helped line up opportunities for her to speak on the topic, which brought her to the attention of those in positions to promote her. She worked her way up to vice president of global channel, alliances and partners at Ciena Corp., her previous employer, a role that in turn served as a stepping stone to her current position.

Manage up and manage down
If you really want to shine, make sure your team does. And make your manager look good, too. After all, in almost all cases your boss will be the one to recommend you for top assignments and promotions. Have regular face-to-face conversations where you can talk about company objectives, professional goals and, yes, even your personal interests, says Dale Carnegie Training's Palazzolo.

Put the same effort into building relationships with your team, because you're only as good as the output you get from them. Vidhya Ranganathan, senior vice president of products and engineering at cloud-services firm Accellion Inc., takes a commonsense approach to building relationships. She regularly has lunch with her team and chats over coffee. "It's not to give them [formal] guidance, but to just listen and let them know I'm available," she says.

Avoid missteps
To make your rise through the ranks as painless as possible:
Don't wait for your manager to offer you opportunities. There's a reason why Microsoft CEO Satya Nadella recently found himself embroiled a firestorm of criticism when he urged women seeking a raise to "have faith in the system" rather than asking for what they want -- it's bad advice for all employees. "Too often, middle managers take a passive approach to their career advancement" -- including raises and promotions, career-coach Goldsmith says. "Go out and find the opportunities yourself.
Don't linger in a job you dislike or that's not well suited for you. "Motivation plummets, mistakes are made, stress increases. And whether you're conscious of it or not, you start to be seen as a poor performer," Goldsmith explains.
Don't get trapped in the weeds. According to Goldsmith, middle managers often do more hands-on work than they should. You need to move out of the tech trenches and lead your team, not code with them.

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Startup proposes fiber-based Glass Core as a bold rethink of data center networking

Software Defined Networking (SDN) challenges long held conventions, and newcomer Fiber Mountain wants to use the SDN momentum to leap frog forward and redefine the fundamental approach to data center switching while we're at it. The promise: 1.5x to 2x the capacity for half the price.

How? By swapping out traditional top of rack and other data center switches with optical cross connects that are all software controlled. The resultant “Glass Core,” as the company calls it, provides “software-controlled fiber optic connectivity emulating the benefits of direct-attached connectivity from any port … to any other server, storage, switch, or router port across the entire data center, regardless of location and with near-zero latency.”

The privately funded company, headed by Founder and CEO M. H. Raza, whose career in networking includes stints at ADC Telecommunications, 3Com, Fujitsu BCS and General DataComm, announced its new approach at Interop in New York earlier this week. It’s a bold rethinking of basic data center infrastructure that you don’t see too often.

“Their value proposition changes some of the rules of the game,” says Rohit Mehra, vice resident of network infrastructure at IDC. “If they can get into some key accounts, they have a shot at gaining some mind share.”

Raza says the classic approach of networking data center servers always results in “punting everything up to the core” – from top of rack switches to end of row devices and then up to the core and back down to the destination. The layers add expense and latency, which Fiber Mountain wants to address with a family of products designed to avoid as much packet processing as possible by establishing what amounts to point-to-point fiber links between data center ports.

“I like to call it direct attached,” Raza says. “We create what we call Programmable Light Paths between a point in the network and any other point, so it is almost like a physical layer connection. I say almost because we do have an optical packet exchange in the middle that can switch light from one port to another.”

That central device is the company’s AllPath 4000-Series Optical Exchange, with 14 24-fiber MPO connectors, supporting up to 160x160 10G ports. A 10G port requires a fiber pair, and multiple 10G ports can be ganged together to support 40G or 100G requirements.

The 4000 Exchange is connected via fiber to any of the company’s top-of-rack devices, which are available in different configurations, and all of these devices run Fiber Mountain’s Alpine Orchestration System (AOS) software.

That allows the company’s homegrown AOS SDN controller, which supports OpenFlow APIs (but is otherwise proprietary), to control all of the components as one system. Delivered as a 1U appliance, the controller “knows where all the ports are, what they are connected to, and makes it possible to connect virtually any port to any other port,” Raza says. The controller “allows centralized configuration, control and topology discovery for the entire data center network,” the company reports, and allows for “administrator-definable Programmable Light Paths” between
How do the numbers work out? Raza uses a typical data center row of 10 racks of servers as the basis for comparison. The traditional approach;

Each rack typically has two top-of-rack switches for redundancy, each of which costs about $50,000 (so $100,000/rack, or $1 million per row of 10 racks).
Each row typically has two end-of-row switches that cost about $75,000 each (another $150,000)
Cabling is usually 5%-10% of the cost (10% of $1.15 million adds $115,000)
Total: $1.265 million

With the Fiber Mountain approach:
Each top-of-rack switch has capacity enough to support two racks, so a fully redundant system for a row of 10 racks is 10 switches, each of which cost $30,000. ($300,000).
The 4000 series core device set up at the end of an isle costs roughly $30,000 (and you need two, so $60,000).
Cabling is more expensive because of the fiber used, and while it wouldn’t probably be more than double the expense, for this exercise Raza says to use $300,000.

Total $660,000. About half, and that doesn’t include savings that would be realized by reducing demands on the legacy data center core now that you aren’t “punting everything up” there all the time.

What’s more, Raza says, “besides lower up front costs, we also promise great Opex savings because everything is under software control.”

No one, of course, rips out depreciated infrastructure to swap in untested gear, so how does the company stand a chance at gaining a foothold?

Incremental incursion.
Try us in one row, Raza says. Put in our top-of-rack switches and connect all the server fibers to that and the existing top-of-rack switch fibers to that, and connect our switches to one of our cores at the end of the isle. “Then, if you can get somewhere on fiber only, you can achieve that, or, if you need the legacy switch, you can shift traffic over to that,” he says.

Down the road, connect the end of isle Glass Core directly to other end of row switches, bypassing the legacy core altogether. The goal, Raza says, is to direct connect racks and start to take legacy switching out.

While he is impressed by what he sees, IDC’s Mehra says “the new paradigm comes with risks. What if it doesn’t scale? What if it doesn’t do what they promise? The question is, can they execute in the short term. I would give them six to 12 months to really prove themselves.”

Raza says he has four large New York-based companies considering the technology now, and expects his first deployment to be later this month (October 2014).

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9 cool Java 9 proposals developers will love

Modularity, JSON, smart compilation -- Java's future offers compelling features to look forward to

Cool Java 9 proposals developers will love
Java 8 arrived earlier this year to much fanfare, including high marks for lambda expressions and JavaScript on the JVM via Nashorn. But not everything about Java 8 was a love fest, and core developers at Oracle are already chalking up plans for the next version to improve Java.

Expected in early 2016, Java Development Kit 9, based on the Java Standard Edition 9 specification, is expected to include performance tweaks, new capabilities, and, most notably, modularity. While some proposed features could miss the final cut or be postponed to a later release, there's already a lot to like about Java's proposed future. Here is a preview of some of the most intriguing proposals for JDK 9 so far.

Modular source code
The most highly anticipated change to Java 9 will be modularity. Inspired by Project Jigsaw, which was deferred from Java 8 until Java 9, the effort to modularize Java's source code will be accompanied by a build system enhanced for this capability.

"Project Jigsaw aims to design and implement a standard module system for the Java SE Platform and to apply that system to the platform itself and to the JDK," according to JDK Enhancement Proposal (JEP) documentation. "Its primary goals are to make implementations of the platform more easily scalable down to small devices, improve the security and maintainability, enable improved application performance and provide developers with better tools for programming."

Multiple JEPs are planned as part of the modularization process.

Lightweight JSON API
Java 9 is expected to include a lightweight JSON API to facilitate the inclusion of JSON documents and data streams in Java programming.

"JSON has become the lingua franca for Web services and it is time for Java SE to adopt functionality for interacting with and utilizing JSON documents and data streams," a JEP document says. "This proposal is designed [to] provide the most commonly needed functionality and take advantage of Java 8/9 language and library features."

The JSON effort aims to enable Java developers to parse and generate JSON data. A generator style API for JSON data stream output and JSON literals is also a goal.

Process API updates
Java 9 is also expected to improve the API for controlling and managing operating system processes.

"The limitations of the current API often force developers to resort to native code," according to the process API JEP. Java SE presently offers limited support for native OS processes, allowing Java developers to simply set up an environment and start a process. Changes will require new unit and functional tests, according to the JEP.

OS differences mark the main risk facing this API, in particular Windows. "The design of this API needs to accommodate possible deployment on smaller devices with different operating system models. It should also take into account environments where multiple Java virtual machines are running in the same operating system process," the JEP states.

Segmented code cache
Java 9 aims to divide code cache into segments to improve performance and facilitate extensions.

"Instead of having a single code heap, the code cache is segmented into distinct code heaps, each of which contains compiled code of a particular type. Such a design enables us to separate code with different properties," the JEP states.

Top-level types of compiled code include JVM internal code, profiled and nonprofiled code, which would be separated. The organization and maintenance of compiled code has a big impact on performance, according to the JEP. Better control of the JVM memory footprint is a goal of this initiative, as is improved execution time for some compilation-intensive benchmarks.

Smart Java compilation, Phase 2
Java 9 proposes to improve the sjavac compiler tool, so it can be used by default in the JDK build. The tool is also expected to be generalized for use in other large projects.

"Due to various issues relating to stability and portability, sjavac is not used by default in the JDK build scripts," the JEP document states. "The first goal of this JEP is to resolve these issues. This involves making sure the tool produces reliable results on all software/hardware configurations at all times."

Currently, core developers have improved sjavac's build speed and allowed for incremental builds. "The quality of the code and stability of the tool as a whole, however, is not satisfactory and it is certainly not ready for public release."

Improve contended locking
Core Java developers aim to boost the performance of contended Java object monitors in the next iteration of Java, as measured by benchmarks and tests, including CallTimerGrid, among others.

"Improving contended locking will significantly benefit real-world applications, in addition to industry benchmarks such as Volano and DaCapo," JEP documentation states.

Performance improvements will be explored in a number of areas pertaining to contended Java monitors, such as field reordering and cache line alignment, as well as fast Java monitor enter and exit operations.

HTTP 2
Under development by the IETF, HTTP 2 aims to improve Web page loading times and API capabilities and is based on Google's SPDY networking protocol. "The focus of the protocol is on performance; specifically, end-user perceived latency, network and server resource usage," according to HTTP 2 documentation on GitHub. "One major goal is to allow the use of a single connection from browsers to a website."

Core Java developers are keeping an eye on HTTP 2 developments. "[This proposal is] basically looking at HTTP 2 and what is needed to support that," says Georges Saab, vice president of the Java platform group at Oracle and head of the Java Standard Edition group.

Cloud-optimized JVM
Core Java developers hope to enable users to better leverage existing cloud infrastructures with Java 9 by cloud-optimizing the JVM.

This proposal is all about helping with deployments of Java in the cloud, Oracle's Saab says.

Oracle already has been working on better enablement of cloud computing in Java EE (Enterprise Edition) 7. Plans call for building on that with Java EE 8, due in two years.


Ahead-of-time compilation
One common knock against Java is its relatively slower startup times. Java 9 proposes to fix this, by enabling ahead-of-time compilation to improve startup, among other benefits.

"The primary reason for adding ahead-of-time compilation to Java is improved startup time, but it may also bring other benefits such as smaller install footprint for self-contained Java applications that are bundled with a JRE [Java Runtime Environment]," says Henrik Stahl, vice president of java product management at Oracle.

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