Product development and advertising costs

It’s probably fairly obvious that product development costs affect the overall profitability of any product. Some products like drugs and new technology incur huge development costs. New technology, at least at the consumer end, often incurs huge advertising and promotion costs too. And simply, if sales are not sufficient, then losses occur.

As an example, consider a report from the Irish Times on Microsoft’s efforts in the tablet market.

“Microsoft’s Surface tablets have yet to make any profit as sputtering sales have been eclipsed by advertising costs and an accounting charge, according to the software company’s annual report.

The two tablet models, introduced in October and February to challenge Apple’s popular iPad, have so far brought in revenue of $853 million, Microsoft revealed for the first time in its annual report filed with regulators yesterday.

That is less than the $900 million charge Microsoft announced earlier this month to write down the value of unsold Surface RT – the first model – still on its hands.

On top of that, Microsoft said its sales and marketing expenses increased $1.4 billion, or 10 per cent, because of the huge advertising campaigns for Windows 8 and Surface. It also identified Surface as one of the reasons its overall production costs rose.

The Surface is Microsoft’s first foray into making its own computers after years of focusing on software, but its first attempts have not won over consumers. By comparison, Apple sold almost $24 billion worth of iPads over the last three quarters.”

(Above is copyright of Irish Times/Reuters)