What's under the Surface with Microsoft?

US tactics around Surface suggest channel-stuffing, a focus on volumes, or even an Apple-like strategy, warns Larry Walsh

Microsoft appears to be inching closer to letting more providers resell its Surface tablets and accessories. It is screening would-be US resellers to understand their sales capacities, support resources and willingness to operate under strict guidelines.

CRN US got a look at the Microsoft screening questionnaire and published its highlights. It appears to reveal much about Microsoft's thinking behind Surface reselling and how its channel is evolving.

Essentially, Microsoft's device and services strategy will make its channel look more like Apple than its open network of partners.

Microsoft is making no bones about its desire to extend Surface resale permission to partners that can deliver volume. The tablet, now in its second generation, is starting to see sales momentum, despite its limited indirect channel.

Yet sales are still woefully behind those of Apple's iPad or any of the Google Android-based tablets. The first 12 partners to receive Surface rights in June were almost exclusively direct market resellers, which are built around volume sales.

Microsoft is asking would-be US partners about their ability to sell Surface in volumes up to one million units.

Microsoft appears to want an understanding of US providers' ability to sell and support Surface in enterprise accounts. Here, Microsoft appears not to be just looking for partners that have enterprise relationships, but development and support capabilities that will drag other Microsoft products into the sale.

Sales capacity is only half of the equation. Microsoft wants commitments, too. Microsoft wants partners to commit to joint sales plans, performance expectations and reviews.

Between the prescribed volume and joint planning, Microsoft's approach to selling devices through the channel sounds much like Apple, which is apathetic toward partnership and doesn't extend resale rights until partners have demonstrated an ability to push certain products at certain volume.

But Microsoft's sales volume requirements go beyond a partner's capacity and commitment. Microsoft also wants visibility into existing hardware sales activities.

The language is vague, but Microsoft seems to want partners who are willing to disclose their existing and ongoing hardware sales activities.

Hardware sales visibility smacks of Microsoft wanting inside knowledge of the business they're not getting through partners.

Very few providers work exclusively with one vendor - despite vendors' best efforts. If Microsoft has this viability, it could put pressure on partners to lead with their Surface products, associated services and accessories over those of other manufacturers.

Several vendors - most notably HP - have come out saying Microsoft is increasingly a competitor for tablet and PC sales.

Microsoft's desire to get a look at other vendor sales through partners reinforces that perception and could put solution providers in an awkward, if not compromising, position.

Astoundingly, Microsoft is looking for partners who are willing to take Surface into inventory and keep it regardless of sales success. Essentially, Microsoft is looking for partners willing to engage in channel stuffing, or taking product on to their books to make Microsoft's sales volumes and revenue look good.

Microsoft does this by asking about providers' ability to manage logistics, by taking product into inventory and managing the distribution.

Why does this indicate channel stuffing proclivities?

Distributors have haunted Microsoft to allow them to manage just-in-time delivery systems -- just as they do with PCs today.

Instead of a third-party provider holding product in its warehouse, a distributor would hold the inventory and deliver to the reseller or customer when a sale is transacted.

Microsoft hasn't engaged distributors the way Dell and HP have. By asking partners if they can take product on their books, Microsoft is showing that it's willing to inflate sales numbers at resellers' expense.

What gives away Microsoft's channel stuffing desires? Two other requirements for partners - no discounting Surface tablets or reselling to the secondary market, and a promise to destroy unsold accessories.

This isn't necessarily unreasonable on Microsoft's part, as it doesn't want to lose price integrity over a product that is just now gaining momentum.

If resellers dump their unsold inventory in the grey market or start price cutting to clear their warehouses, Microsoft could find its entire ecosystem undermined.

This is sort of what happened to HP's TouchPad tablet in 2011. When retailers could sell the pallets of product in their warehouses, HP started steep discounts, which cleared the inventory.

Selling out was good, but HP recognised it was only an illusion. If it put TouchPad back into production and reset prices to their normal rates, unsold inventory levels would return.

Microsoft's wanting unsold accessories, such as the Touch and Type Pad covers, also reflects the channel-stuffing intent.

In June, Microsoft wrote off $900m (£549m) in unsold Surface inventory -- much of it the typepad covers.

By getting partners to destroy unsold accessories, Microsoft won't have to deal with returns and write-offs. Surface sale numbers will remain artificially high regardless of the number of units that make it into customers' hands.

This Microsoft Surface reselling questionnaire, based on what has been reported, isn't about extending the tablet to partners that have "what it takes", but rather to VARs willing to surrender their autonomy and health for the whims of Microsoft operational parameters that mostly benefit Microsoft.

Larry Walsh is president and chief executive officer of Channelnomics

As part of our special editorial partnership, CRN is republishing this article by Channelnomics