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Scratch the Surface: Microsoft Should Exit Hardware

Stocks in this article: MSFT AAPL GOOG

NEW YORK ( TheStreet) -- A couple of weeks ago, I asked, "Where's Microsoft Going?"

It was a rhetorical question, one that I've been pondering for quite some time. Although I've always liked this company and have come to its defense on more than one occasion, I don't believe that management has taken the sort of risks necessary to grow Microsoft (MSFT) beyond its core businesses.

Though Microsoft has struggled to compete with Apple (AAPL) and Google (GOOG) as the importance of mobile devices grows, the bull case for Microsoft has always been the company's strong cash flow, which has been spurred by its Windows and Office franchises.

But given the dire state of the PC industry, which has been in perpetual decline, Microsoft now appears to be constantly "in transition." This now seems to be the popular excuse for the company's weak recent results, including its recent miss in its GAAP gross margin, which declined by five points in the fourth quarter.

Missed estimates is one thing, but I can't overstate enough the magnitude of this new reality. Nor can I ignore the company's slashing of prices of its failed Surface tablets in hopes of increasing higher adoption. Unfortunately, the strategy, which has come at the expense of better margins, is not working. And now Microsoft is running out of options.

Let's recall, it's been only a couple of weeks since the company announced that the price of its Surface RT tablet, which has been a failure by many standards, was going to be trimmed 30% from a price of $499 to $349. Raise your hand if you didn't see that coming. How Microsoft felt that it could go toe-to-toe with Apple by putting Surface at a price point where the iPad is dominating, is still a mystery to me.

Although Surface has decent features and a real nice ad campaign, retailers were struggling to sell the product. Looking to incentivize shoppers, Microsoft then responded by offering a free keyboard cover. But that didn't work either. So you didn't need a crystal ball to see that last month's price cut was the logical next step.

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